MAA716 Financial Accounting Assignment Help

MAA716 Financial Accounting Assignment Help

MAA716 Financial Accounting Assignment Help

Introduction

This assessment is giving the concept of control and consolidated financial statement. This project of finance is comprising of two sections one is concept of control and another one is consolidated journal of different companies. First section consist of Knapp Limited and Leo Ltd regarding the entities and subsidiaries and second section is about acquiring of Diane Limited by Dean Limited according to the financial statements and accounting policies during an accounting period. 

MAA716 Financial Accounting Assignment Help

Section A

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

No, Knapp ltd., is established by Leo ltd., because of a sole project which needs to be developed and marketed by Leo Ltd. transferred$500,000 for 7%, 10 year debentures that can be convertible at any time into 500 shares of Knapp ltd. voting ordinary shares, and as it is assumed that the instruments of the company are exercisable. And Mr. Wang has been engaged for developing new product and given the position of Managing director. At the time of establishing Knapp Ltd. Mr. Wang invested $10,000 and received 10 shares of voting ordinary shares.

Concept of control as per AASB 10 Consolidated Financial Statements

The objective is to establish rules and regulations for preparing the consolidated financial statement when a company controls other subsidiaries. An Investor will first of enquire regardless of its nature with investee, investor will determine whether it is owned by assessing or whether it controls the investee. It requires an entity who controls a parent company and other subsidiaries to prepare a consolidated financial statement, describes the control principle and establish control for the basis for consolidation. It drives the principle of control and identify whether investor controls the investee and sets the accounting principles and policies for preparing consolidation statement. (AASB, 2017)

Actual Control vs. Capacity to control

Actual control is when the investor controls the investee that means Leo Ltd. controls the Knapp Ltd. as its subsidiaries when it has the rights to variable returns from involvement with investee and having the power of controlling and affecting those variable returns by the control over the investee. The investor gets the power over investee when it has rights and ability of directing relevant activities that means the power of affecting investee returns. And it increases power of investor on investee if directly obtained from the voting rights granted by equity shares and considering the voting from the shareholders.

Capacity of control of an investor in the entity or subsidiary over the investee can be determined by the power over investee, rights to variable returns from involvement with investee and the ability to use that power for affecting investee. Investor’s return could be either positive or negative or may be both positive and negative, and only one can control investee but returns can be shared by more of an investee an example could be members of non-controlling interests can share profit as well the distributions of an investee. But if an investor holds protective rights than investor does not have power on control on investee. (AASB, 2017)

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

Leo Ltd. is considered as a passive controller because it holds 7%, 10-year debentures that can be converted any time into 500 voting ordinary shares of Knapp Ltd., and at the time of establishment there was no known economic legal impediments to Leo Ltd. for converting the debt, and therefore, Leo Ltd is a passive controller because Leo Ltd. will show the acceptance and will allow Knapp Ltd. as to what they are doing without any active resistance because Knapp Ltd. is developing the project and Leo Ltd. has protective rights over it therefore Leo Ltd. without any active response allow Knapp Ltd. to produce the product and develop it. And Knapp Ltd. has given certain powers to the active holders of voting ordinary shares as per the company’s constitution which classifies:

1. Power to amend corporate purpose of Knapp Ltd.

2. The power to convert authorize voting shares and securities into voting shares.

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

No, at the time of initial issuing of shares of Knapp Ltd. Mr. Wang purchased or invested $10,000 on the project and received 10 shares of voting ordinary shares and as per the norms of Knapp Ltd. as per its company’s constitution the shareholder has the power to amend corporate purpose of Knapp Ltd. and the shareholder can convert the authorized voting shares and securities in the voting shares. Mr. Knapp can control the Knapp Ltd. even after the Leo Ltd. actually choose to exercise the conversion option because Mr. Wang, becomes the investor in Knapp Ltd. and is authorized to affect the returns of the investee and has power and control over the investee. Because Leo Ltd. has the protective rights over Knapp Ltd. but Mr. Wang being the Managing Director of the project being granted the voting shares of Knapp Ltd. and acts as a active controller of Knapp Ltd.

Should the likelihood of exercise of the conversion option be part of the decision process as well?

Yes, because Leo Ltd. is acting as a passive controller and as per AASB 10 consolidated financial statements of the accounting standards reflects the procedure of controlling the investee is required and therefore the implications on Knapp Ltd. could be implicitly drawn by Leo Ltd. as it established Knapp Ltd. for a project development and marketing and that’s why the conversion option should be the part of decision process which will become a power of controlling Knapp Ltd. and there was also no known economic legal impediments to Leo Ltd. converting the debt at the time of establishment of Knapp Ltd., Leo Ltd. holds convertible securities of Knapp limited so that Leo Ltd. can become an active controller of Knapp Ltd. (AASB, 2017)

Section B Consolidation Journal Entries

Acquisition Analysis

Acquisition Information

Ownership

100%

Acquirer:

Dean Ltd.

Acquiree:

Diane Ltd.

Acquisition Date:

1st January 2013

Consolidation date:

31st December 2017

Years since acquisition

5

Tax Rate

30%

Consolidation Date Information

Share caital of Diane Ltd.

$125,000

Revaluation reserve of Diane Ltd.

$4375

General reserve of Diane Ltd.

$31,250

Dividend declared by Diane Ltd.

$10,000

Dividend paid by Diane Ltd.

 

Impaired Goodwill (01/01/2014)

$12,938

Acquisition Analysis

Fair Value of Net Assets

Share Capital

 

 

125000

General Reserve

 

 

31250

Retained Earnings

 

 

25000

Revaluation Reserve - Plant (6250*0.70)

4375

Total Future Value

 

 

185625

Consideration

 

 

200000

Goodwill

 

 

14375

Journal entry showing acquisition of Dean Ltd

01-01-2013

Investment in Diane

200000

 

 

Cash

 

200000

 

(Being Business Acquired)

 

 

Pre - Acquisition Entry

01-01-2013

Share Capital

125000

 

 

General Reserve

31250

 

 

Retained Earnings

25000

 

 

Revaluation Reserve - Plant (6250*1-0.30)

4375

 

 

Goodwill

14375

 

 

        Investment in Diane Limited

 

200000

 

(Being Investment Cancelled)

 

 

Revaluation Surplus Journal Entries as on 31-12-2017

31-12-2017

Plant

6250

 

 

To revaluation reserve

 

4375

 

To deferred tax liability

 

1875

 

(Being Revaluation Reserve on Plant)

 

 

 

 

 

 

 

Depreciation Expense

11250

 

 

Retained Earnings

45000

 

 

To Accumulated Depreciation

 

56250

 

(Being Depreciation Booked)

 

 

 

 

 

 

 

Deferred Tax Liability

16875

 

 

To Income Tax Expense

 

5062.5

 

To Retained Earnings

 

11812.5

 

(Being Tax effect of Depreciation)

 

 

 

 

 

 

Elimination of intra group sale of inventory and unrealised profit in Diane & reinstatement of overstated inventory in Dean Ltd.

 

 

 

 

31-12-2017

Sales

12500

 

 

To Cost of goods sold

 

11375

 

To Inventory

 

1125

 

(Being Intragroup Transaction Eliminated)

 

 

 

 

 

 

Tax effect

 

 

 

31-12-2017

Deffered tax assets

337.5

 

 

To income tax expenses

 

337.5

 

(Being Tax Effect Eliminated)

 

 

 

 

 

 

Elimination of unrealised profit in opening inventory and tax effect

31-12-2017

Retained Earnings

14000

 

 

Income Tax Expense

6000

 

 

To Cost of Goods Sold

 

20000

 

(Being Opening Inventory Profit Cancelled)

 

 

 

 

 

 

Profit on sale of non-current assets- Machine

31-12-2017

Gain on Sale - Machine

60000

 

 

Machine A/c

20000

 

 

To Accumulated Depreciation

 

80000

 

(Being Gain on Sale of Machine Eliminated)

 

 

 

 

 

 

31-12-2017

Deferred Tax Assets

18000

 

 

To Income Tax Expense

 

18000

 

(Being Tax Effect on Gain on Sale)

 

 

 

 

 

 

31-12-2017

Accumulated Depreciation

5000

 

 

To Depreciation Expense

 

5000

 

(Being Additional Depreciation Eliminated)

 

 

 

 

 

 

31-12-2017

Income Tax Expenses

1500

 

 

To Deferred Tax Asset

 

1500

 

(Being Tax Effect Eliminated)

 

 

 

 

 

 

Intragroup Balance Elimination - Computer Service Cost

31-12-2017

Sundry Creditors

3000

 

 

Computer Service Cost (Revenue)

36000

 

 

To Computer Service Cost (Expenses)

 

36000

 

To Sundry Debtors

 

3000

 

(Being Intra Group Balances Eliminated)

 

 

 

 

 

 

Profit on sale of non-current assets- Plant

31-12-2017

Retained Earnings

8000

 

 

Plant

14000

 

 

To Accumulated Depreciation

 

22000

 

(Being Gain on Sale of Plant Eliminated)

 

 

 

 

 

 

31-12-2017

Deferred Tax Assets

2400

 

 

To Retained Earnings

 

2400

 

(Being Tax Effect on Gain on Sale)

 

 

 

 

 

 

31-12-2017

Accumulated Depreciation

1600

 

 

To Depreciation Expense

 

800

 

To Retained Earnings

 

800

 

(Being Additional Depreciation Eliminated)

 

 

 

 

 

 

31-12-2017

Income Tax Expense

240

 

 

Retained Earnings

240

 

 

To Deferred Tax Asset

 

480

 

(Being Tax Effect Eliminated)

 

 

 

 

 

 

Dividend Payable Entry

31-12-2017

Dividend Payable

10000

 

 

To Dividend Receivable

 

10000

 

(Being Dividend Eliminated)

 

 

 

 

 

 

Goodwill Impairment

31-12-2017

Retained earnings

1437

 

 

Goodwill impairment

3000

 

 

To Goodwill a/c

 

4437

 

(Being Goodwill Impaired)

 

 

Conclusion

This assignment explains us insightful knowledge about the concepts of consolidation and various aspects relating to AASB 10. The consolidated financial statements for an entity are a must to show a true picture of its financial position as it needs to eliminate intragroup transactions and adhere to the consolidating principles imposed by the standards. The assignment led us to gain in depth knowledge about accounting principles relating to consolidation which will help us to analyse real world business problems.

References

AASB, 2016. Accounting standard AASB 10 consolidated financial statements. AASB publication. 00206, pp. 4-72. 

Deloitte, 2017. IFRS consolidated financial statements. [online] Deloitte. Available at: https://www.iasplus.com/en/standards/ifrs/ifrs10. [Assessed on: 20/9/2017].  

www.aasb.gov.au. (2017). Consolidated Financial Statements. [online] Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf. [Accessed 13 Sep. 2017].

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.

AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.