Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Question 1 (67 marks) P Limited (P) acquired S Limited (S) and A Limited (A) and the details are as follows: S Limited A Limited Date of acquisition 1 January 2018 1 January 2019 Shares acquired 80% 25% Non-controlling interests at fair value $155,000 The statements of financial position of S and A as at the date of acquisition were as follows: Statement of Financial Position as at 1 January 2018 2019 S A Book value Fair value Book value Fair value $ $ $ $ Fixed assets, net 350,000 350,000 57,000 59,000 Intangible assets - 67,000 - - Inventory 120,000 135,000 3,000 3,000 Accounts receivable 190,000 160,000 4,000 4,000 Cash 88,000 88,000 8,000 8,000 Accounts payable (130,000) (130,000) (9,000) (9,000) Total identifiable net assets 618,000 670,000 63,000 65,000 Share capital 500,000 36,000 Retained earnings 118,000 27,000 Total equity 618,000 63,000 The financial statements of P, S and A for the year ended 31 December 2020 are as follows: Income Statement and Partial Statement of Changes in Equity for the year ended 31 December 2020 P S A $ $ $ Sales 1,523,000 720,000 330,000 Cost of sales (609,000) (288,000) (132,000) Gross profit 914,000 432,000 198,000 Dividend income 39,000 Operating expenses (523,000) (235,000) (94,000) Profit before tax 430,000 197,000 104,000 Tax expense (69,000) (32,000) (17,000) Net profit after tax 361,000 165,000 87,000 Retained earnings, 1 January 482,000 260,000 37,000 Dividends declared (70,000) (45,000) (12,000) Retained earnings, 31 December 773,000 380,000 112,000 Statement of Financial Position as at 31 December 2020 P S $ $ Fixed assets, net 750,000 542,000 Intangible assets 38,000 - Investment in S 620,000 - Investment in A 20,000 - Inventory 92,000 138,000 Accounts receivable 35,000 60,000 Cash 168,000 220,000 Total assets 1,723,000 960,000 Accounts payable 50,000 80,000 Share capital 900,000 500,000 Retained earnings 773,000 380,000 Total liabilities and equity 1,723,000 960,000 Additional information: (1) The intangible assets of S had a remaining useful life of 5 years from the date of acquisition
Question 1 (67 marks)
P Limited (P) acquired S Limited (S) and A Limited (A) and the details are as follows:
|
|
S Limited |
A Limited |
|
Date of acquisition |
1 January 2018 |
1 January 2019 |
|
Shares acquired |
80% |
25% |
|
Non-controlling interests at fair value |
$155,000 |
|
The statements of financial position of S and A as at the date of acquisition were as follows:
Statement of Financial Position as at 1 January
|
|
2018 |
|
2019 |
|
|
S |
|
A |
|
|
Book value Fair value |
|
Book value Fair value |
|
|
$ $ |
|
$ $ |
|
Fixed assets, net |
350,000 350,000 |
|
57,000 59,000 |
|
Intangible assets |
- 67,000 |
|
- - |
|
Inventory |
120,000 135,000 |
|
3,000 3,000 |
|
Accounts receivable |
190,000 160,000 |
|
4,000 4,000 |
|
Cash |
88,000 88,000 |
|
8,000 8,000 |
|
Accounts payable |
(130,000) (130,000) |
|
(9,000) (9,000) |
Total identifiable net assets 618,000 670,000 63,000 65,000
|
|
|
|
|
|
|
|
Share capital |
500,000 |
|
|
36,000 |
|
|
Retained earnings |
118,000 |
|
|
27,000 |
|
Total equity 618,000 63,000
The financial statements of P, S and A for the year ended 31 December 2020 are as follows:
Income Statement and Partial Statement of Changes in Equity for the year ended 31 December 2020
P S A
$ $ $
Sales 1,523,000 720,000 330,000
Cost of sales (609,000) (288,000) (132,000)
|
Gross profit |
914,000 |
|
432,000 |
|
198,000 |
|
Dividend income |
39,000 |
|
|
|
|
|
Operating expenses |
(523,000) |
|
(235,000) |
|
(94,000) |
Profit before tax 430,000 197,000 104,000
Tax expense (69,000) (32,000) (17,000)
|
Net profit after tax |
361,000 |
|
165,000 |
|
87,000 |
|
Retained earnings, 1 January |
482,000 |
|
260,000 |
|
37,000 |
|
Dividends declared |
(70,000) |
|
(45,000) |
|
(12,000) |
Retained earnings, 31 December 773,000 380,000 112,000 Statement of Financial Position as at 31 December 2020
|
|
P |
|
S |
|
|
$ |
|
$ |
|
Fixed assets, net |
750,000 |
|
542,000 |
|
Intangible assets |
38,000 |
|
- |
|
Investment in S |
620,000 |
|
- |
|
Investment in A |
20,000 |
|
- |
|
Inventory |
92,000 |
|
138,000 |
|
Accounts receivable |
35,000 |
|
60,000 |
|
Cash |
168,000 |
|
220,000 |
Total assets 1,723,000 960,000
|
|
|
|
|
|
Accounts payable |
50,000 |
|
80,000 |
|
Share capital |
900,000 |
|
500,000 |
|
Retained earnings |
773,000 |
|
380,000 |
Total liabilities and equity 1,723,000 960,000
|
Additional information: |
|
|
|
(1) The intangible assets of S had a remaining useful life of 5 years from the date of acquisition.
- The undervalued inventory of S at the date of acquisition was sold to third parties in January 2020.
- The overvalued accounts receivable was confirmed irrecoverable and was written off as bad debt expenses by S in December 2019.
- The undervalued fixed assets of A had a remaining useful life of 4 years from the date of acquisition.
- The transfers of fixed assets and inventory between P and S were as follows:
$ $
- Transfer of fixed assets from S to P on 1 January 2019
Transfer price 17,000
Original cost 24,000
|
|
|
15 |
|
, |
|
000 |
|
|
|
|
|
2 |
|
,000 |
|
|
Net book value at date of transfer
Profit on sale recorded by S in 2019
Remaining useful life was 4 years at the date of transfer.
- Sales from P to S 2019 2020
$ $
Sales 33,000
Original cost (26,000)
Gross profit 7,000
Percentage unsold to third parties at year-end 60% 10%
- Sales from S to P 2020
$
Sales 9,000
Original cost (3,500) Gross profit 5,500
Percentage unsold to third parties at year-end 55%
(6) Transfers of inventory and fixed assets between P and A were as follows:
2020
- Sales from P to A $
Sales 6,000
Original cost 2,900 Gross profit 2,100
Percentage unsold to third parties at year-end 40%
- Transfer of fixed assets from A to P on 1 October 2019
$ $
Transfer price 4,600
Original cost 12,000
|
|
|
3,000 |
|
|
|
|
|
1 |
|
, |
|
6 |
|
00 |
|
|
Net book value at date of transfer
Profit on sale recorded by A in 2019
Remaining useful life was 2 years at the date of transfer.
- There is no change in the share capital of S and A from the date of acquisition.
- Ignore all tax effect.
Required:
- Prepare the consolidation entries for the year ended 31 December 2020 with brief narratives. (39 marks)
- Prepare the equity accounting entries for the year ended 31 December 2020 with brief narratives. (14 marks)
- Prepare the Consolidated Income Statement for the year ended 31 December 2020 and the Consolidated Statement of Financial Position as at 31 December 2020.
(14 marks)
*************************************************************************************************************************** The Consolidation Worksheets on Pages 4-5 carry NO marks. Students should prepare the consolidated financial statements in writing on Answer Book.
***************************************************************************************************************************
4
5
Question 2 (23 marks)
On 31 December 2019, Pearl Company, whose functional and presentation currency is the dollar ($), acquired the entire ordinary share capital of Silver Company, a foreign company whose financial statements are prepared in local currency, the LC.
Silver’s financial statements for the year ended 31 December 2020 are shown below:
Silver Company
Income Statement and Statement of Changes in Equity (partial) for the year ended 31 December 2020
|
|
LC |
|
Sales |
510,000 |
|
Cost of goods sold |
(240,000) |
|
Gross profit |
270,000 |
|
Depreciation expense |
(31,000) |
|
Amortization expense |
(12,000) |
|
Insurance expense |
(3,200) |
|
Other operating expenses |
(140,000) |
|
Tax expense |
(15,000) |
|
Net profit after tax |
68,800 |
|
Dividends paid |
(20,000) |
|
Retained earnings, 1 January |
50,000 |
Retained earnings, 31 December 98,800
Silver Company
Comparative Statement of Financial Position 31 December 2019 and 2020
|
|
2019 |
|
2020 |
|
|
LC |
|
LC |
|
Fixed assets (net) |
207,500 |
|
296,500 |
|
Patent |
54,000 |
|
42,000 |
|
Inventory (cost) |
90,000 |
|
80,000 |
|
Prepaid insurance |
5,600 |
|
2,400 |
|
Accounts receivable |
83,900 |
|
82,700 |
|
Cash |
10,000 |
|
12,000 |
Total assets 451,000 515,600
|
|
|
|
|
|
Accounts payable |
20,000 |
|
37,000 |
|
Tax payable |
30,000 |
|
28,000 |
|
Notes payable |
20,000 |
|
20,000 |
|
Other payables |
1,000 |
|
1,800 |
|
Long-term loan payable |
100,000 |
|
100,000 |
|
Share capital |
230,000 |
|
230,000 |
|
Retained earnings |
50,000 |
|
98,800 |
Total liabilities and equity 451,000 515,600
Additional information:
- Silver was incorporated on 1 January 2018. The long-term loan was obtained from a local bank on the date of incorporation. There are no changes in the share capital and long-term loan payable since the date of incorporation.
- Fixed assets comprised plant and equipment that were acquired as follows:
Net book value Net book value
Date purchased Cost as at as at
31 Dec 2019 31 Dec 2020
LC LC LC
-
-
- January 208 200,000 60,000 40,000
- July 019 50,000 47,500 4,500
-
20 July 2020 120,000 - 114,000
207,500 296,500
Plant and equipment were measured at historical cost and depreciated over 10 years on a straight-line basis with no residual value. A full month’s depreciation was recorded in the month of purchase.
- The patent was acquired on 2 July 2019 at a cost of LC60,000. The estimated life of the patent was 5 years from the date of purchase.
- Silver used the FIFO inventory valuation method. Purchases were made evenly throughout the year.
- The insurance premium for a two-year policy was paid on 1 October 2019.
- Dividends of LC20,000 were paid on 31 March 2020.
- Relevant exchange rates are as follows:
Date LC1 =
-
- January 208 $.15
31 December 2018 $1.13
-
- July 019 $1.10
1 October 2019 $1.12
Average rate when 2019 closing inventory was acquired $1.09
31 December 2019 (date of acquisition) $1.08
31 March 2020 $1.03
20 July 2020 $1.07
31 December 2020 $1.04
Average rate for 2020 $1.06
Average rate when 2020 closing inventory was acquired $1.05
Required:
- Assume the functional currency of Silver Company is the LC. Translate the financial statements of Silver Company for the purpose of consolidation into Pearl Company’s presentation currency ($) for the year ended 31 December 2020. (14 marks)
- Assume the functional currency of Silver Company is the dollar ($). Translate or calculate the following items of Silver Company for the purpose of consolidation into Pearl Company’s presentation currency ($) for the year ended 31 December 2020:
- Cost of goods sold (2 marks)
- Fixed assets (net) (2 marks)
- Prepare a schedule to calculate the translation gain or loss. (5 marks) Question 3 (10 marks)
- Investor A has 30 percent of the voting rights of the investee as well as an option to acquire additional 35 percent of the investee’s voting rights. The option is currently exercisable at a fixed price, that is deeply out of the money and is expected to remain so in the next two-year period.
In accordance with HKAS 28 (Investments in Associates and Joint Ventures, 2011), determine if investor A has significant influence over the investee and discuss in general what factors should be considered in assessing the existence of significant influence. (4 marks)
- Contrast the recognition and impairment of goodwill in consolidation with that under equity method. (6 marks)
Expert Solution
Need this Answer?
This solution is not in the archive yet. Hire an expert to solve it for you.
