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Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions
When are profits realised on transfers of depreciable assets within the group?
Where a previous period intragroup transaction involves a depreciable asset, why is retained earnings adjusted?
Where a current period intragroup transaction involves a depreciable asset, why is depreciation expense adjusted?
When are profits realised in relation to inventories transfers within the group?
With regards to intragroup transfers of inventories, are adjustments for current period transfers different from adjustments for such transfers happening in a previous period? Explain.
What is meant by ‘realisation of intragroup profits or losses’?
What are the key questions to consider when preparing consolidation worksheet adjustments for intragroup transactions?
In making consolidation worksheet adjustments for intragroup transactions, sometimes tax-effect entries are made. Why?
Why is it important to identify intragroup transactions as current or previous period transactions?
Why is it necessary to make adjustments for intragroup transactions?
Undervalued and unrecorded assets, unrecorded liabilities, pre‐acquisition reserves transfers LO3, 5, 7 George Ltd acquired all the issued shares (ex div.) of Francis Ltd on 1 July 2017 for $246 000. At this date the equity of Francis Ltd consisted of the following. Share capital $130
Undervalued assets, unrecorded liabilities, pre‐acquisition reserves transfers LO5 On 1 July 2018, Zack Ltd acquired all the issued shares (ex div.) of William Ltd for $227 500. At this date the equity of William Ltd consisted of the following. Share capital (100 000 partly paid
Undervalued and unrecorded assets, unrecorded liabilities, pre‐acquisition reserves transfers LO5 Ron Ltd operates a number of supermarkets with an emphasis on supplying high‐quality produce. The operations of Sam Ltd are primarily in the fine fruit market. Believing that the
Undervalued and unrecorded assets, pre‐acquisition reserves transfers LO5 Robert Ltd acquired all the issued shares (cum div.) of Matt Ltd on 1 July 2018. At this date the statement of financial position of Matt Ltd included the following information. Carrying amount Fair value Plant
Undervalued and unrecorded assets, unrecorded liabilities, pre‐acquisition reserves transfers LO3, 5, 7 Griffin Ltd is a major Australian manufacturer of women’s clothing. One of its major competitors was Frank Ltd whose business was established by a French family over 30 years ago. It
Undervalued and unrecorded assets, unrecorded liabilities, pre‐acquisition reserves transfers LO4, 5 On 1 August 2016, Erik Ltd acquired 10% of the shares in Finn Ltd for $8000. Erik Ltd used the fair value method to measure this investment with movements in fair value being recognised in
Undervalued and unrecorded assets, pre‐acquisition reserves transfers LO3, 4, 5, 7 On 1 July 2018, Jason Ltd held an investment in the shares in Bruce Ltd previously measured at $18600. Jason Ltd uses the fair value method to measure this investment with movements in fair value being
Undervalued assets, pre‐acquisition reserves transfers LO3, 4, 6, 7 Ethan Ltd acquired all the issued shares (ex div.) of Darren Ltd on 1 July 2018 for $110 000. At this date Darren Ltd recorded a dividend payable of $10 000 and equity of the following. Share capital $54 000 Retained
Undervalued assets, pre‐acquisition reserves transfers LO3, 4, 5 Barry Ltd acquired all the issued shares of Colin Ltd on 1 January 2019 for $72 000. At this date the equity of Colin Ltd consisted of the following. Share capital $50 000 General reserve 12 500 Retained earnings 5 000 All the
Undervalued assets, pre‐acquisition reserves transfers LO3, 4, 5 On 1 July 2019, Mutt Ltd acquired all the issued shares of Jeff Ltd for $174 800. At this date the equity of Jeff Ltd consisted of share capital of $80 000 and retained earnings of $68 800. All the identifiable assets and
Previously recorded goodwill, pre‐acquisition reserves transfers On 1 July 2018, Adam Ltd acquired all the issued shares (ex div.) of Luke Ltd. At this date the financial statements of Luke Ltd showed the following balances in its accounts. Share capital $150 000 General reserve 40 000
Undervalued and unrecorded assets, unrecorded liabilities LO3, 4 In the year ended 30 June 2015, Stan Ltd acquired 40% of the issued shares of Lee Ltd for $72 000. This acquisition did not give Stan Ltd control of Lee Ltd, because the ownership of Lee Ltd was held by a small number of
Pre‐acquisition dividends, previously recorded goodwill LO3, 4, 5 On 1 January 2020, Graham Ltd acquired all the issued shares (cum div.) of Leslie Ltd for $263 000. At that date the equity of Leslie Ltd was recorded as follows. Share capital $150 000 General reserve 40 000 Retained earnings
Previously recorded goodwill LO4, 5 On 1 July 2019, John Ltd acquired all the issued shares of Robert Ltd for $153 000. At this date the equity of Robert Ltd was recorded as follows. Share capital $80 000 General reserve 30 000 Retained earnings 40 000 All the identifiable assets and
Pre‐acquisition reserves transfers LO3, 4, 5 On 1 July 2019, Max Ltd acquired all the issued shares of Rodney Ltd for $200 000. The financial statements of Rodney Ltd showed its equity at that date to be as follows. Share capital (20 000 shares) $100 000 General reserve 40 000 Retained
Pre‐ and post‐acquisition dividends LO3, 4, 5 On 1 July 2019, Jackson Ltd acquired all the issued shares (cum div.) of Laurie Ltd for $240 000. At that date, the financial statements of Laurie Ltd showed the following information. Share capital $100 000 General reserve 50 000 Retained
Undervalued and unrecorded assets, unrecorded liabilities LO3, 4 On 1 July 2019, Ava Ltd acquired all the issued shares of Isabel Ltd for a cash consideration of $1 000 000. At that date, the financial statements of Isabel Ltd showed the following information. Share capital $650 000 General
Undervalued and unrecorded assets LO3, 6 On 1 July 2019, Michelle Ltd acquired all the issued shares of Tracy Ltd, paying $250 000 cash. At that date, the financial statements of Tracy Ltd showed the following information. Share capital $100 000 Retained earnings 100 000 All the assets and
Acquisition analysis, acquisition date entries LO3, 4 On 1 July 2019, Simon Ltd acquired the remaining 80% of the issued shares that it did not previously own in Martin Ltd, transferring 200 000 Simon Ltd shares to Martin Ltd’s former shareholders. At that date, the financial statements of
Acquisition analysis, acquisition date entries LO3, 4 On 1 July 2019, Christina Ltd acquired all the issued shares of Adeline Ltd, paying $120 000 cash and transferring 100 000 of its own shares to Adeline Ltd’s former shareholders. At that date, the financial statements of Adeline Ltd showed
GAIN ON BARGAIN PURCHASE The accountant for Carina Ltd, Ms Finn, has sought your advice on an accounting issue that has been puzzling her. When preparing the acquisition analysis relating to Carina Ltd’s acquisition of Lyra Ltd, she calculated that there was a gain on bargain purchase of $10 000.
GOODWILL When Hydra Ltd acquired the shares of Draco Ltd, one of the assets in the statement of financial position of Draco Ltd was $15 000 goodwill, which had been recognised by Draco Ltd upon its acquisition of a business from Valhalla Ltd. Having prepared the acquisition analysis as part of
MISVALUED AND UNRECORDED ASSETS AND LIABILITIES Mensa Ltd has acquired all the shares of Careers Ltd. The accountant for Mensa Ltd, having studied the requirements of AASB 3/IFRS 3 Business Combinations, realises that all the identifiable assets and liabilities of Careers Ltd must be recognised in
UNRECORDED LIABILITY Scorpio Ltd has finally concluded its negotiations to acquire Norma Ltd, and has secured ownership of all the shares of Norma Ltd. One of the areas of discussion during the negotiation process was the current court case that Norma Ltd was involved in. The company was being
CASE STUDY UNRECORDED ASSETS Lynx Ltd has just acquired all the issued shares of Indus Ltd. The accounting staff at Lynx Ltd has been analysing the assets and liabilities acquired as a result of this business combination. This analysis found that Indus Ltd had been expensing its research outlays in
Using an example, explain how the business combination entries affect the pre‐acquisition entries, both at acquisition date and in the subsequent years.
Explain how and why the pre‐acquisition entries will be adjusted in subsequent years after the acquisition date.
Explain how and why the business combination valuation entries will be adjusted in subsequent years after the acquisition date.
Why are some adjustment entries in the previous period’s consolidation worksheet also made in the current period’s worksheet?
Explain how the existence of a gain on bargain purchase affects the pre‐acquisition entries, both in the year of acquisition and in subsequent years.
If the subsidiary has recorded goodwill in its records at acquisition date, how does this affect the acquisition analysis, the business combination valuation entries and the pre‐acquisition entries?
Is it necessary to distinguish pre‐acquisition dividends from post‐acquisition dividends? Why?
When there is a dividend payable by the subsidiary at acquisition date, under what conditions should it be taken into consideration in preparing the pre‐acquisition entries?
Explain the purpose of the pre‐acquisition entries in the preparation of consolidated financial statements.
Explain the purpose of the business combination valuation entries in the preparation of consolidated financial statements.
If the parent assesses that some of the subsidiary’s identifiable assets and liabilities are not recorded by the subsidiary at acquisition date, explain why adjustments to these assets and liabilities are required in the preparation of the consolidated financial statements.
At the date the parent acquires a controlling interest in a subsidiary, if the carrying amounts of the subsidiary’s identifiable assets are not equal to their fair values, explain why adjustments to these assets are required in the preparation of the consolidated financial statements.
How does AASB 3/IFRS 3 Business Combinations affect the acquisition analysis?
Explain the purpose of the acquisition analysis in the preparation of consolidated financial statements.
Explain the purpose and format of the consolidated worksheet.
Explain the adjustments that may be required as part of the consolidation process.
Explain the initial adjustments that may be required before undertaking the consolidation process.
Briefly describe the consolidation process in the case of wholly owned entities.
Accounting by the acquirer, liquidation of the acquiree LO6, 7 Edward Ltd is a manufacturer of frozen foods in Geelong. The company’s products include many forms of vegetables and meats but one item lacking in its product range is frozen fish. The board of Edward Ltd decided to
Accounting by acquirer, liquidation journal entries by acquiree LO6, 7 The financial statements of Pacino Ltd at 1 August 2019 contained the following information. Assets Equity Vehicles $ 30 000 Share capital: 50 000 shares $ 48 000 Accumulated depreciation (4 400) Retained earnings 25
Acquisition of two businesses LO6 Blink Ltd is a manufacturer of specialised industrial machinery seeking to diversify its operations. After protracted negotiations, the directors decided to purchase the assets and liabilities of Weeping Ltd and the spare parts retail division of Angel
Accounting for acquisitions of a business and shares in another entity LO6 Major Ltd is seeking to expand its share of the men’s products market and has negotiated to acquire the operations of Jack Ltd and the shares of Harkness Ltd. At 1 July 2020, the trial balances of the three
Accounting for a business combination by the acquirer LO6 Doctor Ltd was having difficulty in raising finance for expansion while Who Ltd was interested in achieving economies by marketing a wider range of products. They entered discussions on how they could mutually achieve added
Acquisition analysis LO6 On 1 July 2021, Martha Ltd and Jones Ltd sign an agreement whereby the operations of Jones Ltd are to be taken over by Martha Ltd. Jones Ltd will liquidate after the transfer is complete. The statements of financial position of the two companies on that day were
Accounting for business combination by acquirer LO6 River Ltd and Song Ltd are two family‐owned flax‐producing companies in Queensland. River Ltd is owned by the Jones family and the Smith family owns Song Ltd. The Jones family has only one son and he is engaged to be married to the
Accounting for business combination by acquirer LO6 Police Ltd and Box Ltd are small family‐owned companies engaged in vegetable growing and distribution. The Noble family owns the shares in Box Ltd and the Tyler family owns the shares in Police Ltd. The head of the Noble family wishes to
Accounting by an acquirer LO6 Howard Ltd is seeking to expand its share of the widgets market and has negotiated to take over the operations of Falcon Ltd on 1 January 2021. The statements of financial position of the two companies as at 31 December 2020 were as follows. Howard Ltd Falcon
Consideration transferred LO6 On 1 September 2019, the directors of Face Ltd approached the directors of Bo Ltd with the following proposal for the acquisition of the issued shares of Bo Ltd, conditional on acceptance by 90% of the shareholders of Bo Ltd by 30 November 2019. • Two fully
Accounting by an acquirer LO6 David Ltd, a supplier of snooker equipment, agreed to acquire the business of a rival company, Tennant Ltd, taking over all assets and liabilities as at 1 June 2020. The price agreed on was $60 000, payable $20 000 in cash and the balance by the issue to the
Accounting by an acquirer LO6 Russell Ltd acquired all the assets and liabilities of Davies Ltd on 1 July 2021. At this date, the assets and liabilities of Davies Ltd consisted of the following. Carrying amount Fair value Current assets $1 000 000 $ 980 000 Non‐current assets 4 000 000 4 220
Accounting by an acquirer LO6 On 1 July 2020, Sonic Ltd acquired the following assets and liabilities from Screwdriver Ltd. Carrying amount Fair value Land $ 300 000 $350 000 Plant (cost $400 000) 280 000 290 000 Inventories 80 000 85 000 Cash 15 000 15 000 Accounts payable (20 000) (20 000)
ACCOUNTING FOR ACQUISITION‐RELATED COSTS One of the responsibilities of the group accountant for Southland Ltd, Ms Bluff, is to explain to the company’s board of directors the accounting principles applied by the company in preparing the annual report. Having analysed AASB 3/IFRS 3, Ms Bluff is
ACCOUNTING FOR RESEARCH Tall Ltd has acquired all the net assets of Shorts Ltd with the latter going into liquidation. Both companies operate in the area of testing and manufacturing pharmaceutical products. One of the main reasons that Tall Ltd sought to acquire Shorts Ltd was that the latter
IDENTIFYING THE ACQUIRER White Ltd has been negotiating with Cloud Ltd for several months, and agreements have finally been reached for the two companies to combine. In considering the accounting for the combined entities, management realises that, in applying AASB 3/IFRS 3, an acquirer must be
ACCOUNTING FOR GOODWILL Silver Ltd has acquired a major manufacturing division from Fern Ltd. The accountant, Ms Ball, has shown the board of directors of Silver Ltd the financial information regarding the acquisition. Ms Ball calculated a residual amount of $45 000 to be reported as goodwill in
CASE STUDY APPLYING AASB 3/IFRS 3 Bass Ltd has recently undertaken a business combination with Bream Ltd. At the start of negotiations, Bass Ltd owned 30% of the shares of Bream Ltd. The current discussions between the two entities concerned Bass Ltd’s acquisition of the remaining 70% of shares
How is an acquirer identified?
Entities required to prepare consolidated financial statements LO2, 4 In the following independent situations, discuss which entity, if any, may be a parent required to prepare consolidated financial statements under AASB 10/IFRS 10. 1. Jamie Ltd owns 100% of the shares of Pod Ltd,
Parent–subsidiary relationship LO2 In the following independent situations, determine whether a parent–subsidiary relationship exists and which entity, if any, is a parent. 1. Tom Ltd and Toots Ltd each hold 50% of the shares in Jerry Ltd, all companies being involved in the
Parent–subsidiary relationship LO2 In the following independent situations, determine whether a parent–subsidiary relationship exists, and which entity, if any, is a parent. 1. Road Ltd is a company that was hurt by a major downturn in the economy. It previously obtained a
Control LO2 Daffy Duck Ltd has acquired, during the current year, the following investments in shares issued by other companies. Elmer Ltd $120 000 (40% of issued capital) Fudd Ltd $117 000 (35% of issued capital) Daffy Duck Ltd is unsure how to account for these investments and has
Determining subsidiary status LO2 During the current financial period, Heckle Ltd acquired 40% of the ordinary shares of Jeckle Ltd. Under the company’s constitution, each share is entitled to one vote. On the basis of past experience, only 65% of the eligible votes are typically cast at
Convertible debt LO2 Scrooge Ltd and McDuck Ltd own 55% and 45% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Beagle Boys Ltd. McDuck Ltd also holds debt instruments that are convertible into ordinary shares of Beagle Boys Ltd. The debt
Options LO2 Toby Ltd and Fred Ltd own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Stella Ltd. Toby Ltd sells half of its interest to Coco Ltd and buys call options from Coco Ltd that are exercisable at any time at a
Voting rights LO2 Chip Ltd has 37% of the voting interest in Dale Ltd. An investment bank with which Chip Ltd has business relationships holds a 15% voting interest in Dale Ltd. Because of the closeness of the business relationship with the bank, Chip Ltd believes it can rely on the bank’s
Voting rights LO2 Sylvester Ltd owns 40% of the shares of Tweety Pie Ltd; no other party owns more than 3% of the shares. The annual general meeting of Tweety Pie Ltd is to be held in one month’s time. Historically, only the holders of around 75% of the shares were present and voted in each
Options LO2 Hewey Ltd, Dewey Ltd and Louie Ltd each own one-third of the ordinary shares that carry voting rights at a general meeting of shareholders of Woodchuck Ltd. Hewey Ltd, Dewey Ltd and Louie Ltd each have the right to appoint two directors to the board of Woodchuck Ltd. Hewey Ltd also
Relevant activities LO2 Caspar Ltd and Spooky Ltd decide to establish a new entity, Ghosts Ltd. The purpose of Ghosts Ltd is to develop and market a new car seat designed for use by babies when travelling in a car. Caspar Ltd and Spooky Ltd have specific roles in the new company and have
Parent–subsidiary relationship LO1, 2, 3 Visit the website of Woolworths Limited (www.woolworthslimited.com.au) and retrieve the most recent annual report. Required 1. Identify and discuss the principles of consolidation used as disclosed in note 1 to the consolidated financial statements.
RIGHTS TO VARIABLE RETURNS Some have argued that the criteria for consolidation should refer to significant variable returns. These parties argue that the consolidated financial statements are not meaningful if they include subsidiaries in which the parent’s level of rights to variable returns is
POWER AND RELEVANT ACTIVITIES According to paragraph BC43 of the Basis for Conclusions on AASB 10/IFRS 10 Consolidated Financial Statements: Respondents to ED 10 did not object to changing the definition of control to power to direct the activities of an investee. Many were confused, however,
CASE STUDY NATURE OF CONTROL The following comment was received by the IASB on 6 April 2009 from the Swedish Financial Reporting Board in response to the issue of Exposure Draft (ED) 10 Consolidated Financial Statements (the predecessor of IFRS 10). We agree that consolidated financial statements
What is a structured entity?
What is the key objective of AASB 12/IFRS 12?
What is an agent or a principal?
When are potential voting rights considered in determining if one entity controls another?
What is the link between ownership interest and control?
What benefits could be sought by an entity that obtains control over another entity?
What are variable returns?
What are substantive rights and protective rights?
What are ‘relevant’ activities?
When does an investor have power over an investee?
What are the key elements of control?
What is meant by the term ‘control’?
Why do the regulators require the parent entity to prepare consolidated financial statements?
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