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accounting question On 1 April 2010 Parent Ltd acquired 90% of the equity in Subsidiary Ltd...

accounting question

On 1 April 2010 Parent Ltd acquired 90% of the equity in Subsidiary Ltd for $650 000 cash. At this date the equity of Subsidiary Ltd comprised:

Share capital

$500 000

Retained earnings

130 000

Part A

(a) Assume the net assets of Subsidiary Ltd were at fair value on 1 April 2010. Prepare the notional journal entry to offset the carrying amount of the asset Investment in Subsidiary Ltd and the parent’s portion of equity in Subsidiary Ltd in accordance with the requirements of NZ IFRS 3 Business Combinations and NZ IFRS 10 Consolidated Financial Statements.

(b) Assume the net assets of Subsidiary Ltd were not at fair value on 1 April 2010. At the date of acquisition Subsidiary Ltd had an unrecognised intangible asset of $22 000 and a contingent liability of $8 000. Prepare the notional journal entry to offset the carrying amount of the asset Investment in Subsidiary Ltd and the parent’s portion of equity in Subsidiary Ltd in accordance with the requirements of NZ IFRS 3 Business Combinations and NZ IFRS 10 Consolidated Financial Statements.

(c) Briefly explain why the amount of acquired goodwill recognised above in (a) and (b) will not be the same amount.

Part B

Assume the net assets of Subsidiary Ltd were at fair value on 1 April 2010. Prepare the notional journal entry to identify the non-controlling interest (NCI) in Subsidiary Ltd to be reported in the group accounts as at 31 March 2017 in accordance with the requirements of NZ IFRS 3 Business Combinations and NZ IFRS 10 Consolidated Financial Statements. Parent Ltd measures the NCI at the NCI’s proportionate share of the acquiree’s identifiable net assets.

Additional information provided for Part B:

(i) During March 2016 Subsidiary Ltd made sales to Parent Ltd and realised a profit of

$2 000. At 31 March 2016 this purchase was included in the inventory balance of Parent Ltd.

(ii) During March 2017 Subsidiary Ltd made sales to Parent Ltd and realised a profit of

$3 000. Parent Ltd had not sold this purchase of inventory by 31 March 2017.

(iii) At the date of consolidation 31 March 2017 the equity of Subsidiary Ltd comprised:

Share capital

$500 000

Retained earnings - opening

145 000

Profit after tax

62 000

Dividends declared and paid

35 000

172 000

ARS

30000

Total equity

702 000

(iv) The directors of Parent Ltd believe the acquired goodwill in Subsidiary Ltd was impaired by $4 500 in the year ended 31 March 2017.

Part A (a) ALL workings must be shown on each line of your notional journal entry below. These workings will be marked.

Part A (b) ALL workings must be shown on each line of your notional journal entry below. These workings will be marked.

Question 1 continued:

Part A (c) Explanation:

Part B ALL workings must be shown on each line of your notional journal entry below. These workings will be marked.

Solutions

Expert Solution

In the given question Part A, no details about non controlling interest are provided. Therefore, it is assumed that non controlling interest is measured at a proportionate share of acquirees fair value of net assets. Considering this approach, elimination entry and related calculations are as follows:

Section C: NZ IFRS 3 and 10 requires identifiable net assets to be recorded at fair value, whether or not, these assets were recorded in the books of the acquirer. Goodwill calculation depends on the values of NCI, Purchase consideration and fair value of net assets. Because fair value of net assets is different as given in section B, the goodwill amount, naturally is different.

Part B

ekkarill92 answered 1 year ago
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