consolidations week 4 text chap 17 & 18 consolidations week 4 text chap 17 & 18

CONSOLIDATIONSWEEK 4

TEXT CHAP 17 & 18

CONSOLIDATIONSWEEK 4

TEXT CHAP 17 & 18

Partial Ownership in Partial Ownership in SubsidiarySubsidiary

Ownership interest in a subsidiary other than the Ownership interest in a subsidiary other than the parent company is referred to asparent company is referred to as

‘ ‘ Outside Equity Interest’ (OEI)Outside Equity Interest’ (OEI)

80%80%

OEI 20%OEI 20%

H LTD

S LTD

Consolidation entriesConsolidation entries

Pre-acquisition entry only adjust Pre-acquisition entry only adjust proportionproportion Dividends only Dividends only proportionproportion Other entries (e.g. transfers. inventory & depreciable Other entries (e.g. transfers. inventory & depreciable

assets assets no changeno change)) O.E.I. adjustments - additional entriesO.E.I. adjustments - additional entries

1. at acquisition1. at acquisition

2. between acq date and beginning of2. between acq date and beginning of

current periodcurrent period

3. current period3. current period

Goodwill & adjustments to Goodwill & adjustments to Fair ValuesFair Values

On 1 July 2000, Vanity Ltd acquired 60% of the issued On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity capital of Fair Ltd for $46,600 when the shareholders equity of fair was:of fair was:

Capital 40,000Capital 40,000

General Reserve 2,000General Reserve 2,000

Retained Profits 2,000Retained Profits 2,000

Liabilities included Provision for Dividend $1000Liabilities included Provision for Dividend $1000

At 1 July 19x0 fair value of Fair Ltd assets :At 1 July 19x0 fair value of Fair Ltd assets :

Equipment (cost $250,000 acc depn $70,000 ) Equipment (cost $250,000 acc depn $70,000 )

Fair value $200,000 Fair value $200,000

Inventory (fair values $10,000 )Inventory (fair values $10,000 )

Equipment further 5 year life goodwill 5 yrsEquipment further 5 year life goodwill 5 yrs












F.V. ASSETS ACQ60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000COST OF ACQ 46,600-.6*1000 = 46 000GOODWILL $7,000

AMORTISATION per annum = 1400














1. REVALUATION ENTRYDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,0002.PRE-ACQ ENTRYDR CAPITAL 24,000DR GR 1,200DR R.P. 1,200DR A.R.R. 8,400DR GOODWILL 7,000DR INVENTORY 6,000DR PROV FOR DIV 600 CR D.T.L. 1,800 CR DIVIDEND REC 600 CR SHARES IN S 46,000

















1. OEI ENTRY 40%DR CAPITAL 16 000DR GENERAL RESERVE 800DR R P 800DR ARR 5 600 CR OEI 23 200















1. REVALUATION ENTRY after 3 yearsDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000DR Depreciation Expense 4 000DR Retained Profits 8 000 CR Acc Depreciation 12 000DR DTL 3,600 CR Income Tax Expense 1,200 CR R P 2,400

2.PRE-ACQ ENTRYDR Goodwill expense 1,400DR CAPITAL 24,000DR GR 1,200DR R.P. 8,200DR A.R.R. 8,400DR GOODWILL 7,000 CR Acc Amortisation 4,200 CR SHARES IN S 46,000

1. REVALUATION ENTRY after 3 yearsDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000DR Depreciation Expense 4 000DR Retained Profits 8 000 CR Acc Depreciation 12 000DR DTL 3,600 CR Income Tax Expense 1,200 CR R P 2,400

2.PRE-ACQ ENTRYDR Goodwill expense 1,400DR CAPITAL 24,000DR GR 1,200DR R.P. 8,200DR A.R.R. 8,400DR GOODWILL 7,000 CR Acc Amortisation 4,200 CR SHARES IN S 46,000



OEI Subsequent to OEI Subsequent to acquisition acquisition

Pre-acquisition profits Pre-acquisition profits (done)(done) Current profitsCurrent profits Profits from acquisition to beginning of current Profits from acquisition to beginning of current

periodperiod

Example OEIExample OEI

Over the next 3 years FAIR Ltd recorded the followingOver the next 3 years FAIR Ltd recorded the following

19x1 19x2 19x319x1 19x2 19x3

O.P. (after tax) 8,000 12,000 15,000O.P. (after tax) 8,000 12,000 15,000

R.P. (begin) 2R.P. (begin) 2,000 7,800 17,000,000 7,800 17,000

10,000 19,800 32,00010,000 19,800 32,000

Dividend Paid 1,000 1,200 1,500Dividend Paid 1,000 1,200 1,500

Dividend Provided Dividend Provided 1,200 1,600 2,0001,200 1,600 2,000

Retained Profits (end) Retained Profits (end) $7,800 $17,000 $28,500$7,800 $17,000 $28,500



19x1 19x2 19x319x1 19x2 19x3


R.P. (begin) 2R.P. (begin) 2,000 7,800 17,000,000 7,800 17,000

10,000 19,800 32,00010,000 19,800 32,000




Year 3 ::1. Current profits40% 15 000- depn adjustment revaluation entry 4000- 1200ie 40% (15 000-(4 000-1 200))DR OEI Share of Profit 4 880 CR OEI 4 880

Year 3 ::1. Current profits40% 15 000- depn adjustment revaluation entry 4000- 1200ie 40% (15 000-(4 000-1 200))DR OEI Share of Profit 4 880 CR OEI 4 880



19x1 19x2 19x319x1 19x2 19x3


R.P. (begin) 2R.P. (begin) 2,000 7,800 17,000,000 7,800 17,000

10,000 19,800 32,00010,000 19,800 32,000




Year 3::1. Pre-acq profits (excluding current year)= 17 000 - @acq 2 000 - preac entry( 8 000 - 2400) *40%= 3 760DR Retained Profits 3 760 CR OEI 3 760

Year 3::1. Pre-acq profits (excluding current year)= 17 000 - @acq 2 000 - preac entry( 8 000 - 2400) *40%= 3 760DR Retained Profits 3 760 CR OEI 3 760

OEI Post Acquisition OEI Post Acquisition DividendDividend

Dividends paid by Subsidiary $10 000Dividends paid by Subsidiary $10 000

dr Dividend revenue 8,000dr Dividend revenue 8,000

cr Dividends paid 8,000cr Dividends paid 8,000

(adjust based 80% $10,000)(adjust based 80% $10,000) OEI adjustmentOEI adjustment

dr OEI 2,000dr OEI 2,000

cr Dividends paid 2,000cr Dividends paid 2,000

(20% $10,000)(20% $10,000)

OEI Post Acquisition OEI Post Acquisition DividendDividend

Dividends declared by Subsidiary $ 15 000Dividends declared by Subsidiary $ 15 000

dr Dividend payable 12,000dr Dividend payable 12,000

cr Dividends declared 12,000cr Dividends declared 12,000

(adjust based 80% $15,000)(adjust based 80% $15,000)

dr Dividend revenue 12,000dr Dividend revenue 12,000

cr Dividends receivable 12,000cr Dividends receivable 12,000

(adjust based 80% $15,000)(adjust based 80% $15,000)

OEI adjustmentOEI adjustment

dr OEI 3,000dr OEI 3,000

cr dividends declared 3,000cr dividends declared 3,000

(20% $15,000)(20% $15,000)

Interentity eliminations- Interentity eliminations- oei ?oei ?

Inter company adjustments covered previously Inter company adjustments covered previously eliminate the total unrealised profit. However if there is eliminate the total unrealised profit. However if there is OEI then any adjustment has to take this into OEI then any adjustment has to take this into considerationconsideration

ieieOpening Stock adjustmentOpening Stock adjustmentClosing Stock AdjustmentClosing Stock AdjustmentUnrealised Profit on sale of Non-current AssetsUnrealised Profit on sale of Non-current Assets

Down stream adjustmentsDown stream adjustments

If asset sold down stream ie Holding coy sells to If asset sold down stream ie Holding coy sells to subsidiary > any adjustment to unrealised profit subsidiary > any adjustment to unrealised profit would be profit in the Holding Coy. OEI have no would be profit in the Holding Coy. OEI have no interest in this. No further adjustment.interest in this. No further adjustment.

80%80%

OEI 20%OEI 20%

H LTD

S LTD

Up stream adjustmentsUp stream adjustments

If asset sold up stream ie Subsidiary Coy sells to If asset sold up stream ie Subsidiary Coy sells to Holding Coy > any adjustment to unrealised profit Holding Coy > any adjustment to unrealised profit would be profit in the Subsidiary Coy. OEI do have would be profit in the Subsidiary Coy. OEI do have any interest ie they own % of company. Further any interest ie they own % of company. Further adjustment required.adjustment required.

80%80%

OEI 20%OEI 20%S LTD

H LTD

OEI & Inter-entity OEI & Inter-entity transactiontransaction

closing stockclosing stock Exercise in text Gum buys 80% of Tree= OEI 20%Exercise in text Gum buys 80% of Tree= OEI 20% Inventory (assume Tree sold to Gum Ltd)Inventory (assume Tree sold to Gum Ltd)

dr Sales 23 000dr Sales 23 000

cr Cost of Sales 21 500cr Cost of Sales 21 500

cr Inventory 1 500cr Inventory 1 500

dr DTA 450dr DTA 450

cr Tax expense 450cr Tax expense 450

(these entries still done as before on 100%)(these entries still done as before on 100%) OEI entry adjustmentOEI entry adjustment

dr OEI 210dr OEI 210

cr OEI share profit 210cr OEI share profit 210

(20% $1 050)(20% $1 050)

Note if Gum had sold to Tree Note if Gum had sold to Tree no OEI adjustmentno OEI adjustment


Opening stock adjustmentOpening stock adjustment Inventory (assume Tree sold to Gum Ltd)Inventory (assume Tree sold to Gum Ltd)

dr R.P. 4 000dr R.P. 4 000

cr Cost of Sales 4,000 cr Cost of Sales 4,000

dr Tax expense 1 200dr Tax expense 1 200

cr R.P. 1,200cr R.P. 1,200

(these entries still done as before on 100%)(these entries still done as before on 100%)

OEI entry adjustmentOEI entry adjustmentdr OEI share profit 560dr OEI share profit 560

cr R.P. 560cr R.P. 560

(20% (4,000-1,200)(20% (4,000-1,200)

note if Gum had sold to Tree note if Gum had sold to Tree no OEI adjustment no OEI adjustment


Transfer depreciable assetTransfer depreciable asset Assume that on 1 July 200X the Subsidiary sells a Assume that on 1 July 200X the Subsidiary sells a

depreciable asset to the Holding Company for $50 depreciable asset to the Holding Company for $50 000, the written down value of the asset being $40 000, the written down value of the asset being $40 000. Assume that the non current asset has a 000. Assume that the non current asset has a further 5 year life.further 5 year life.

Because this is an upstream transaction the OEI is Because this is an upstream transaction the OEI is affected. At 30 June 200Y the consolidation journal affected. At 30 June 200Y the consolidation journal entries would be:entries would be:


Elimination entry:Elimination entry: Revenue on sale of non current asset DR 50 000Revenue on sale of non current asset DR 50 000 Carrying amount of non current asset CR 40 000Carrying amount of non current asset CR 40 000 Non current asset CR 10 000Non current asset CR 10 000

Deferred Tax Asset DR 3 000Deferred Tax Asset DR 3 000 Income Tax Expense CR 3 000Income Tax Expense CR 3 000

OEI AdjustmentOEI Adjustment

OEI DR 1 400OEI DR 1 400 OEI – Share of Net Profit CR 1 400OEI – Share of Net Profit CR 1 400 (20% of (10 000 – 3 000)) (20% of (10 000 – 3 000))


Depreciation AdjustmentDepreciation Adjustment

Accumulated Depreciation – Non current asset DR 2 000Accumulated Depreciation – Non current asset DR 2 000 Depreciation Expense CR 2 000Depreciation Expense CR 2 000

Income Tax Expense DR 600Income Tax Expense DR 600 Deferred Tax Asset CR 600Deferred Tax Asset CR 600

OEI AjustmentOEI Ajustment

OEI - Share of Net Profit DR 280OEI - Share of Net Profit DR 280 OEI DR 280OEI DR 280 (2 000 – 600) x 20%(2 000 – 600) x 20%

Tutorial QuestionsTutorial Questions

Exercise 17.1 Exercise 17.1 Exercise 17.2Exercise 17.2 Problem 17.1Problem 17.1 Exercise 18.1Exercise 18.1 Exercise 18.2Exercise 18.2 Exercise 18.4Exercise 18.4

consolidations week 4 text chap 17 & 18 consolidations week 4 text chap 17 & 18

Documents

19x0 fair value of fair

inventory fair values

fair values n

issued capital of fair

shareholders equity

cr equipment

dr goodwill

dr inventory