Financial Accounting Share Capital of Jewel

Question: Discuss about the Financial Accounting for Share Capital of Jewel. Answer: 1. 100% of the share capital of Jewel Ltd. acquired by Joan Evaluation of Acquisition as on 30 June, 2016 Acquired Net assets Fair value Share Capital $2,00,000.00 Retained Earnings $80,000.00 Revaluation Surplus ((9000*(100-30%)) $6,300.00 $2,86,300.00 Acquisition Cost $3,56,000.00 Goodwill on acquisition $69,700.00 journal entries (Consolidation) as on 30 June, 2016 Plant Ac Dr. $9,000.00 To Tax Liability (Deferred) $2,700.00 To Revaluation Surplus $6,300.00 (being plant considered at fair value) Share Capital A/c Dr $2,00,000.00 Retained Earnings A/c Dr. $80,000.00 Revaluation Surplus A/c Dr. $6,300.00 Goodwill A/c Dr. $69,700.00 To Jewel investment $3,56,000.00 (being entry passed for acquisition) Retained earnings A/c Dr. $6,000.00 Depreciation A/c Dr. $1,500.00 To Accumulated Depreciation A/c $7,500.00 (being recording of depreciation done) Deferred tax liability A/c Dr. $2,250.00 To, expenses of income tax $450.00 To Retained earnings $1,800.00 (being tax accounted on depreciation) Sales A/c Dr. $42,000.00 To Cost of goods sold $42,000.00 (Being stock sale of intercompany removed) Sales A/c Dr. $65,000.00 To Cost of goods sold $65,000.00 (Being stock sale of intercompany removed) Cost of goods sold A/c Dr. $2,000.00 To Inventory A/c $2,000.00 (Being elimination of Profit on inventory done) Cost of goods sold A/c Dr. $13,000.00 To Inventory $13,000.00 (Being elimination of Profit on inventory done) Sales A/c Dr. $20,000.00 To Cost of goods sold $15,000.00 To Inventory $5,000.00 (Being elimination of Profit on inventory done) Gain on sale of plant A/c Dr. $36,000.00 To Plant $36,000.00 (Being elimination of Profit on plant sale done) Management fee revenue A/c Dr. $26,500.00 To, fee expenses of Management $26,500.00 (Being revenue and expense of inter company eliminated) Dividend received from Jewel A/c Dr. $93,000.00 To payment of dividend $93,000.00 (Being inter company dividend eliminated) Part B Worksheet Consolidated Removals Joan Jewel Dr. Cr. Financials (Consolidated) Assets Current Assets $ - Accounts Receivable $ 55,400.00 $ 84,500.00 $ 1,39,900.00 Inventory $ 1,05,000.00 $ 38,000.00 $ 20,000.00 $ 1,23,000.00 Non-Current Assets $ - Land and buildings $ 2,78,000.00 $ 3,26,000.00 $ 6,04,000.00 Plant - at cost $ 2,99,850.00 $ 3,55,800.00 $ 9,000.00 $ 36,000.00 $ 6,28,650.00 Less: Accumulated Depreciation $ (85,750.00) $ (1,38,800.00) $7,500.00 $ (2,32,050.00) Investment in Jewel Ltd. $ 3,56,000.00 $ 3,56,000.00 $ - Goodwill $ 69,700.00 $ - $ 69,700.00 Total Assets $ 10,08,500.00 $ 6,65,500.00 $ 78,700.00 $ 4,19,500.00 $ 13,33,200.00 Liabilities Retained Earnings $ 3,58,000.00 $ 2,44,200.00 $ 2,19,700.00 $ 78,450.00 $ 4,60,950.00 Share capital $ 3,50,000.00 $ 2,00,000.00 $ 2,00,000.00 $ 3,50,000.00 Revaluation Surplus $ - Current Liabilities Accounts Payable $ 81,700.00 $ 76,300.00 $ 1,58,000.00 Tax Payable $ 66,300.00 $ 25,000.00 $ 91,300.00 Non-current Liabilities Loans $ 1,52,500.00 $ 1,20,000.00 $ 2,72,500.00 Deferred tax liability $ 450.00 $ 450.00 $ - Total Liabilities $ 10,08,500.00 $ 6,65,500.00 $ 4,19,700.00 $ 78,900.00 $ 13,33,200.00 Removals Joan Jewel Dr. Cr. Financials (Consolidated) Sales $ 7,81,400.00 $ 7,40,000.00 $ (1,27,000.00) $ 13,94,400.00 Cost of Sales $ (4,94,000.00) $ (4,38,000.00) $ 1,22,000.00 $ 15,000.00 $ (8,25,000.00) Gross Profit $ 2,87,400.00 $ 3,02,000.00 $ 5,69,400.00 Dividend recd from Jewel $ 93,000.00 $ - $ (93,000.00) $ - Management fee revenue $ 26,500.00 $ - $ 26,500.00 $ - Gain on sale of plant $ 40,000.00 $ 36,000.00 $ (36,000.00) $ 40,000.00 Expenses Admin expenses $ (40,800.00) $ (28,700.00) $ (69,500.00) Depreciation $ (29,500.00) $ (56,800.00) $1,500.00 $ (87,800.00) Expenses of Management fee $ - $ (26,500.00) $ 26,500.00 $ - Other expenses $ (1,25,100.00) $ (86,000.00) $ (2,11,100.00) Operating profit before tax $ 2,51,500.00 $ 1,40,000.00 $ 2,41,000.00 Income tax exp $ (75,500.00) $ (42,000.00) $ 450.00 $ (1,17,050.00) Operating profit after tax $ 1,76,000.00 $ 98,000.00 $ 1,23,950.00 Retained earnings 1 July 2015 $ 3,19,400.00 $ 2,39,200.00 $84,200.00 $ 4,74,400.00 Available for appropriation $ 4,95,400.00 $ 3,37,200.00 $ 5,98,350.00 Dividends paid $ (1,37,400.00) $ (93,000.00) $ 93,000.00 $ (1,37,400.00) Retained earnings 30 June 2016 $ 3,58,000.00 $ 2,44,200.00 $ 4,60,950.00 2. According to IFRS-3, a subsidiary can be termed as a company having a voting right greater than 50% controlled by different company. Specifically, it is termed as the parent company (Graham Smart, 2012). A subsidiary can be controlled by the holding company either in part or in full. In this scenario, Bosco Ltd. contains a holding of 80% of Circus Ltd. Therefore, the relationship can be term as holding subsidiary and not associates (Horngren, 2013). Partial Goodwill Method Acquisition analysis as on 30 June, 2016 Acquired Net assets Fair value Share Capital $5,00,000.00 Retained Earnings $4,25,000.00 Revaluation surplus $10,000.00 $9,35,000.00 Bosco Ltd Share (80%) $7,48,000.00 Acquisition csost $8,90,000.00 Goodwill on acquisition $1,42,000.00 Journal entries as on 30 June, 2016 Consolidated Share Capital A/c Dr $5,00,000.00 Retained Earnings A/c Dr. $4,25,000.00 Revaluation Surplus A/c Dr. $10,000.00 Goodwill A/c Dr. $1,42,000.00 To Circus Ltd. investment $8,90,000.00 To interest of Non-Controlling $1,87,000.00 (being entry passed for Acquisition) Sales $1,43,000.00 To COGS $1,43,000.00 (being sale of inventory by Bosco to Circus) Sales $1,20,000.00 To COGS $1,20,000.00 (being sale of inventory by Circus to Bosco) COGS (84000-70000) A/c Dr. $14,000.00 To Inventory A/c $14,000.00 (Being elimination done for Unrealised gain on sale of inventory) Impairment of goodwill A/c Dr. $5,000.00 To Goodwill A/c $5,000.00 (Being Goodwill impairment done) Profit on sale of plant A/c Dr. $87,500.00 To Plant $87,500.00 (Being Profit on sale of plant eliminated done on a inter company basis) Loan from Bosco Ltd A/c Dr. $3,00,000.00 To, Loan to Circus Ltd $3,00,000.00 (being elimination of intercompany loan done) Income on interest A/c Dr. $9,000.00 To Interest expense $9,000.00 (Being Interest income expense on inter company loan eliminated) Dividend revenue A/c Dr. $1,86,000.00 To payment of dividend $1,86,000.00 (Being elimination of dividend to holding company done ) Circus Retained earnings A/c Dr. $6,77,000.00 To Bosco Ltd (attributable profit) $5,41,600.00 To Non controlling interest (attributable profit) $1,35,400.00 (Being distribution of profit done)) Part C Acquisition analysis As on 30 June, 2016 Full Goodwill Method Acquired Net assets Fair value Share Capital $5,00,000.00 Retained Earnings $4,25,000.00 Revaluation surplus $10,000.00 $9,35,000.00 Cost of Acquisition (890000+200000) $10,90,000.00 Acquisition leading to Goodwill $1,55,000.00 Journal entries (Consolidated) as on 30 June, 2016 Share Capital A/c Dr $5,00,000.00 Retained Earnings A/c Dr. $4,25,000.00 Revaluation Surplus A/c Dr. $10,000.00 Goodwill A/c Dr. $1,55,000.00 To Investment in Circus Ltd. $8,90,000.00 To Non-Controlling interest $2,00,000.00 (Being full goodwill method used) 3. Acquisition analysis Acquired Net assets Fair value Share Capital $2,00,000.00 Retained Earnings $95,000.00 $2,95,000.00 Cricket Ltd. Share $1,18,000.00 Acquisition Cosst $1,60,000.00 Goodwill on acquisition $42,000.00 Consolidation Journal entries - As on 30 June, 2017 Share Capital A/c Dr. $80,000.00 Retained earnings A/c Dr. $38,000.00 Goodwill A/c Dr. $42,000.00 To Investment in Charlie Ltd. $1,60,000.00 (being passing of Acquisition entry done) Sales A/c Dr. $6,000.00 To COGS $4,000.00 To Inventory $2,000.00 (Being elimination of inventory held by cricket ltd) Sales A/c Dr. $12,000.00 To COGS $9,000.00 To Inventory $3,000.00 (Being elimination of inventory held by Charlie ltd) Land A/c Dr. $50,000.00 To Asset revaluation Surplus $35,000.00 To Deferred Tax Liability $15,000.00 (being revaluation of land done) Dividend Income A/c Dr. $80,000.00 To payment of dividend $80,000.00 (Being dividend payment eliminated) Retained earnings (WN:1) $10,36,400.00 To Cricket Ltd. (attributed profit) $10,36,400.00 (Being attribution of [profit done) Working 1 Computation of attributable profit 30 June 2017 figure of Retained earnings $25,91,000.00 Cricket Ltd. share % 40% Cricket Ltd. attributable profit $10,36,400.00 References Graham, J. Smart, S. (2012). Introduction to corporate finance. Australia: South-Western Cengage Learning. Horngren, C. (2013)Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group. Leo, Ken J. (2011). Company Accounting, Boston:McGraw Hill Libby, R., Libby, P. Short, D. (2011) Financial accounting. New York: McGraw- Hill/Irwin.