CIMA F1 Financial Reporting & Taxation Workbook

Transcription

1 CIMA F1 Financial Reporting & Taxation Workbook 1

2 Mind Map 1 - Tax I 2

3 Illustration 1 In year ended 31/01/X1 Johnboy Co. had Profit Before Tax of $30,000. This was after the deduction of personal expenses that were disallowable for tax purposes worth $4700. In addition Johnboy Co. had $7000 of income exempt from taxation. Johnboy Co s Non Current Assets totaled $35,000 and these were being depreciated at 25% on cost. Tax is Payable at 20%. Calculate the Tax Payable for the year ended 31/01/X1. Solution $ Profit Before Tax 30,000 Add back Personal Expenses 4,700 Less Exempt Income -7,000 Add back Depreciation (35,000 x 25%) 8750 Taxable Profit Tax Due (36,450 x 20%)

4 Illustration 2 Jimmy Co. purchased an asset worth $500,000. WDAs are available on the asset at 25% on the reducing balance basis. Show the tax allowable depreciation (WDAs) for the first 5 years of the asset and the Written Down Value (WDV) at the end of each year. (Round to the nearest $) Solution Year O Bal WDA 25% WDV 1 500, , , ,000 93, , ,250 70, , ,938 52, , ,203 39, ,652 4

5 Illustration 3 Andy Co. purchased an asset in 20X1 worth $100,000. WDAs are available on the asset at 25% on the reducing balance basis. At the end of 20X3 Andy Co. sold the asset for $40,000. Calculate the Balancing Charge/Allowance on the sale Solution WDV Year O Bal WDA 25% WDV X1 100,000 25,000 75,000 X2 75,000 18,750 56,250 X3 56,250 $ Proceeds 40,000 WDV (W1) -56,250 Balancing Allowance -16,250 5

6 Illustration 4 Welling Co. had assets at 01/02/20X2 with a carrying value in the financial statements of $600,000 and a tax written down value of 400,000. Accounting Depreciation was charged on the assets 10% reducing balance. WDAs are available on the at 25% also on the reducing balance basis. On 31/01/X4 20X4 Welling Co. sold all the assets for $500,000. In year ended 31/01/X4 Welling Co. had Profit Before Tax of $2,000,000. This was after the deduction of entertainment expenses that were disallowable for tax purposes worth $30,000. In addition Welling Co. had $200,000 of income exempt from taxation. Tax is Payable at 22%. Calculate the Tax Payable for the year ended 31/01/X4. Process to follow: Be careful with the year ends. Calculate the WDV at the year end 31/01/X4 That enables you to get the Balancing Charge Calculate the Carrying Value at the year end 31/01/X4 That enables you to get the Accounting Profit on disposal & Dep n Charge Fill it all into the Pro-forma Solution WDV Year O Bal WDA 25% WDV 31/01/X3 400, , ,000 31/01/X4 300,000 $ Proceeds 500,000 WDV (W1) -300,000 Balancing Charge 200,000 6

7 Depreciation & Disposal Year O Bal Dep n CV 31/01/X3 600,000 60, ,000 31/01/X4 540,000 54, ,000 $ Proceeds 500,000 Carrying Value -486,000 Accounting Profit 14,000 Tax Computation $ Profit Before Tax 2,000,000 Add back Entertainment Expenses 30,000 Less Exempt Income -200,000 Add back Depreciation (W2) 54,000 Less Accounting Profit on Disposal (W2) -14,000 Add Balancing Charge (W1) 200,000 Taxable Profit 2,070,000 Tax Due (2,070,000 x 22%) 455,400 7

8 Illustration 5 Using the taxable profit for the year ended 31/01/X4 from Illustration 4 of $2,070,000 and tax rates of: 01/04/02-01/04/03-20% 01/04/03-01/04/03-25% Assuming that profit accrues evenly across the period: Calculate the Tax Payable for the year ended 31/01/X4. Solution $ Tax Due to 01/04/03 ($2,070,000 x 2/12 x 20%) Tax Due to 31/01/04 ($2,070,000 x 10/12 x 25%) Total Tax Due

9 Illustration 6 In Fabbland it is possible to carry back losses to set against trading profit in previous years and then forwards against trading profits in future years. Kalls Co. has the following results: Year Trading Profit/Loss 1 500, ,400, ,000, ,000 Calculate the taxable profit based on the above information in each of the 4 years. Solution Year Trading Profit/ Loss Loss Allocation Taxable Profits 1 500, , ,400, ,000, ,000 1,100, , ,000 Loss Allocated -1,400,000 9

10 Illustration 7 In Lalaland it is possible to carry back losses in the year of cessation to set against trading profit in previous years for up to 3 years on a LIFO (most recent first) basis. Marbles Co. has the following results: Year Trading Profit/Loss 1 500, , ,000 Year of Cessation -900,000 Calculate the taxable profit based on the above information in each of the 4 years. Solution Year Trading Profit/ Loss Loss Allocation Taxable Profits 1 500, , , , , , , , Loss Allocated -300,000 10

11 Objective Test Questions 1. There are certain principles that a tax system should have in an ideal situation. Which of the following is NOT traditionally regarded as a principle of an ideal tax? A. The cost of collecting the tax should bot outweigh the benefits of it. B. The timing of the tax and the method to pay it should be convenient. C. The amount to be paid should be certain. D. The amount raised should be the maximum amount possible for the government. Answer D 2. Which of the following best describes Hypothecation? A. A tax charges on the sale of goods to consumers. B. A tax system that collects the tax at source. C. A tax charge that is imposed directly on an entity and paid to the authorities. D. A tax charge that has the proceeds raised from it earmarked for a specific purpose. Answer D 3. ABC Ltd. earns profit of $500,000 and pays tax of $100,000. In the same country, CBD Ltd. earns profit of $130,000 and pays tax of $26,000. The income tax regime in this country could be described as: A. Progressive B. Proportional C. Regressive D. Fixed Amount Answer B 11

12 4.In year ended 31/01/X4 Endeavor Co. had Profit Before Tax of $220,000. This was after the deduction of entertainment expenses that were disallowable for tax purposes worth $30,000. In addition Endeavor Co. had $25,000 of income exempt from taxation. Endeavor Co. had Non Current Assets with a carrying value of $500,000 at the start of the year and these were being depreciated at 10% reducing balance. Tax is Payable at 22%. What is the tax payable for the year? A. $47,300 B. $71,500 C. $60,500 D. $49,599 Answer C Solution $ Profit Before Tax 220,000 Add back Entertainment Expenses 30,000 Less Exempt Income -25,000 Add back Depreciation (500,000 x 10%) 50,000 Taxable Profit 275,000 Tax Due (275,000 x 22%) 60,500 12

13 Mind Map 2 - Tax II 13

14 Illustration 1 In year ended 31/01/X1 ABD Co. decided to sell an asset that they had bought 10 years previously. The asset had cost $40,000 and was sold for $100,000. Indexation allowance of 25% of the cost of the asset was allowed for the effects of inflation. Capital gains are taxed at 30% Calculate the capital tax payable. Solution Proceeds from sale 100,000 Less Original Cost -40,000 $ Less Indexation Allowance (40,000 x 25%) -10,000 Capital Gain 50,000 Tax Due (50,000 x 30%) 15,000 Illustration 2 In year ended 31/01/X1 ABD Co. decided to sell an building that they had bought 10 years previously. The building had cost $300,000 plus legal fees of $3,000 and was sold for $600,000. Indexation allowance of 30% of the cost of the asset was allowed for the effects of inflation. The building had been extended when purchased initially costing $100,000 and costs to sell of $6,000 were incurred on the sale. Capital gains are taxed at 20% Calculate the capital tax payable. 14

15 Solution $ Proceeds from sale 600,000 Less Cost to sell -6,000 Net Proceeds 594,000 Less Original Cost -300,000 Less Costs to Buy -3,000 Less Enhancement Costs -100,000 Less Indexation Allowance ((300, , ,000) x 30%) -120,900 Capital Gain 70,100 Tax Due (20%) 14,020 15

16 Illustration 3 On 01/01/X5 DFT Co. sold a building they had purchased on 01/01/X0. The building had cost $500,000 plus legal fees of $1,000 and was sold for $900,000. The building had been extended on 01/01/X3 costing $50,000 and costs to sell of $2,000 were incurred on the sale. Indexation allowance is available on assets bought/built at the below times at the following rates: 01/01/X1-31/12/X2 = 20% 01/01/X3-01/01/X5 = 15% Capital gains are taxed at 25% Calculate the capital tax payable. Solution $ Proceeds from sale 900,000 Less Cost to sell -2,000 Net Proceeds 898,000 Less Original Cost -500,000 Less Costs to Buy -1,000 Less Enhancement Costs -50,000 Less Indexation Allowance (Building) (500,000 x 20%) Less Indexation Allowance (Extension) (50,000 x 15%) -100,200-7,500 Capital Gain 239,300 Tax Due (25%) 59,825 16

17 Illustration 4 In Fabbland it is not possible to carry back capital losses to set against capital gains in previous years. However losses can be relieved against other current year capital gains, and then forward against future capital gains Kalls Co. has the following results: Year Capital Gains/(Losses) 1 5, , , ,000 Calculate the taxable gains based on the above information in each of the 4 years. Solution Year Capital Gains/ (Losses) Loss Allocation Taxable Gains 1 5, , ,000-10, ,000-2,000 5,000 Loss Allocated -12,000 17

18 Objective Test Questions 1. LM recently disposed of a building for 600,000 on 31 December The original cost of the building was 110,000 which reflected its dilapidated condition. 40,000 was spent to repair the roof on 31 December 2015 to bring it into occupation...a further 75,000 was spent on an extension on 31 December 20X7. The indexation factors are as follows: 20X5 to 20X9 30% 20X7 to 20X9 20% Calculate the capital gains tax arising on the disposal assuming a tax rate of 20% (rounded to the nearest ) Answer Proceeds Less cost Less enhancement Less enhancement Less: Indexation (110K + 40K) * 30% Less: Indexation (75K) * 20% Chargeable Gain % 43, MM purchases an asset on 1 April 20X0 for 375,000, incurring legal fees of 12,000.MM is resident in country X. There was no indexation allowed on the asset. MM sold the asset on 31 March 20X3 for 450,000 incurring transaction charges of 15,000. Tax is charded at 25%. Calculate the capital gains tax due from MM on the disposal of the asset. (Round to the nearest ) Answer 12,000 Disposal Proceeds 450,000 Costs to sell -15,000 Net Proceeds 435,000 Cost Duties Taxable gain %

19 3. Capital losses in the year must first be offset against capital gains in the year before being carried forward to offset against the first available gains in the future. During the year ended 30 April 20X4 SM made two disposals resulting in a capital gain of 15,000 and a capital loss of 18,000. In the year ended 30 April 20X5, the entity also disposed of a chargeable asset for 90,000. The asset originally cost 30,000 in 20X0 and maintenance costs of 5,000 were incurred in 20X3. In 20X4 there was enhancement expenditure of 10,000. The indexation factors were: 20X0 20X240% 20X3 20X438% 20X4 20X528% Which of the following options correctly shows the capital gains tax due for 31 March 20X4 and 20X5. You should assume a tax rate of 20% and no annual exemption throughout. A Nil ,040 B (600) ,440 C Nil ,440 D (3,000) ,440 Answer C 20X4 Net Capital Loss of 3,000 is assessed as NIL 2005 Proceeds 90,000 Less Loss b/f Less Original Cost -30,000 Less Enhancement -10,000 Less IA Cost Less IA Enhance Taxable Gain %

20 4. Profit Ltd and Loss Ltd are in a group for corporation tax purposes. Profit Ltd relevant trading profit of 150,000. Loss Ltd relevant trading loss of 90,000 and capital losses of 40,000. Calculate the group taxable profit. Answer Profit Ltd 150,000 Loss Ltd (90,000) Group Taxable Profits 60, An entity makes a taxable profit of 300,000 and pays corporate income tax at 20%. The entity pays a dividend to its shareholders. A shareholder receiving 7,000 dividend then pays the standard personal income tax rate 12% on the divided, paying a further 960 tax. The tax system could be said to be A A classical system B An Imputation system C A partial imputation system D A split rate system Answer A A classical system 20

21 Mind Map 3 - Tax III 21

22 Illustration 1 In Lalaland the rate of VAT is 15%. The following purchases and sales of a computer happen before it is eventually sold to the consumer. Abel manufactures the computer and sells it to a distributor for $200. The distributor sells it to a retailer for $300. The retailer sells it to the consumer for $500. The figures above are exclusive of VAT. Calculate the VAT payable by each of the parties above. Solution VAT payable on each transaction: Abel manufactures the computer and sells it to a distributor for $200 = VAT of (200 x 15%) $30 The distributor sells it to a retailer for $300 = VAT of (300 x 15%) $45 The retailer sells it to the consumer for $500 = VAT of (500 x 15%) $75 Party Input Tax Paid when Purchased Output Tax Paid when Sold Net Amount Payable Manufacturer Distributor Retailer Consumer

23 Illustration 2 Arttie Co. is registered for VAT and the VAT rate applicable is 12%. In the most recent VAT period they made sales of $120,000 and purchases of $50,000. Both of these figures are exclusive of VAT. Calculate the VAT payable in the period. Solution $ VAT Due on Sales (120,000 x 12%) VAT Paid on Purchases (50,000 x 12%) 6000 Net Amount Payable to Authorities

24 Illustration 3 Jenny s business is registered for sales tax purposes. During the quarter ending 31 December 2011, she made the following sales and purchases, all of which were subject to VAT at 20%: Sales $ Purchases $ Sales of Goods (Excludes Tax) 550 Purchase of Goods (Excludes Tax) 1,055 Sales of Goods (Includes Tax) 900 Purchase of Goods (Includes Tax) 720 Sales of Goods (Excludes Tax) 945 Purchase of Goods (Includes Tax) 420 Sales of Goods (Includes Tax) 660 Purchase of Goods (Includes Tax) 1,140 What is the amount of VAT payable or receivable on 31 December 2011? Solution $ Sale of Goods (Excludes Tax) 550 x 20% 110 Sale of Goods (Includes Tax) 900 x (20 / 120) 150 Sale of Goods (Excludes Tax) 945 x 20% 189 Sale of Goods (Includes Tax) 660 x (20 / 120) 110 Total Sales Tax on Sales 559 Purchases of Goods (Excludes Tax) 1,055 x 20% 211 Purchases of Goods (Includes Tax) 720 x (20 / 120) 120 Purchases of Goods (Includes Tax) 420 x (20 / 120) 70 Purchases of Goods (Includes Tax) 1,140 x (20 / 120) 190 Total Sales Tax on Purchases 591 Total Receivable ( ) 32 24

25 Objective Test Questions 1. Which of the following is not an indirect tax? A Wealth Tax B Excise Duty C Property Tax D Income Tax Answer D Income Tax 2. Zoe is in the process of completing her VAT return for the quarter ended 31 March The following information is available: Sales invoices totalling 128,000 were issued in respect of standard rated sales. Standard rated expenses amounted to 24,800. On 15 February 2013 Gwen purchased machinery at a cost of 24,150. This figure is inclusive of VAT. Unless stated otherwise all of the above figures are exclusive of VAT. The standard rate of tax is 20%. What is the Vat payable? Answer VAT return quarter ended 31 March 2013 Output VAT Sales (128,000 x 20%) 25,600 Input VAT Expenses (24,800 x 20%) 4,960 Machinery (24,150 x 20/120) 4,025 (8,985) VAT payable 16,615 25

26 3. Correctly identify the difference between exempt and zero rated supplies. The options cannot be used more than once. Type of Supply Zero Rated Exempt Options Entity must be registered for VAT purposes Entity does not register for VAT purposes Vat can be claimed back on purchases Vat cannot be claimed back on purchases 26

27 Mind Map 4 - Tax IV 27

28 Objective Test Questions 1. Which of the following is a characteristic of transfer pricing? A This does not have an effect on individual entity purposes B The results in transactions not taking place at arms length and profits being effected by the group members. C A legal way of reducing your tax bill D An illegal way of reducing your tax bill Answer B 2. Identify which of the following is a Benefit in Kind A Company Car B Time in Lieu C Gym Membership D Overtime Answer A & C 3. Which of the following describes Avoidance of Tax? A Illegal means to avoid tax B Legal means to avoid tax Answer B 28

29 Mind Map 5 - International Tax 29

30 Objective Test Questions 1. What determines a company s country of residence? A. Where the company s income is earned B. Where the company s place of control is C. Where they receive dividends D. Where the majority of their subsidiaries are located Answer B 2. Which of the following statements is correct about the deduction method of double taxation relief? A. Tax relief is obtained by deducting foreign tax as an expense in the statement of profit and loss B. Tax relief is obtained by treating foreign tax as a loss C. Tax relief is obtained by deducting the foreign tax from the foreign income so that only the net amount is subject to tax in the country of residency D. Tax relief is obtained by deducting foreign tax from revenue in the statement of profit or loss. Answer C 3. Which of the following is a concept of a Branch of a company? A. Loss relief is available B. Loss relief is not available C. Separate company D. Asset transfers can result in a gain or loss Answer A 4. Which of the following is an advantage for the tax authority of deduction of tax at source? A. Administration costs are borne by the entity deducting tax B. Tax is deducted after income is paid to the taxpayer C. Tax is collected later D. The total amount of tax due for the period is difficult to calculate Answer A 30

31 5. Which of the following cannot be classed as a permanent establishment under the OECD Model? A. Factory B. Office/Branch C. Construction project D. Pop up Restaurant Answer D 31

32 Mind Map 6 - Intro to Groups 32

33 Objective Test Questions 1. What does NCI stand for in terms of Group Accounting? A. Nuclear Control Institute B. Non Coded Information C. Non Controlling Interest D. Non Conforming Image Answer C 2. Which of the following can constitute control of a company after an undertaking? A. Has the right to exercise a dominant influence over an undertaking B. Owns 35% of the shares C. Has not got the right to appoint or remove a majority of its board of directors D. Has no right to returns from the company Answer A 33

34 Mind Map 7 - Introduction to Group SFP 34

35 Illustration 1 Almeria Murcia Non Current Assets Tangible Investment in Murcia 300 Current Assets Inventory Receivables Cash Ordinary Shares Accumulated Profits Equity Non Current Liabilities Current Liabilities Additional Information Almeria today acquired all the shares in Murcia for $300m. The Fair Value of the NCI at acquisition was 0. Required Prepare the consolidated statement of financial position for the Almeria group 35

36 Pro-Forma Working 1 - Group Structure Almeria Murcia Date Acquired Parent Share NCI Working 2 - Equity Table At Acquisition At Year End Share Capital Accumulated Profits Working 3 - Goodwill Cost of Parent Investment Fair Value of NCI at acquisition Less net assets at acquisition (W2) Goodwill 36

37 Working 4 - NCI $ Fair Value of NCI at acquisition NCI% of Sub Post-Acq Profits Value of NCI at Year End Working 5 - Accumulated Profits $ Parent s Accumulated Profits Add: Parent % of the subsidiary s post acquisition profits 37

38 SFP for Almeria Group Almeria Murcia Group Non Current Assets Goodwill Tangible Investment in Murcia 300 Current Assets Inventory Receivables Cash Ordinary Shares Accumulated Profits Non Controlling Interest Equity Non Current Liabilities Current Liabilities

39 Solution Working 1 - Group Structure Almeria 100% Murcia Date Acquired TODAY Parent Share 100% NCI 0% Working 2 - Equity Table At Acquisition At Year End Share Capital Accumulated Profits Working 3 - Goodwill Cost of Parent Investment 300 Fair Value of NCI 0 Less net assets at acquisition (W2) -300 Goodwill 0 39

40 Working 4 - NCI $ Fair Value of NCI at acquisition 0 NCI% of Sub Post-Acq Profits 0 Value of NCI at Year End 0 Working 5 - Accumulated Profits Parent s Accumulated Profits 240 $ Add: Parent % of the subsidiary s post acquisition profits Nil

41 SFP for Almeria Group Almeria Murcia Group Non Current Assets Goodwill None (W3) Nil Tangible Investment in Murcia 300 Cancel out Nil Current Assets Inventory Receivables Cash Ordinary Shares Parent 160 Accumulated Profits W5 240 Non Controlling Interest W4 Nil Equity Non Current Liabilities Current Liabilities

42 Information for Illustration 2 - OTQs for Lecture 7 Ant Dec Assets Investment in Dec Ordinary Shares Accumulated Profits Equity Liabilities Additional Information Ant today acquired 160m of the 200m shares in Dec. The Fair Value of the NCI was 50. OTQ 1 What is the percentage ownership and the date of acquisition for Ant Group? A. 70% & Today B. 80% & 1 year ago C. 80% & Today D. 100% & Today Answer C 42

43 OTQ 2 What is the value of the net assets acquired by Ant in Dec on the date of acquisition A. 200 B. 300 C. 100 D. 600 Answer B Working 2- Equity Table At Acquisition At Year End Share Capital Accumulated Profits OTQ 3 What is the value of the Goodwill in Dec on the date of acquisition? A. 100 B. 350 C. 50 D. 400 Answer A Working 3 - Goodwill Cost of Parent Investment 350 Fair Value of NCI at acquisition 50 Less net assets at acquisition (W2) -300 Goodwill 100 OTQ 4 43

44 What is the value of the non controlling interest in Dec at the year end? A. 100 B. 300 C. 100 D. 50 Answer D Working 4 - NCI $ Fair Value of NCI at acquisition 50 NCI% of Sub Post-Acq Profits 0 Value of NCI at Year End 50 OTQ 5 What is the value of the retained earnings for the group at the year end? A. 200 B. 300 C. 250 D. 50 Answer C Working 5 - Accumulated Profits $ Parent s Accumulated Profits 250 Add: Parent % of the subsidiary s post acquisition profits Nil 250 OTQ 6 44

45 What is the value of the total assets and the share capital that will appear in the statement of financial position for Ant Group? A & 100 B. 100 & 100 C. 1,100 & 300 D. 1,100 & 100 Answer B Statement of Financial Position for Ant Group Ant Dec Group Goodwill W3 100 Assets Investment in Dec 350 Cancelled in Goodwill W3 Nil Total Assets Ordinary Shares Accumulated Profits Parent Only W5 250 NCI W4 50 Liabilities Total Equity & Liabilities

46 Mind Map 8 - Group SFP continued 46

47 Illustration 1 Evan Dando Assets Investment in Dando 500 Current Assets Ordinary Shares ($1) Accumulated Profits Equity Non Current Liabilities Liabilities Additional Information Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m. The Fair Value of the NCI on the date of acquisition was $100m. Required Prepare the consolidated statement of financial position for the Evan group. 47

48 Solution Working 1- Group Structure Date Acquired Parent Share NCI Working 2 - Equity Table At Acquisition At Year End Share Capital Accumulated Profits Working 3 - Goodwill Cost of Parent Investment Fair Value of NCI at acquisition Less net assets at acquisition (W2) Goodwill 48

49 Working 4 - NCI $ Fair Value of NCI at acquisition NCI% of Sub Post-Acq Profits Value of NCI at Year End Working 5 - Accumulated Profits $ Parent s Accumulated Profits Add: Parent % of the subsidiary s post acquisition profits 49

50 Statement of Financial Position for Evan Group Evan Dando Group Goodwill Assets Investment in Dando 500 Current Assets Ordinary Shares ($1) Accumulated Profits NCI Equity Non Current Liabilities Liabilities

51 Solution Working 1- Group Structure Evan 75% Dando Date Acquired 1 Year Ago Parent Share 75% NCI 25% 100% Working 2 - Equity Table At Acquisition At Year End Share Capital Accumulated Profits Working 3 - Goodwill Cost of Parent Investment 500 Fair Value of NCI at acquisition 100 Less net assets at acquisition (W2) -240 Goodwill

52 Working 4 - NCI $ Fair Value of NCI at acquisition 100 NCI% of Sub Post-Acq Profits (25% x 60m) 15 Value of NCI at Year End 115 Working 5 - Accumulated Profits $ Parent s Accumulated Profits 250 Add: Parent % of the subsidiary s post acquisition profits (75% x 60m)

53 Statement of Financial Position for Evan Group Evan Dando Group Goodwill W3 360 Assets Investment in Dando 500 Cancelled out in W3. Nil Current Assets Ordinary Shares ($1) Accumulated Profits Parent Only 200 W5 295 NCI W Non Current Liabilities Liabilities

54 Illustration 2 Virtual Insanity Assets Investment in Insanity 600 Current Assets Ordinary Shares ($1) Accumulated Profits Equity Non Current Liabilities Liabilities Additional Information Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were $60m. The Fair Value of the NCI at that date was $120m. Required Prepare the consolidated statement of financial position for the Virtual group 54

55 Solution Working 1- Group Structure Virtual 60% Insanity Date Acquired 1 Year Ago Parent Share 60% NCI 40% 100% Working 2 - Equity Table At Acquisition At Year End Share Capital Accumulated Profits Working 3 - Goodwill Cost of Parent Investment 600 Fair Value of NCI at acquisition 120 Less net assets at acquisition (W2) -160 Goodwill

56 Working 4 - NCI Fair Value of NCI at acquisition 120 $ NCI% of Sub Post-Acq Profits (40% x ( )) 136 Value of NCI at Year End 256 Working 5 - Accumulated Profits Parent s Accumulated Profits 750 $ Add: Parent % of the subsidiary s post acquisition profits (60% x ( )

57 Statement of Financial Position for Virtual Group Virtual Insanity Group Goodwill W3 560 Assets Investment in Insanity 600 Cancelled in W3 Nil Current Assets Ordinary Shares ($1) Accumulated Profits Parent Only W5 954 NCI W4 256 Equity Non Current Liabilities Liabilities

58 Illustration 3 Brad acquires 80% of Angelina s share capital for $800. Angelina has 100 shares in issue with a nominal value of $1 and Angelina s share price is $8. At the date of acquisition the net assets of Angelina are $600. Calculate the gross goodwill arising on the acquisition. Solution Goodwill Cost of Parent s investment 800 Fair value of NCI at acquisition (100 x 20% x $8) Less net assets at acquisition in W2-600 Gross Goodwill

59 Illustration 4 Brad acquires 80% of Angelina s share capital for $800. Angelina has 100 shares in issue with a nominal value of $1 and Angelina s share price is $8. At the date of acquisition the net assets of Angelina are $600. Calculate the goodwill arising using the proportionate method. Solution Goodwill Cost of Parent Investment 800 Value of NCI (600 x 20%) 120 Net assets at acquisition (W2) -600 Goodwill

60 Illustration 5 Archie acquires 60% of Mitchell s share capital with consideration of $900. Mitchell has 200 shares in issue with a share price is $5. At the date of acquisition the net assets of Mitchell were $800 and are $950 at the year end. At the year end the retained earnings of Archie were $1,000. An impairment review has been carried out on the goodwill at the year end which has found it to be impaired by $40. Calculate the gross goodwill, the retained earnings and the NCI at the year end. Solution Goodwill Cost of Parent s investment 900 Fair value of NCI at acquisition (200 x 40% x $5) Less 100% net assets at acquisition in W2-800 Gross Goodwill 500 Impairment -40 Post Impairment Goodwill 460 Dr W4 16 Dr W

61 NCI Fair Value of NCI at Acquisition 400 NCI% Post Acquisition Profit ( ) x 40% 60 NCI Share of Impairment Retained Earnings Parent 1000 NCI% Post Acquisition Profit ( ) x 60% 90 Parent Share of Impairment

62 Illustration 6 French acquired 75% of Shambles several years ago. Cost of Investment Fair Value of NCI at acquisition Net assets at acquisition Net assets at year end Goodwill Impairment at Y/E $ $ $ $ $ 1, , If French has $1500 of retained earnings at the year end, calculate the gross goodwill, retained earnings for the group and the NCI at the year end. 62

63 Solution Goodwill Cost of Parent s investment 1,000 Fair value of NCI at acquisition (Market Value) 300 Less 100% net assets at acquisition in W2-800 Gross Goodwill 500 Impairment -200 Post Impairment Goodwill 300 DR W4 50 DR W5 150 NCI Fair Value of NCI at acquisition 300 Plus NCI share of post acquisition profits 2200 x 25% 550 Impairment

64 Retained Earnings Parent 1500 NCI% Post Acquisition Profit 2200 x 75% 1650 Parent Share of Impairment

65 Illustration 7 Pinky acquired 80% of Brain 4 years ago. The following information is relevant: Net Assets at year end Net Assets at acquisition Cost of investment Fair Value of NCI at acquisition $ $ $ $ Goodwill is calculated gross and is subject to an annual impairment review. In the current year goodwill has been impaired by $20. Pinky Brain Investment in Pinky 175 Assets Inventory Receivables Bank Ordinary Shares ($1) Accumulated Profits Equity Non current liabilities Liabilities

66 Solution Working 1- Group Structure Pinky 80% Brain Date Acquired 4 Years Ago Parent Share 80% NCI 20% 100% Working 2 - Net Assets Subsidiary At Acquisition At Year End Share Capital Accumulated Profits

67 Working 3 - Goodwill Cost of Parent s investment 175 Fair value of NCI at acquisition (Market Value) 25 Less 100% net assets at acquisition in W2-100 Gross Goodwill 100 Impairment -20 Post Impairment Goodwill 80 Dr W4 (20%) 4 Dr W5 (80%) 16 Working 4 - NCI Fair Value of NCI at acquisition 25 Plus NCI share of post acquisition profits 50 x 20% 10 Less Goodwill Impairment 20 x 20%

68 Working 5 - Group Accumulated Profit Parent s Accumulated Profits 240 Less Goodwill Impairment 20 x 80% -16 $ Add: Parent % of the subsidiary s post acquisition profits 80% x ( ) (W2) Statement of Financial Position for Pinky Group Pinky Brain Group Goodwill W3 80 Assets Inventory Receivables Bank Ordinary Shares ($1) Accumulated Profits Parent Only W5 264 NCI W4 31 Equity Non current liabilities Liabilities

69 Illustration 8 George owns 80% of the subsidiary Bungle. Goodwill has been calculated on a proportionate basis and at acquisition was $400m. During the impairment review in the current year it was found that the carrying value of the goodwill has been impaired by $50m What is the required treatment to deal with the impairment of goodwill? Solution Goodwill on Balance Sheet Proportionate goodwill 400 Impairment -50 Goodwill after impairment 350 Treatment DR Retained Earnings (W5) 50 CR Goodwill 50 69

70 Objective Test Questions 1. PRT acquired 90% of SUB s ordinary shares on 1 January 2012 for $1,250,000 when SUB s retained earnings were $300,000. At 1 January 2011 the fair value of the Non- Controlling Interest was $200,000. The equity of SUB as at 31 December 2013: Ordinary share capital 430,000 Share premium 86,000 Retained earnings 324,000 The retained earnings of PRT were $2,100,000 at 31 December What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for the Non-Controlling Interest? A. $250,000 B. $204,600 C. $205,000 D. $206,400 Answer D Solution Net Assets Subsidiary At Acquisition At Year End Share Capital Share Premium Accumulated Profits Post Acq Profit 64 NCI Fair Value of NCI at acquisition 200 Plus NCI share of post acquisition profits 10% x

71 2. HX acquired 70% of SA s equity shares on 1 July 2010 for $452,000.The fair value of the NCI on the 1 July 2010 was $60,000 SA has $200,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share premium of $40,000 and retained earnings of $62,000. What is the value of the gross goodwill arising on the acquisition of SA? A. $235,000 B. $210,000 C. $245,000 D. $135,000 Answer B Solution Working 2 - Net Assets Subsidiary At Acquisition At Year End Share Capital 200,000 N/A Share Premium 40,000 Accumulated Profits 62, Working 3 - Goodwill Cost of Parent s investment 452,000 Fair value of NCI at acquisition (Market Value) 60,000 Less 100% net assets at acquisition in W2-302,000 Gross Goodwill 210,000 71

72 3. HP acquired 70% of SA s equity shares on 1 July 2010 for $652,000. Sauce has $400,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share premium of $220,000 and retained earnings of $122,000. What is the value of the proportionate goodwill arising on the acquisition of SA? A. $235,000 B. $210,000 C. $132,600 D. $135,000 Answer C Solution Working 2 - Net Assets Subsidiary At Acquisition At Year End Share Capital 400,000 N/A Share Premium 220,000 Accumulated Profits 122, ,000 Working 3 - Goodwill Cost of Parent s investment 652,000 Fair value of NCI at acquisition ( x 30%) 222,600 Less 100% net assets at acquisition in W2-742,000 Gross Goodwill 132,600 72

73 4. PRT acquired 80% of SUB s ordinary shares on 1 January 2011 for $1,136,000 when SUB s retained earnings were $260,000. At 1 January 2011 the fair value of the Non- Controlling Interest was $300,000. SUB has not issued any new shares since acquisition by PRT. SUB is PRT s only subsidiary. PRT calculated that goodwill in its subsidiary was impaired by 20% at 31 December The equity of SUB as at 31 December 2013: $000 Ordinary share capital 430 Share premium 86 Retained earnings 324 The retained earnings of PRT were $2,100,000 at 31 December What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Goodwill? A. $250,000 B. $200,000 C. $440,000 D. $528,000 Answer D 73

74 Solution Working 2 - Net Assets Subsidiary At Acquisition At Year End Share Capital Share Premium Accumulated Profits Post Acq Profit 64 Working 3 - Goodwill Cost of Parent s investment 1,136 Fair value of NCI at acquisition (Market Value) 300 Less 100% net assets at acquisition in W2-776 Gross Goodwill 660 Impairment

75 5. PRT acquired 80% of SUB s ordinary shares on 1 January 2011 for $2,346,000 when SUB s retained earnings were $341,000. SUB has not issued any new shares since acquisition by PRT. SUB is PRT s only subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by 10% at 31 December The equity of SUB as at 31 December 2013: $000 Ordinary share capital 630 Share premium 24 Retained earnings 576 The retained earnings of PRT were $3,100,000 at 31 December What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Goodwill? A. $195,000 B. $1,395,000 C. $1,234,000 D. $155,000 Answer B 75

76 Solution Working 2 - Net Assets Subsidiary At Acquisition At Year End Share Capital Share Premium Accumulated Profits Post Acq Profit 235 Working 3 - Goodwill Cost of Parent s investment 2,346 Fair value of NCI at acquisition (994 x 20%) 199 Less 100% net assets at acquisition in W2-995 Gross Goodwill 1550 Impairment

77 Mind Map 9 - Inter Company Transactions 77

78 Illustration 1 A Parent company has recorded an asset of $500 goods receivable with a subsidiary. The subsidiary had recorded this as a payable of $500. How should this be adjusted for on consolidation? Solution When cross casting assets & liabilities: Less Payables $500 (DR) Less Receivables $500 (CR) Illustration 2 A Parent company has recorded an asset of $300 goods receivable with a subsidiary. The subsidiary had recorded this as an initial liability payable of $300 but has just recorded and sent a cheque payment to the parent of $50 leaving the payable balance of $250. How should this be adjusted for on consolidation? Solution When cross casting assets & liabilities: Less Payables $250 (DR) Plus Cash at bank $50 (DR) Less Receivables $300 (CR) 78

79 Illustration 3 Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary. The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has not received them. As a result the subsidiary has a balance of $400 recorded as a liability in payables. How should this be treated on consolidation? Solution When cross casting assets & liabilities: Less Payables $400 (DR) Plus Inventory $100 (DR) Less Receivables $500 (CR) 79

80 Illustration 4 Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below Arctic Monkeys Current Assets Inventory Receivables Bank Current Liabilities The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction of $10m in respect of cash sent by Monkeys but not yet received by Arctic. The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these goods had been dispatched by Arctic, but were not yet received by Monkeys. Show the treatment on consolidation. 80

81 Solution Remember! Add the goods/cash in transit Subtract the inter company current accounts +/- Item Where? $m + Cash in transit Cash at Bank 10 + Goods in transit Inventory 25 - Inter Company Current Account Payables 35 - inter Company Current Account Receivables 70 Current Assets Arctic Monkeys Group Inventory Goods in transit of 25 Receivables inter company current account Bank cash in transit Current Liabilities inter company current account

82 Illustration 5 Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below Sea Lion Current Assets Inventory Receivables Bank Current Liabilities The trade payables of Lion includes $20m due to Arctic. This was after the deduction of $15m in respect of cash sent by Lion but not yet received by Sea. The receivables of Sea at the year end include $50m due from Lion. $15m of these goods had been dispatched by Sea, but were not yet received by Lion. Show the treatment on consolidation. 82

83 Solution Remember! Add the goods/cash in transit Subtract the inter company current accounts +/- Item Where? $m + Cash in transit Cash at Bank 15 + Goods in transit Inventory 15 - Inter Company Current Account Payables 20 - inter Company Current Account Receivables 50 Current Assets Sea Lion Group Inventory Goods in transit of 15 Receivables inter company current account Bank cash in transit Current Liabilities inter company current account

84 Illustration 6 Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun. I. Calculate the PURP. II. III. Show the accounting treatment if the parent company is the seller. Show the accounting treatment if the subsidiary company is the seller. IV. Do parts I - III if the goods had been sold at a margin of 30%. 84

85 Solution (Mark-up) Unsold Inventory Mark-up PURP (400 x 3/4) = / Parent is seller DR/CR Account $ $ DR Accumulated Profits (W5) to decrease 60 CR Inventory to decrease 60 Subsidiary is seller DR/CR Account $ $ DR Accumulated Profits (W5) with parent share to decrease (60 x 80%) 48 DR NCI (W4) with subsidiary share to decrease 12 CR Inventory to decrease 60 85

86 Solution (Margin) Unsold Inventory Margin PURP (400 x 3/4) = % 90 Parent is seller DR/CR Account $ $ DR Accumulated Profits (W5) to decrease 90 CR Inventory to decrease 90 Subsidiary is seller DR/CR Account $ $ DR Accumulated Profits (W5) with parent share to decrease (90 x 80%) 72 DR NCI (W4) with subsidiary share to decrease 18 CR Inventory to decrease 90 86

87 Illustration 7 Avco Co. owns 60% of Strappo Co. and on the first day of this accounting period a Non Current Asset with a carrying value of $100,000 and a useful economic life of 5 years was sold between the two for $120,000. I. Show the accounting treatment if the parent company is the seller II.Show the accounting treatment if the subsidiary company is the seller Solution Parent is seller DR/CR Account $ $ Adjust the Value of the Asset DR Accumulated Profits (W5) 20,000 CR Non Current Asset to decrease 20,000 Reduce depreciation as too much provided DR Non Current Asset to Increase (20,000 / 5) 4,000 CR Accumulated Profits (W5) 4,000 Subsidiary is seller Account $ $ Adjust the Value of the Asset DR Accumulated Profits (W5) with P% of PURP (20,000 x 60%) 12,000 DR NCI (W4) with NCI% of PURP (20,000 x 40%) 8,000 CR Non Current to decrease 20,000 Reduce depreciation as too much provided DR Non Current to Increase (20,000 / 5) 4,000 CR NCI (W4) with NCI% of Dep n (4,000 x 40%) 1,600 CR Accumulated Profits (W5) with P% of Dep n (4,000 x 60%) 2,400 87

88 Objective Test Questions 1. A Parent company has recorded an asset of $800 goods receivable with a subsidiary. The subsidiary had recorded this as a payable of $800. The treatment on consolidation has been recorded as: Less Payables $800 (CR) Less Receivables $800 (DR) Is this treatment: A Correct B Incorrect Answer B (The DR and CR are the wrong way around) 2. A Parent company has recorded an asset of $2,000 goods receivable with a subsidiary. The subsidiary had recorded this as an initial liability payable of $2000 but has just recorded and sent a cheque payment to the parent of $230 leaving the payable balance of $1,770. How should this be adjusted for on consolidation? Less Payables $1,770 (DR) Plus Cash at bank $230 (DR) Less Receivables $2,000 (CR) Is this treatment: A Correct B Incorrect Answer A 88

89 3. Dafo has sold goods to their subsidiary Aldo during the year and at the year end has recorded a receivable of $4,690 due from Aldo. Aldo has sent a cheque which has not yet been received by Dafo which means that the payable due to Dafo is recorded as $3,240 in the financial statements of Aldo. Before adjustment for any of the above the group cash balance stood at $134,880. What will the balance on cash be after making an adjustment for the above? A. $139,570 B. $138,120 C. $136,330 D. $133,430 Answer C Solution Cash in transit ( ) $1450 Group Cash (134, ) $136,330 89

90 4. DW sold goods to PR. DW is PR s 80% owned subsidiary on 1 February The goods were sold to PR for $90,000. HW made a profit of 25% on the original cost of the goods. At the year end, 30 June 2011, 30% of the goods had been sold by PR, the balance were still in PR s inventory and PR had not paid for any of the goods. Which ONE of the following states the correct adjustments required in the HW group s consolidated statement of financial position at 30 June 2011? A. Reduce inventory and retained earnings by $12,600 and Reduce payables and receivables by $12,600. B. Reduce inventory by $12,600, the NCI by $2,520, retained earnings by $10,080 and Reduce payables and receivables by $90,000. C. Reduce inventory and retained earnings by $15,750 and Reduce payables and receivables by $15,750. D. Reduce inventory by $15,750, the NCI by $3,150, retained earnings by $12,600 and Reduce payables and receivables by $90,000. Answer C Solution Unsold Mark up PURP 90,000 x 70% = 63,000 25/125 12,600 CR Inventory 12,600 DR NCI (20%) 2,520 DR Ret. Earnings (80%) 10,080 DR Payables 90,000 CR Payables 90,000 90

91 5. Dando Co. owns 80% of Pobo Co. and on the first day of this accounting period Pobo Co. sold a Non Current Asset to Dando Co. The asset had a carrying value of $250,000 and a useful economic life of 4 years was sold between the two for $300,000. What amount will go to NCI to account for the above transaction? A. $7,500 CR B. $7,500 DR C. $10,000 DR D. $2,500 CR Answer B Solution Account $ $ Adjust the Value of the Asset DR Accumulated Profits (W5) with P% of PURP (50,000 x 80%) 40,000 DR NCI (W4) with NCI% of PURP (50,000 x 20%) 10,000 CR Non Current to decrease 50,000 Reduce depreciation as too much provided DR Non Current to Increase (50,000 / 4) 12,500 CR NCI (W4) with NCI% of Dep n (12,500 x 20%) 2,500 CR Accumulated Profits (W5) with P% of Dep n (12,500 x 80%) 10,000 Amount to NCI (10,000 (DR) - 2,500 (CR)) 7,500 (DR) 91

92 Mind Map 10 - Associates (IAS 28) 92

93 Illustration 1 3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of $400,000. Since that time Wars Ltd.has had the following results: Year Profit Dividend Paid By Associate 1 $200, $160,000 $150,000 3 $30,000 0 Due to poor trading results and customer service issues, Star Ltd feel that in the current year the investment in Wars Ltd. has been impaired by $20,000. Show the treatment of War Ltd. in the statement of financial position of Star Group and in the Income statement for the 3 years of the investment. Solution Year 1 Investment In Associate (SFP) Initial Investment 400,000 Parent Share of Post Acquisition Profit (200,000) x 25% 50,000 Investment in Associate 450,000 Year 1 Income From Associate (Income Statement) Parent share of Current Year Income (200,000 x 25%) 50,000 93

94 Year 2 Investment In Associate (SFP) Initial Investment 400,000 Parent Share of Post Acquisition Profit (200, ,000) x 25% 90,000 Share of Dividend (150,000 x 25%) -37,500 Investment in Associate 452,500 Year 2 Income From Associate (Income Statement) Parent share of Current Year Income (160,000 x 25%) 40,000 Year 3 Investment In Associate (SFP) Initial Investment 400,000 Parent Share of Post Acquisition Profit (200, , ,000) x 25% 97,500 Share of Dividend (150,000 x 25%) -37,500 Impairment -20,000 Investment in Associate 440,000 Year 3 Income From Associate (Income Statement) Parent share of Current Year Income (30,000 x 25%) 7500 Impairment -20,000 Loss From Associate

95 Illustration 2 Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%. At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun. I. Calculate the PURP. II. III. Show the accounting treatment if the parent company is the seller. Show the accounting treatment if the Associate company is the seller. 95

96 Solution Unsold Inventory Mark-up PURP Group % (1300 x 1/2) = / Parent is seller DR/CR Account $ $ DR Accumulated Profits (W5) to decrease 45 CR Investment in Associate 45 Associate is seller DR/CR Account $ $ DR Accumulated Profits (W5) to decrease 45 CR Group Inventory 45 96

97 Objective Test Questions 1. An associate is an entity in which an investor has significant influence over the investee. Which of the following indicate(s) the presence of significant influence? I. The investor owns 330,000 of the 1,500,000 equity voting shares of the investee II. The investor has representation on the board of directors of the investee III. The investor is able to insist that all of the sales of the investee are made to a subsidiary of the investor IV. The investor controls the votes of a majority of the board members A (i) and (ii) only B (i), (ii) and (iii) C (ii) and (iii) only D All four Answer A 2. The Caddy group acquired 240,000 of August s 800,000 equity shares for $6 per share on 1 April August s profit after tax for the year ended 30 September 2014 was $400,000 and it paid an equity dividend on 20 September 2014 of $150,000. On the assumption that August is an associate of Caddy, what would be the carrying amount of the investment in August in the consolidated statement of financial position of Caddy as at 30 September 2014? A $1,455,000 B $1,500,000 C $1,515,000 D $1,395,000 Answer A Solution Parent Investment (240 x 6) 1,440 Share Profit (400 x 30% x 6/12) 60 Dividend Received (150 x 30%) -45 1,455 97

98 3. HB sold goods to AT, its 30% owned associate, on 1 November 20X0. The goods were sold to S2 for $33,000. HB made a profit of 25% on the original cost of the goods. At the year end, 31 March 20X1, 50% of the goods had been sold by S2. The remaining goods were included in inventory. What is the amount of the adjustment required to retained earnings in the consolidated statement of financial position at 31 March 20X1. A. $660 B. $1,238 C. $3,300 D. $990 Answer D Solution Unsold Mark up Associate % PURP 16,500 25/125 30% The HC group acquired 30% of the equity share capital of AF on 1 April 2010 paying $25,000. At 1 April 2010 the equity of AF comprised: $1 equity shares 50,000 Share premium 12,500 Retained earnings 10,000 AF made a profit for the year to 31 March 2011 (prior to dividend distribution) of $6,500 and paid a dividend of $3,500 to its equity shareholders. What is the value of HC s investment in AF for inclusion in HC s statement of financial position at 31 March A $26,950 B $31,500 C $28,000 D $25,900 Answer D 98