Corporate Accounting Assignment

    On 1 July 2008 Max Ltd acquired 100% of the issued shares of Millie Ltd at a cost of $550,000. At this date the capital of Millie Ltd was as follows:

    Share Capital $300,000
    General Reserve 10,000
    Retained Earnings 70,000

    At 1 July 2008 all the identifiable net assets of Millie Ltd were recorded at fair value with the exception of :
    Carrying Amount Fair Value
    Plant and Equipment * $83,000 $100,000
    Inventory** 32,500 35,000
    Contingent Liability – 10,000

    *At acquisition date Plant and Equipment had a further 5 years of useful life

    **Sold during year ended 30 June 2009

    Additional Information:

    a) Inventory
    – Closing inventory of Max Ltd at 30 June 2009 included goods purchased from Millie Ltd for $2,100. Max Ltd purchases inventory from Millie Ltd at cost plus 25%
    – Total purchases by Max Ltd from Millie Ltd for year ended 30 June 2010 was $9,000.
    – At 30 June 2010 Max Ltd held $6,000 inventory purchased from Millie Ltd.
    – During the year ended 30 June 2010 Max Ltd sold inventory to Millie Ltd for $12,000. All this inventory had been sold outside the group by 30 June 2010.

    b) Non current asset transfers
    – A Motor Vehicle was sold by Millie Ltd to Max Ltd on 1 July 2008. The before tax gain on this sale was $4,800. Details of asset sold:

    Original Cost $29,000
    Carrying Amount at 1 July 2008 19,000
    Remaining useful life at 1 July 2008 4 years

    – An item of Plant and Equipment was sold by Max Ltd to Millie Ltd on 31 December 2009 for $47,000

    Original Cost $49,500
    Accumulated Depreciation at 31 December 2009 $7,700
    Depreciation Rate 25% per annum Straight Line

    c) Intra group dividends

    All dividends paid/declared were from post acquisition profits with the exception of the interim dividend paid by Millie Ltd of $43,000
    Dividends from other group entities are recognised as revenue at the time the dividend is declared

    d) Interest on Loan
    Interest of $3,000 was paid on the intra group loan during the year ended 30 June 2010

    e) Impairment of goodwill
    The directors of Max Ltd believe that an impairment charge of $10,000 should be recorded on goodwill at 30 June 2010

    Trial balances of each entity at 30 June 2010 are as shown below

    Trial Balances as at 30 June 2010
    Max Ltd Millie Ltd
    Dr Cr Dr Cr
    Share Capital 500000 300000
    Retained Earnings (1 July 2009) 200000 95000
    General Reserve 50000 15000
    Current Tax Liability 37500 19000
    Deferred Tax Liability 19000 18000
    Dividend Payable 35000 37500
    Loan from Max Ltd 53000
    Payables 85000 72000
    Land 100000 170000
    Plant and Equipment 105000 185000
    Accumulated Depreciation Plant 38050 102000
    Motor Vehicles 52000 72500
    Accum. Deprec MV 24800 34000
    Loan to Millie 53000 –
    Dividends Receivable 37500 2500
    Other Receivable 28530 43970
    Shares in Millie Ltd 550000
    Accum Impairment Losses 43000
    Inventory 35000 32500
    Cash 50000 120000
    Other Investments – 30000
    Sales Revenue 140000 110000
    Interest Revenue 3180 –
    Service Fee Revenue – Millie 12200 –
    Dividend Revenue 80500 10000
    Other Income 8800 9400
    Cost of Sales 70000 55000
    Interest Expense – 3230
    Service Fee Expense – 12200
    Impairment Loss Investment in Millie 43000 –
    Other Expenses 55000 47500
    Income Tax Expense 30000 20000
    Dividend Paid 33000 43000
    Final Dividend Declared 35000 37500

    1277030 1277030 874900 874900

    Required:
    Using the information provided:

    A
    Prepare the consolidated financial statements for the year ended 30 June 2010 for Max Ltd. including:
    – Acquisition analysis
    – Consolidation journal entries for year ended 30 June 2010
    – Consolidation worksheet at 30 June 2010
    – Consolidated statement of comprehensive income for year ended 30 June 2010
    – Consolidated statement of changes in equity for year ended 30 June 2010
    – Consolidated statement of financial position at 30 June 2010

    1 + 10 + 4 + 3 = 18 marks

    Note:
    – Income tax rate is 30%
    – Max Ltd share capital consists of 500,000 x $1 shares fully paid

    B
    Discuss the issues arising from the choice between making asset revaluation (BCVR) adjustments on consolidation or in the records of the subsidiary

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