Journal entries: Angelina Ltd. Machinery Dr Fixtures & fittings Dr Vehicles Dr Current assets Dr Goodwill Dr

Transcription

1 Question 12.3 Accounting by acquirer On 1 July 2016, Angelina Ltd took control of the assets and liabilities of Jolie Ltd. At this date the statement of financial position of Jolie Ltd was as follows: Carrying amount Fair value Machinery $ $ Fixtures & fittings Vehicles Current assets Current liabilities (16 000) (18 000) Total net assets $ Share capital ( shares at $1.00 per share) General reserve Retained earnings Total equity $ Required Prepare the journal entries in the records of Angelina Ltd at 1 July 2016 in each of the following situations, assuming the costs of issuing the shares by Angelina Ltd cost $1600: A. Angelina Ltd issued shares having a fair value of $2.40 per share in exchange for the net assets of Jolie Ltd B. Angelina Ltd issued shares having a fair value of $2.00 per share in exchange for the net assets of Jolie Ltd. C. Angelina Ltd acquired the shares of Jolie Ltd. The agreement was that Angelina Ltd would pay the shareholders of Jolie Ltd one share in Angelina Ltd for every two shares held in Jolie Ltd plus $1 in cash for each share held in Jolie Ltd. Shares in Angelina Ltd have a fair value of $1.80 per share. A. Acquisition of net assets of Jolie Ltd: FV of an Angelina Ltd shares is $2.40 Net fair value of identifiable assets and liabilities acquired: Machinery $ Fixctures & fittings Vehicles Current assets Current liabilities (18 000) $ Consideration transferred Shares: x $2.40 $ Goodwill = $ $ $ Journal entries: Angelina Ltd Machinery Dr Fixtures & fittings Dr Vehicles Dr Current assets Dr Goodwill Dr

2 Current liabilities Cr Share capital Cr (Acquisition of assets and liabilities of Jolie Ltd) Share capital Dr Cash Cr (Share issue costs) B. Acquisition of net assets of Jolie Ltd: FV of an Angelina Ltd shares is $2.00 Net fair value of net assets acquired $ Consideration transferred Shares: x $2.00 $ Gain on bargain purchase = $ $ $4 000 Journal entries: Jolie Ltd Machinery Dr Fixtures & fittings Dr Vehicles Dr Current assets Dr Current liabilities Cr Gain on bargain purchase Cr Share capital Cr (Acquisition of assets & liabilities of Higher Ltd) Share capital Dr Cash Cr (Share issue costs) C. Acquisition of shares in Jolie Ltd Consideration transferred: Shares: 1/2 x x $1.80 $ Cash: $1.00 x $ Journal entries in Angelina Ltd: Shares in Jolie Ltd Dr Share capital Cr Cash Cr (Acquisition of shares in Jolie Ltd) Share capital Dr Cash Cr (Share issue costs)

3 Question 12.6 Accounting by the acquirer, provisional accounting, disclosures by the acquirer Matt Ltd was a pharmaceutical company operating in Brisbane while Damon Ltd operated a number of research laboratories on the Gold Coast, being particularly concerned with producing products that were related to the effects of mosquito bites. Matt Ltd believed that the acquisition of Damon Ltd would be of significant benefit to it as Damon Ltd had an excellent research facility that would add value to the products manufactured by Matt Ltd. It was prepared to pay a premium for the assets of Damon Ltd because of the high quality of the research staff of Damon Ltd and their ability to provide synergies between the two companies. On 1 June 2016, Matt Ltd acquired all the assets and liabilities of Damon Ltd. In exchange for these, Matt Ltd issued shares. Based on recent market transactions, it was determined that these shares had a fair value at acquisition date of $3.04. At this date, Matt Ltd could only determine a provisional fair value for the machinery. Matt Ltd also recognised an intangible asset relating to research and development undertaken by Damon Ltd, but it was not recognised by that entity as it did not meet the recognition criteria under AASB 138 Intangible Assets. This asset was considered to have a fair value of $4000. Subsequent to the end of the reporting period of 30 June 2016, the final fair value was determined on 2 September 2016 to be $ Depreciation on machinery was charged at 20% p.a. The assets and liabilities of Damon Ltd at 1 June 2016 were as follows: Carrying amount Fair value Machinery $ $ Fixtures Accounts receivable Cash Accounts payable (6 400) (6 400) Loans (13 600) (13 600) Required A. Prepare the journal entries at 1 June 2016 in the accounting records of Matt Ltd to record the acquisition of Damon Ltd as well as any disclosures regarding the acquisition in the notes to the accounts at 30 June B. Prepare any journal entries at 2 September 2016 in relation to the provisional measurement of the machine. A: At 1 June 2016: Net fair value of identifiable assets and liabilities of Damon Ltd = $ $ $ $ $ $ $ = $ Consideration transferred = shares x $3.04 = $ Goodwill = $ $ = $8 000

4 The journal entries at acquisition date, 1 June 2016 are: Machinery Dr Fixtures Dr In-process research and development Dr Accounts receivable Dr Cash Cr Goodwill Dr Accounts payable Cr Loans Cr Share capital Cr (Acquisition of assets and liabilities of Damon Ltd) Check disclosures against the following paragraphs from AASB 3 Appendix B: Paragraph B64 (a) the names and descriptions of the combining businesses [Matt Ltd is a pharmaceutical company; Damon Ltd is a company involved in research] B64 (b) the acquisition date: 1 June 2016 B64 (d) primary reasons for the business combination [ R&D] B64 (e) a qualitative description of the factors making up goodwill [excellent work force and synergies] B64 (f) the consideration transferred: $ Fair value of each major class of consideration, including for equity instruments issued: - the number [50 000] - the method of determining fair value [recent market transactions] B64 (i) amounts recognised for each major class of assets acquired and liabilities assumed [see journal entry] B. See paragraphs of AASB 3 in relation to initial accounting determined provisionally. At 1 June 2016, the provisional amounts must be used as per journal entries in (A.) on the previous page. Note the disclosure required by paragraph B67 of AASB 3. In 2016, as per paragraph 45, the carrying amount of the machinery must be calculated as if its fair value at the acquisition date had been recognised from that date, with an adjustment to goodwill. If the machinery had a 5-year life from acquisition date, Damon Ltd would have charged depreciation for 1 month in Extra depreciation of $80 is required, being 1/5 x 1/12 x $ The adjusting entry at 2 September 2016 is: Machinery Dr Goodwill Cr (Adjustment for provisional accounting) Retained earnings (1/7/16) Dr 80 Accumulated depreciation Cr 80 (Adjustment to depreciation due to provisional accounting) If depreciation has been calculated monthly for 2016, further adjustments would be required.

5 Question Accounting by the acquirer, liquidation of the acquiree Edward Ltd is a manufacturer of frozen foods in Geelong. His 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 investigate a takeover of a Tasmanian company, Norton Ltd, whose prime product was the packaging of frozen Huon salmon. The reason this company was of particular interest was that Edward Ltd already owned a number of factories in Hobart some of which were under-utilized. If Norton were acquired, then Edward Ltd would liquidate the company and transfer all the processing work to its other Hobart factories. The financial statements of Norton Ltd at 1 December 2016 showed the following information: Plant $ Accumulated depreciation plant (32 000) Land Cash Accounts receivable Inventory Total assets Accounts payable Provisions Loans Total liabilities Share capital A ordinary shares B ordinary shares Retained earnings Total equity All the assets and liabilities of Norton Ltd were recorded at amounts equal to fair value except for: Fair value Plant Land Inventory Norton Ltd also had a brand Jon West that was not recorded by the company because it had been internally generated. It was valued at $ Norton Ltd had not recorded both the interest accrued on the loans amounting to $ and annual leave entitlements of $ Edward Ltd decided to acquire all the assets of Norton Ltd except for the cash. In exchange for these assets, Edward Ltd agreed to provide: Two shares in Edward Ltd for every three A ordinary shares held in Norton Ltd. The fair value of each Edward Ltd share was agreed to be $2.16. Artworks to the owners of the B ordinary shares held in Norton Ltd. (These artworks were held in the records of Edward Ltd at $ and valued at $ ) Sufficient additional cash to enable Norton Ltd to pay off its liabilities including the expected liquidation costs of $4000. The business combination occurred on 1 December Legal and accounting costs incurred by Edward Ltd in undertaking this business combination amounted to $1300.

6 Costs to issue the shares to the A ordinary shareholders of Norton Ltd were $700. Required A. Prepare the journal entries in the records of Edward Ltd at 1 December 2016 to record the business combination. B. Prepare the following accounts for Norton Ltd: Liquidation, Liquidator s Cash, and Shareholders Distribution. A. Acquisition Analysis Edward Ltd Norton Ltd Net fair value of identifiable assets and liabilities acquired Accounts receivable $ Inventory Plant Land Brand Jon West $ Consideration transferred Shareholders Shares A shares of Norton Ltd Shares in Edward (2/3) x $2.16 $ Artworks to B ordinary shareholders Creditors Cash: Accounts payable Provisions Loans Liquidation costs Interest on loans Annual leave Total cash required Less cash already held (16 000) $ Goodwill [$ $ ] $3 600 EDWARD LTD General Journal Artworks Dr Gain Cr (Gain on re-measurement of asset used as part of consideration in acquisition of Norton Ltd)

7 Accounts receivable Dr Inventory Dr Plant Dr Land Dr Brand Dr Goodwill Dr Payable to Norton Ltd Cr Share capital Cr Artworks Cr (Acquisition of Norton Ltd) Payable to Norton Ltd Dr Cash Cr (Payment of consideration) Acquisition-related expenses Dr Cash Cr (Payment of acquisition-related costs) Share capital Dr 700 Cash Cr 700 (Payment of share issue costs) B. NORTON LTD General Ledger LIQUIDATION ACCOUNT Receivables Retained earnings Inventory Accumulated depreciation Plant Receivable from Edward Ltd Land Interest on loans Annual leave payable Liquidation costs Shareholders distribution LIQUIDATOR S CASH ACCOUNT Opening balance Accounts payable Edward Ltd Provisions Loans Liquidation costs Interest payable Annual leave

8 SHAREHOLDERS DISTRIBUTION Shares in Edward Ltd Share capital A shares Artworks Shares capital B Shares Liquidation Question Accounting by an acquirer Denzel Ltd and Washington Ltd are family-owned ginger producing companies operating in Buderim in Queensland. Denzel Ltd is owned by the Lewis family while the Meninga family owns Washington Ltd. The Lewis family has only one son, Wally, and he is engaged to the daughter of the Meninga family. Because the son is currently managing Denzel Ltd, it is proposed that, after the wedding, Washington Ltd be liquidated and Wally would manage the whole of the two companies assets. Information about the assets and liabilities of Washington Ltd at 1 January 2017 is as follows: Carrying amount Fair value Buildings $ $ Accumulated depreciation (63 000) Land Machinery Accumulated depreciation (26 000) Irrigation equipment Accumulated depreciation (20 000) Vehicles Accumulated depreciation (18 000) Cash Accounts receivable Payables Loan from Broncos bank Denzel Ltd valued a brand at $ that was used by Washington Ltd but had not been recognised by Washington Ltd as it was internally generated. The brand was considered to have an indefinite life. The accounting records of Washington Ltd at 1 January 2017 did not include accrued interest on the loan of $ The Lewis and Meninga families agreed to the following terms in relation to the joining together of the two companies: Denzel Ltd is to acquire all the assets of Washington Ltd except for cash and one of the vehicles (having a carrying amount of $40 500, and a fair value of $43 200) and assume all the liabilities except for the loan from the Broncos bank and any accrued interest. The vehicle will be given to Mr and Mrs Meninga. Washington Ltd will go into liquidation. Denzel Ltd is to supply sufficient additional cash to enable the loan from the Broncos Bank to be paid off and to cover the liquidation expenses of $4950. It will also give $ to be distributed to the Meninga family to help pay for the cost of the wedding. Denzel Ltd is to give a piece of its land in the Buderim Hills overlooking the Maroochydore coastline to Washington Ltd to be distributed to the Meninga family to

9 build a retirement home. The land is recorded in the records of Denzel Ltd at $ and has a fair value of $ Denzel Ltd is to issue shares these having a fair value of $12.60 per share. These are to be distributed via Washington Ltd to the daughter of Mr and Mrs Meninga to give her a continuing interest in the family business. The business combination occurred on 1 January 2017 as per the agreement with Denzel Ltd incurring legal and accounting costs of $ and share issue costs of $ Required Prepare the journal entries in the records of Denzel Ltd to account for the business combination. Acquisition Analysis Net fair value of identifiable assets and liabilities acquired: Accounts receivable $ Land Buildings Machinery Irrigation equipment Vehicles ($ $43 200) Brand Accounts payable $ Consideration transferred: Shares: x $12.60 per share $ Cash: [$ $ $ $ $18 000] Land: $ Goodwill $ $ = $ The journal entries in Denzel Ltd are: Land Dr Gain Cr (Re-measurement as part of consideration transferred in a business combination) Accounts receivable Dr Land Dr Buildings Dr Machinery Dr Irrigation equipment Dr Vehicles Dr Brand Dr Goodwill Dr Payables Cr Share capital Cr Payable to Washington Ltd Cr Land Cr (Acquisition of net assets of Washington Ltd)

10 Payable to Washington Ltd Dr Cash Cr (Payment of purchase consideration) Acquisition-related expenses Dr Cash Cr (Payment of acquisition-related costs) Share capital Dr Cash Cr (Share issue costs) Question 16.8 The reconstruction of accounts (formulae) approach The statements of financial position of Allthrough Ltd as at 30 June 2017 and 30 June 2016 are presented below. ALLTHROUGH LTD Statements of Financial Position as at 30 June Current assets Cash at bank Accounts receivable Inventory Prepayments Non-current assets Buildings Accumulated depreciation buildings Equipment Accumulated depreciation equipment Land Long-term investments Total assets Current liabilities Bank overdraft Accounts payable Accrued expenses Current tax liability Non-current liabilities Loan payable Debentures due 1/9/21 Total liabilities Net assets Equity Share capital Retained earnings Total equity $ ( ( $ $ $ ) ) $ $ ( ( $ $ $ $ $ Examination of the company s general ledger accounts revealed the following: (a) Depreciation expense was recorded during the year as follows: buildings $13 800; and equipment $ ) )

11 (b) An extension was added to the building at a cost of $ cash. (c) Long-term investments with a cost of $ were sold for $ (d) Vacant land next to the company s plant was purchased for $ with payment consisting of $ cash and a loan payable for $ due on 31 July (e) Debentures of $ were issued for cash at nominal value. (f) Thirty thousand shares were issued at $3.80 per share. (g) Equipment was purchased for cash. (h) Sales for the period were $ ; cost of sales amounted to $ ; other expenses (excluding depreciation, carrying amount of investments sold, interest, and bad debts) amounted to $ (i) Bad debts of $3500 were written off. (j) Income tax paid during the year amounted to $ (k) Interest expense and interest paid amounted to $ (l) The bank overdraft is integral part of the company s cash management function. Required A. Prepare the statement of cash flows of Allthrough Ltd for the year ended 30 June 2017 using the direct method of presentation. B. Prepare a note disclosure to reconcile net cash flows from operating activities with the profit for the year and also prepare any other notes required by AASB 107. A. ALLTHROUGH LTD Statement of Cash Flows for the year ended 30 June 2017 Cash flows from operating activities Cash receipts from customers $ Cash paid to suppliers, employees and other ( ) Cash generated from operations Interest paid (40 000) Income taxes paid (73 700) Net cash from operating activities $7 700 Cash flows from investing activities Payment for equipment (30 000) Payments for property ( ) Proceeds from sale of investments Net cash used in investing activities ( ) Cash flows from financing activities Proceeds from issue of shares Proceeds from issue of debentures Dividends paid (69 000) Net cash provided by financing activities Net decrease in cash and cash equivalents (91 300) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period $(16 700)

12 B. Note 1: Cash and cash equivalents Cash and cash equivalents included in the statement of cash flows are comprised of the following amounts included in the statement of financial position: Cash at bank $ $ Bank Overdraft (16 700) Cash and cash equivalents $(16 700) $ The bank overdraft is integral to the company s cash management function. Note 2: Non-cash Financing and Investing Activities During the period, property was acquired for $ , part of the purchase consideration amounting to $ is deferred until July 2018 Note 3: Reconciliation of Net Cash from Operating Activities with Profit Workings Profit for the year $ Depreciation Gain on sale of investments (35 000) Change in assets and liabilities Increase in accounts receivable (15 900) Increase in inventory (53 800) Decrease in prepayments 200 Decrease in accounts payable (3 000) Decrease in accrued expenses (3 500) Increase in current tax liability Net cash from operating activities $7 700 Receipts from customers Accounts Receivable Balance b/d Bad debts expense Sales Cash (from customers) Balance c/d Received Begin Ending From Accounts accounts Bad debts Customers = Sales + rec'able - Rec'able - $ = $ $ $ $3 500

13 Payments to suppliers, employees and other Inventory Balance b/d Cost of sales A/c Payable (purchases)* Balance c/d *balancing item for reconstruction Accounts Payable Cash (paid to suppliers) Balance b/d Balance c/d Inventory (purchases) Payments Begin Ending suppliers Cost of Begin Ending Accts Accts of goods = sales - invent + invent. + payable - Payable $ = $ $ $ $ $ Prepayments and Accrued Expenses Liability (Net) Balance b/d Other operating expenses Cash (paid employees/other) Balance c/d Payments Begin. Ending Begin Ending Employees accrued accrued prepaid prepaid Other = Expense + expenses - expenses - expenses + expenses $ = $ $ $ $ $ Cash payments to suppliers and employees = $ $ = $ Income tax paid Current Tax Liability Cash (income tax paid) Balance b/d Balance c/d Income tax expense* *balancing item for reconstruction

14 Dividends paid Profit or Loss Summary Cost of sales Sales revenue Other operating expenses Proceeds from sale of invest Depn expense - buildings Depn expense - equipment Cost of investments sold Bad debts expense Interest expense Income tax expense Profit for the year* *balancing item for reconstruction Retained Earnings Dividends paid Balance b/d Balance c/d Profit Other Explanations: Interest paid additional info item (k) Income taxes paid additional info item (j) Purchase of equipment additional info item (g) ($ $ = $30 000) Purchase of property additional info items (b) and (d) ($ = $ ) Proceeds from sale of investments additional info item (c ) Proceeds from issue of shares additional info item (f) ( x $3.80= $ ) Proceeds from long term borrowings additional info item (e)

15 Question 16.9 The reconstruction of accounts (formulae) approach The draft statements of financial position of Thecity Ltd as at 30 June 2017 and 30 June 2016 are presented below. THECITY LTD Statements of Financial Position as at 30 June Assets Cash at bank Bank bills Deposits at call Accounts receivable Allowance for doubtful debts Inventory Prepaid expenses Interest receivable Share investments Land Buildings Accumulated depreciation buildings Equipment Accumulated depreciation equipment Deferred tax asset $ ( ( ( ) ) ) $ ( ( ( Total assets $ $ Liabilities Accounts payable Accrued expenses Interest payable Current tax liability Bank overdraft Finance lease Debentures (10%) Deferred tax liability Equity Share capital (ordinary shares, issued at $1) Retained earnings $ $ Total liabilities and equity $ $ ) ) )

16 THECITY LTD Statement of Profit or Loss for the year ended 30 June 2017 Income Sales Interest income Dividend income Discount received Gain on sale of share investments Less: Expenses Cost of sales Bad debts expense Loss on sale of equipment Depreciation equipment Depreciation buildings Discount allowed Interest expense Employee and other expenses Profit before tax $ $ ( ) Less: Income tax expense Profit after tax $ Additional information in relation to the year ended 30 June 2017 (a) New equipment was purchased at a cost of $ of which $ was paid in cash. The balance was covered by taking out a finance lease. (b) Equipment, which cost $ and had a carrying amount of $ was sold for cash. (c) Debentures were issued at nominal value ($100 each) for cash. (d) Share investments with an original cost of $ were sold for cash. (e) Bank bills held and bank overdraft form part of cash and cash equivalents. Required Prepare the statement of cash flows of Thecity Ltd for the year ended 30 June 2017 in accordance with AASB 107 using either of the direct method or indirect method of presentation.

17 A. Direct method THECITY LTD Statement of Cash Flows For year ended 30 June 2017 Cash flows from operating activities Cash receipts from customers $ Cash paid to suppliers, employees and other ( ) Cash generated from operations Interest paid (17 400) Income taxes paid (15 000) Net cash from operating activities $ Cash flows from investing activities Interest received Dividends received Purchase of equipment (17 400) Purchase of buildings ( ) Proceeds from sale of investments Proceeds from sale of equipment Net cash used in investing activities (52 440) Cash flows from financing activities Proceeds from issue of shares Proceeds from issue of debentures Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period $ Note 1: Cash and cash equivalents Cash and cash equivalents included in the statement of cash flows are comprised of the following amounts included in the statement of financial position: Cash at bank $ $ Bank bills held Deposits at call Bank Overdraft (34 800) (32 000) Cash and cash equivalents $ $ Note 2: Non-cash Financing and Investing Activities During the period, new equipment was acquired for $67 400, part of the purchase consideration amounting to $ is subject to a finance lease.

18 Workings Receipts from customers Allowance for Doubtful Debts Accounts receivable* Balance b/d (bad debts written off) Balance c/d Bad debts expense *balancing item for reconstruction Accounts Receivable Balance b/d Allowance for doubt debts Sales revenue (bad debts written off) Discount allowed 950 Cash (from customers) Balance c/d Cash receipts = Sales Increase in Accounts Receivable Bad debts written off Discount allowed = = Payments to suppliers, employees and other Inventory Balance b/d Cost of sales A/c Payable (purchases)* Balance c/d *balancing item for reconstruction Accounts Payable Discount received Balance b/d Cash (paid to suppliers) Inventory (purchases) Balance c/d Prepaid Expenses / Accrued Expenses Liability (Net) Balance b/d (Prepaid exp) Balance b/d (Accrued exp) Cash (paid employees/other) Employee other expenses Balance c/d (Accrued exp) Balance c/d (Prepaid exp) Cash paid to suppliers & employees = $ $ = $

19 Cash paid = Cost of sales + Employee/Other expenses Discount received Decrease in Inventory Increase in Accounts Payable + Increase in Prepaid expenses Increase in Accrued Expenses = = Interest paid Interest Payable Cash (interest paid) Balance b/d Balance c/d Interest expense Interest paid = Interest Expense Increase in Interest Payable = = Income taxes paid Journal entry: Income Tax Expense Dr Deferred Tax Asset Dr Current Tax Liability Cr Deferred Tax Liability Cr Current Tax Liability Cash (income tax paid) Balance b/d Balance c/d ITE/DTA/DTL Income tax paid = Income tax expense + Decrease in Current tax liability + Increase in Deferred tax asset Increase in Deferred tax liability = = Interest received Interest Receivable Balance b/d Cash (interest received) Interest income Balance c/d Interest received = Interest Income + Decrease in Interest Receivable = = 4 560

20 Proceeds from sale of investments Sale of Investments Share investments Proceeds from sale (cost of investments sold) Gain on sale Gain on sale = Proceeds Carrying amount of asset sold Proceeds= Gain on sale + Carrying amount of asset sold = = Proceeds from sale of equipment Sale of Equipment Equipment Loss on sale (carrying amount sold) Proceeds from sale Loss on sale = Proceeds Carrying amount of asset sold Proceeds= Loss on sale + Carrying amount of asset sold = = Purchase of equipment Equipment at cost Balance b/d Sale of equipment (Cost of equip sold) Finance lease liability Cash (purchase) Balance c/d Dividends paid Retained Earnings Dividends paid 0 Balance b/d Balance c/d Profit

21 B. Indirect method THECITY LTD Statement of Cash Flows (extract) For year ended 30 June 2017 Cash flows from operating activities Profit before tax $ Depreciation equipment Depreciation buildings Loss on sale of equipment Interest expense Gain on sale of share investments (22 600) Interest income (4 360) Dividend income (7 200) Increase in accounts receivable (11 500) Increase in allowance for doubtful debts 600 Decrease in inventory Increase in prepaid expenses (6 600) Increase in accounts payable Increase in accrued expenses Cash generated from operations Interest paid (17 400) Income tax paid (15 000) Net cash from operating activities $13 900