In: Accounting
Question 1:
Ace Ltd is a listed parent company with interests in television
stations, cinemas and newspapers. On 1 January 2014, Ace Ltd
acquired 40% of the voting shares of Deuce Pty Ltd, a publisher of
women magazines, for $1 620 000 cash. The acquisition gave Ace Ltd.
significant influence over Deuce Ltd. The recorded net assets and
contingent liabilities of Deuce Ltd as at the date of acquisition
were represented by the following equity items:
$000
Share
Capital
1,000
Retained Earnings 600
General
Reserve
200
Total
1,800
Additional information:
(a) At the date of acquisition, Deuce Ltd has created
several magazine mastheads. The terms and conditions of the
mastheads indicate they can be transferred to another party. The
costs relating to the development of these mastheads had been
written off by Deuce Ltd as expenses when incurred. Ace Ltd can
reliably measure the fair value of the unrecognised mastheads at
the date of acquisition at $300 000.
(b) Ace Ltd has adopted an accounting policy for the
Ace Ltd extended group whereby all intangible assets with a finite
life are to be amortised on a straight-line basis over their useful
lives. Ace Ltd expects the mastheads will provide future economic
benefits for a period of 20 years.
(c) During the year ended 31 December 2014 Deuce Ltd
earned profit before tax of $900 000, incurred an income tax
expense of $300 000 and paid a dividend of $100 000 on 30 September
2014.
(d) On 1 July 2014 Deuce Ltd sold Ace Ltd a printing
machine at an agreed value of $420 000. This equipment had a
carrying amount of $120 000 to Deuce Ltd at the date of its
transfer. The remaining useful life of the machine at the date of
transfer is estimated to be 3 years.
(e) Ace Ltd uses the cost method to account for its
investment in Deuce Ltd in its separate financial statements as
there is no quoted market price for Deuce Ltd. shares.
(f) Ace Ltd has not recognised any impairment losses in
relation to its investment in Deuce Ltd in its separate financial
statements or its consolidated financial statements for the year
ended 31 December 2014.
(g) The company tax rate is 30%.
Required:
i) Calculate the amount of goodwill on acquisition of
Act Ltd’s interest in Deuce Ltd and related journal entry under
cost method.
(ii) Prepare the equity accounting consolidation
adjusting entries required in Ace Ltd’s consolidated financial
statements for the year ended 31 December 2014.
(iii) Estimate the carrying value of Ace Ltd’s
investment in Deuce Ltd the year ended 31
i) Calculation of goodwill on acquisition of Act Ltd's interest in Deuce Ltd:
Goodwill amount = Consideration amount - Value of net assets taken over
Consideration = $1,620,000
Recorded net assets of Deuce Ltd. $1,800,000
Add: Fair value of mastheads $300,000
Total $2,100,000
Value of net assets taken over $840,000
(40% of above)
Thus, value of goodwill = $(1,620,000-840,000) = $780,000
Journal entry:
Investment in Deuce Ltd. A/c Dr. $840,000
Goodwill A/c Dr. $780,000
To Cash Alc. $1,620,000
ii) Equity accounting consolidation adjusting entries required in Ace Ltd’s consolidated financial statements for the year ended 31st Dec, 2014:
Value of printing machine on transfer date = $120,000
Annual Depreciation of Printing Machine = $120,000/3 = $40,000
Depreciation till sale to Ace Ltd's = $40,000*6/12 = $20,000
Therefore, Profit on sale for Deuce Ltd = $420,000 - ($1,20,000 - $20,000)
= $320,000
Profit share for Ace Ltd's = $320,000 * 40%
= $128,000
Equity accounting consolidation adjusting entries as on 31st Dec, 2014:
Investments A/c Dr. $240,000
To Profit & Loss A/c $240,000
Profit & Loss A/c Dr. $128,000
To Investment Alc. $128,000
iii) Carrying value of Ace Ltd's investment in Deuce Ltd for the year ended 31 December 2014:
Value of mastheads = $300,000
Depreciation for the year = Total value/Estimated Useful Life
= 300,000/20 = $15,000
Adjusted Profit share in Deuce Ltd = (Profit - Income Tax Expense) * 40% - Profit Share on sale of printing machine
= ($900,000 - $300,000) * 40% - $128,000
= $240,000 - $128,000
= 112,000
Depreciation related to Mastheads for Ace Ltd = $15,000 * 40% =
$6,000
Total carrying value of Ace Ltd's investments in Deuce Ltd =
Purchase Value - Depreciation related to Mastheads for Ace Ltd +
Adjusted Profit share in Deuce Ltd
= $16,20,000 - ($15,000 * 40%) + $112,000
= $16,20,000 - $6,000 + $112,000
= $17,26,000