Question

Part A                                                                                                                     

You are working as an accountant for Bronson, Lazenby & Dalton and the senior partner has asked you to prepare a report answering the following questions about consolidation procedures for a client:

Follyfoot Ltd has a 33% interest in the share capital of Cue Ltd, which is a company involved in the same industry as Follyfoot Ltd. The remaining share capital is owned by Mr and Mrs Lewelyn who are the founders of Cue Ltd. Mr and Mrs Lewelyn have given Follyfoot Ltd three out of five seats available on the board of directors. Follyfoot Ltd takes the lead on all decisions but the business is closely monitored by Mr and Mrs Lewelyn who hold the other two board positions.

Advise the directors of Follyfoot Ltd of the requirements of AASB 10 in respect of the control criterion and how they would apply to this investment.

Why is it necessary to make adjustments for intra-group transactions?

As the majority of the directors do not have an accounting background, your report answering the questions must be written to convey a clear understanding of consolidation accounting concepts (control vs significant influence) and other relevant accounting issues.

Part B                                                                                                              

You have been asked to prepare the consolidated accounts for a group of companies that contain an Australian company called Prym Ltd and their foreign subsidiary Lang Inc. Prym Ltd and Lang Inc both have functional currencies of the country they reside in, but for presentation purposes the group reports in Australian dollars. Prym Ltd bought all the shares of Lang Inc at the beginning of the current year. Their Trial Balances Reports are available on the Brightspace site. You will need to copy your individual excel file from Brightspace. The password to open the has been emailed to you. You may complete this assignment manually or using either word or excel. (If you complete in word or excel please ensure an electronic copy of your file is uploaded in brightspace)

In order to complete this task, you are required to:

• Translate Lang Inc’s data into Australian Dollars
• Consolidate the two sets of Accounting Records

and

• Prepare General Purpose Financial Reports for the consolidate group
              (Statement of Income and Statement of Financial Position only).

Calculations should not be rounded until the General Purpose Financial Reports, but should be shown to the nearest dollar in your reports

You need to submit the requested reports and all your work papers showing your calculations.

Addition Information for Part B
Closing Inventory for Lang Inc was £895,000
Closing Inventory for Pym Ltd was A$2,350,000
Pym Ltd sold A$5,600,000 of stock to Lang Inc during the year
Lang Inc had sold all that stock by year end, but because of extended trading terms offered to Lang Inc, Pym Ltd still had A$700,000 of inter company sales in their debtors' balance.
Pym Ltd charges Lang Inc A$1,000 per month in technical advice and charged a total of A$241,500 in interest on the inter-company loan.
Lang Inc paid their £20,000 Interim Dividend on the 26th of January.
Lang Inc declared their Final Dividend on the 30th June and plan to pay the dividend on the 2nd of August
Summary of Exchange Rates
1st July	£ 1.00 =	A$2.21
Average rate for the year	£ 1.00 =	A$2.24
Ending Inventory (Pur'd before year end)	£ 1.00 =	A$2.35
26th January	£ 1.00 =	A$2.22
30th June	£ 1.00 =	A$2.37
2nd August	£ 1.00 =	A$2.33

Answer 1

Part-A

1. While doing consolidation of account, we have to make certain adjutment, one of which is to setoff the intra-group transactions, because to eliminate the profit eliment and common asset or liabilty created, which was created by the transactions happned between two entities, which include their individual profits and creation of asset in one F/S and liability in another's F/S or Vice-e-versa.

2. According to the AASB 10, An investor controls an investee if and only if the investor has all the following:

(a)            power over the investee

(b)            exposure, or rights, to variable returns from its involvement with the investee ; and

(c)             the ability to use its power over the investee to affect the amount of the investor’s returns.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.

In our case, follyfoot ltd. has 33% Share Capital of Cue ltd.,and have three members out of five members in Board of Directors therefore they have power over investee, further the business is closely monitored by Mr and Mrs Lewelyn who hold the other two board positions, but it is not relevent since the all the decision cannot be taken without the consent of the follyfoot ltd, they only execute them, therefore follyfoot ltd have exposure, or rights, to variable returns from its involvement with the investee and the ability to use its power over the investee to affect the amount of the investor’s returns.

Thus, from above we can say that follyfoot ltd. has the control over the cue ltd, even they do not have the majority stake in cue ltd, and therefore has to consolidate the accounts of the cue ltd with them.

Part-B

Conversion of Lang Inc. currency to Functional Currency
Particulers	Amount(In £)	Conversion Rate	Amount (in A$)
Closing Inventory	895000	£1= A$2.35	2103250
Divedend	20000	£1= A$2.22	44400
Total	2147650
Statement of Finanacial Position
Particulers	notes	Amount
Assets
Current assets
	Inventory	1	3753250
	Financial Asset
	Account Receivables	2	0
Statement of Income
Particulers	Note	Amount
Income		3	0
Note 1
Particulers		Amount(In A$)
Lang Inc		2103250
Pym Ltd		2350000
Less: Inter Group Stock	700000	3753250
Note 2
Particulers		Amount(In A$)
Sales by pym	5600000
Interest Income	241500
Services by pym	12000
Less: Inter Group Setoff)	5853500	0
Note-3
Particulers		Amount(In A$)
Divedend from Lang	44400
Interest Income	12000
Services by pym	241500
Less: Inter Group Setoff	297900	0