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Assignment 2


The value of this assessment is 20% and total marks are 40.

Unit Learning outcomes

ULO3: discuss, explain and evaluate the issued involved in accounting for investment in subsidiaries; and put on this knowledge in preparing group accounts.

ULO4: apply and show the suitable technical knowledge in analyzing company accounting information and problem solving; provide justification for their decisions by creating references to related accounting standards; and communicate them to the related stakeholder.

Graduate Learning Outcomes

GLO1: discipline-specific knowledge and capabilities

GLO2: communication

GLO8: Global citizenship

Assignment topics

Section A concept of control

Leo Ltd establishes Knapp Ltd for the sole purpose of developing a new product to be manufactured and marketed by Leo Ltd. Leo Ltd engages Mr. Wang to lead the team to develop the new product. Mr. Wang is named Managing Director of Knapp Ltd at an annual salary of $100,000, $10,000 of which is advanced to Mr. Wang by Knapp Ltd at the time Knapp Ltd is established. Mr. Wang invests $10,000 in the project and receives all of Knapp Ltd’s initial issue of 10 shares of voting ordinary shares.

Leo Ltd transfers $500,000 to Knapp Ltd in exchange for 7%, 10-year debentures convertible at any time into 500 shares of Knapp Ltd voting ordinary shares. Knapp Ltd has enough shares authorized to fulfill its obligation if Leo Ltd converts its debentures into voting ordinary shares.

The constitution of Knapp Ltd provides certain powers for the holders of voting ordinary shares and the holders of securities convertible into voting ordinary shares that require a majority of each class voting separately. These include:

a. the power to amend the corporate purpose of Knapp Ltd, and

b. the power to authorize and issue voting shares or securities convertible into voting shares.

At the time Knapp Ltd is established, there are no known economic legal impediments to Leo Ltd converting the debt.


Discuss whether Knapp Ltd is a subsidiary of Leo Ltd. It is assumed that the instrument is currently exercisable.

In your discussion, you should address the following aspects of the case above:

1. The concept of control, as outlined by AASB 10 Consolidated Financial Statements.

2. Actual control vs. capacity to control.

3. Should Leo Ltd be considered as an active controller or a passive controller and why?

4. Can Mr. Wang control Knapp Ltd until Leo Ltd actually chooses to exercise the conversion option?

5. Should the likelihood of exercise of the conversion option be part of the decision process as well? (10 marks)

Section B Consolidation Journal Entries

Dean Ltd acquired all the issued share capital of Diane Ltd on 1 January 2013 for cash $200,000. On the acquisition date, the equity of Diane Ltd consists of share capital, $125,000, general reserve -

$31,250 and retained earnings $25,000.

All the identifiable assets and liabilities of Diane Ltd were recorded at fair value except for some depreciable plant and machinery, which had a carrying amount of $106,250 (cost $125,000) and fair value of 112,500. The remaining useful life was 10 years. The fair value adjustments would be made on consolidation rather than on Diane’s own accounting book.

Additional information shows:

1. During the current period, Dean Ltd sold inventory to Diane Ltd for $25,000. This had originally cost Dean Ltd $22,750 to manufacture. By 31 December 2017, Diane sold half of the inventory to Brit Ltd for $15,388.

2. Dean Ltd’s opening inventory includes inventory purchased from Diane Ltd for $109,000. The inventory had originally cost Diane Ltd $89,000 to purchase.

3. At 1 January 2017, Diane Ltd sold a machine to Dean Ltd for $180,000. This item had a carrying amount at the time of sale to Diane Ltd of $120,000 (original cost $200,000). The remaining useful life of the machine is 12 years for both entities.

4. Dean Ltd provided computer services cost $36,000 to Diane Ltd during the current financial year. At 31 December 2017, $3,000 remained unpaid.

5. On 1 January 2016, Diane Ltd sold a plant to Dean Ltd for $22,000. Diane Ltd recorded a profit of $8,000 before tax. The remaining useful life was 10 years at the time of this intra-group transaction.

6. Diane Ltd declared a final dividend of $10,000 from its current year’s profit.

7. Goodwill had been impaired by 10% in the first year following the acquisition. During the year ended 31 December 2017, it was considered that the goodwill has been further impaired by an amount of $3,000.

8. The tax rate is 30%.


1. Present the acquisition analysis.

2. Prepare all necessary consolidation worksheet journal entries for the year ended 31 December 2017, according to the requirements of AASB10 Consolidated Financial Statements. Assuming the financial year for Dean Ltd and Diane Ltd is as same as the calendar year.

(3 + 27 = 30 marks)

Challenges may face by students

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