TRIMESTER 1 2021 FINALEXAMINATION

STUDENT ID 1489297

STUDENT NAME Nazneen

SUBJECT NAME: Advanced Financial Accounting

and Reporting

SUBJECT CODE: MAC006

TIME ALLOWED: 2 Hours

PERMITTED MATERIALS:

 This is an Open Book exam.

INSTRUCTIONS FOR STUDENTS:

 You do not require a separate answer booklet. Please type your responses in the space
provided.
 Type your full name and ID at the top of this page.
 This exam contains 5 questions.
 Total for this exam is 100 marks.
 Answer all questions.

MAC006 Trimester 1 2021 FEXPage 1 of 13

SECTION 1

Question 1 (10%)
1) What are key differences between a subsidiary and an associate?

[Answer here]
The key differences in the subsidiary and associate are considered on the basis of ownership and
accounting standards. In subsidiary, parent is considered the most important shareholder, whereas in
associate, parent only acts as a minor shareholder with little control and major significance.

In subsidiary, parents are bound to buy or purchase the share, which exceeds 50 % whereas in Associate
the share is in the range of 20 - 50 %. Lastly, IAS 27 is used to define the accounting for subsidiary,
whereas IAS 28 is used to regulate the associate.

Mainly the subsidiary and Associate are differentiated on the basis of ownership percentage and degree of
control exerted by the parent company. Although both are used in the companies to generate profits and
create value.

2) Explain equity method or one line consolidation method according to AASB 128.

[Answer here]
According to the AASB 128, all the entries are recorded against the single line investment account, which
is also known as the single line method. It Involves revaluing the investment and crediting the P&L with
the investor’s share of post-acquisition profits (after certain adjustments).

The equity carrying amount is calculated through adding Initial investment in the associate, share of post-
acquisition retained earnings, share of current year profits, share of increase in post-acquisition reserves
and subtracts share of post-acquisition dividends.

Moreover, the equity method can be implemented in two ways. Firstly, if the investor is not a parent, then
equity method is applied in the investor's books. Secondly, if investor is a parent then cost method will be
used in the investors group and applied on consolidation. In here, consolidation journals are related to
subsidiaries, whereas the equity journals are related to associates.

MAC006 Trimester 1 2021 FEX Page 2 of 7

Question 2 (25%)
Morrison Ltd owns all the shares of Scarlett Ltd. The shares were acquired on 1 July 2018 by
Morrison Ltd at a cost of $620,000. At the acquisition date, the capital of Scarlett Ltd consisted
of 100,000 ordinary shares each fully paid at $2. There were retained earnings of $20,000. All
the identifiable assets and liabilities of Scarlett Ltd were recorded at amounts equal to fair value
except for the following:

Carrying Amount Fair Value

Patent $20,000 $35,000
Land $110,000 $150,000
Machinery (cost $200,000) $160,000 $170,000

Patent and land had both been sold in 2019. Machinery has been depreciated at a rate of 10%
a year.

Additional information:

1. Intragroup sales of inventory for the year ended 30 June 2020 was $40,000. On 30 June
2020, inventory held by Morrison was purchased from Scarlett at a profit of $1000. 100%
of the stock is on hand

2. On 1 July 2019, inventory held by Scarlett Ltd, was purchased from Morrisonin the
previous year at a profit of $8000. 100% of the stock is on hand at 30 June 2020.

3. Intragroup machinery on hand on 30 June 2020:

a. Morrison Ltd: purchased from Scarlett Ltd on 1 July 2019 for $20,000 at a profit
of $2,000. Depreciation rate is 10% per year.

4. Scarlett Ltd had purchased from Morrison Ltd an item of inventory. The carrying amount
in Morrison’s records at time of sale (1 Jan 2019) was $10,000 and it was sold at a profit
of $3,000. The inventory is still on hand as at 30 June 2020.

Required:

Prepare all journal entries required for consolidation of Morrison Group Ltd for the year ended
30 June 2020. Show all calculations necessary. Consolidation worksheet is not required.

[Answer and show workings here]

1 July 2018 Investment in Scarlett Ltd Dr 620 000

Cash/Payable Cr 620 000

(Acquisition of shares in Scarlett Ltd)

2014 – 2015 Cash Dr 24 000

Investment in Scarlett Ltd Cr 24 000

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 (Dividend received from Scarlett Ltd: 30% x
$80 000)

30 June 2015 Investment in Scarlett Ltd Dr 15 000

Share of profit or loss of Cr 15 000

associates and joint ventures

(Recognition of profit in Scarlett Ltd:

30% x $50 000)

2015 – 2016 Cash Dr 4 500

Investment in Scarlett Ltd Cr 4 500

(Dividend received: 30% x $15 000)

30 June 2016 Investment in Scarlett Ltd Dr 13 500

Share of profit or loss of Cr 13 500

associates and joint ventures

(Recognition of profit in Scarlett Ltd:

30% x $45 000)

2016– 2017 Cash Dr 3 000

Investment in Scarlett Ltd Cr 3 000

(Dividend from joint venture:

30% x $10 000)

Investment in Scarlett Ltd * Dr 12 000

Share of profit or loss of Cr 12 000

associates and joint ventures

(Recognition of profit in Scarlett Ltd:

30% x $40 000)

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Question 3 (25%)
Super Ltd acquired 65% of Car Ltd for a cost of $650,000, when the equity of Car Ltd consisted
of:

Share Capital $100,000

General Reserve $8,000
Retained Earnings $20,000

All the identifiable assets and liabilities of Car Ltd were recorded at fair value except for the
following:

Carrying Fair
Amount Value
Vehicles (cost $550,000) $450,000 $500,000
Patent $70,000 $90,000

Required:

Prepare the journal entries for the pre-acquisition stage (i.e., Stage 1) of recording the Non-
Controlling Interest (NCI) using the partial goodwill method.

[Answer and show workings here]

Cost of acquisition 650,000

Book value of net assets

- Share capital 100,000

- Retained earnings 20,000

Total book value of net assets 120,000

Fair value adjustments

- After tax increase in vehicles 50,000

- After tax increase in patents 20,000

Total fair value adjustments 70,000

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 FVINA 190,000

X %age acquired 65% 650,000

Goodwill/(bargain purchase) on acquisition 3,000

Vehicles

Vehicle is undervalued by $50,000

Accordingly, the business combination valuation adjustment required on consolidation (the date of
acquisition) is:

DR Land 50,000

CR BCVR 50,000

The pre-acquisition entry eliminates the asset “Investment in subsidiary” (in the parent’s books) against
the pre-acquisition equity (in the subsidiary’s books)

The pre-acquisition entry required is:

DR Share capital 100,000

DR Retained earnings 20,000

DR BCVR 50,000

CR Investment in Car 422,5

Retained earnings Dr 8 000

Share capital Dr 100 000

Retained Earnings Dr 20 000

NCI Cr 128 000

(10% of equity at 1/7/15)

MAC006 Trimester 1 2021 FEX Page 6 of 7

Question 4 (15%)

1. Explain whether NCI is better classified as debt or equity.

[Answer here]
In the subsidiary, any ownership interest beside the parent is known as NCI. Moreover, it is defined as
any equity in a subsidiary, which cannot be attributed to the parent, directly or indirectly. In any group,
the non-controlling interest is also classified as the group's equity.
In any group, two effective equity parties are present: NCI and the parent's owners. This characterization
impacts two features: NCI calculation and its consolidation in financial statements. Through AASB 10
and IFRS 10 the measurement and disclosure of NCI is determined.
One of the reasons that NCI is better classified as equity is that the subsidiary has no obligation regarding
the NCI, which makes it different from the debt.
Therefore, this criterion is needed to evaluate the NCI as equity instead of debt.

2. Explain why intragroup transactions must be eliminated.

[Answer here]
Intragroup transactions are carried out between the entity groups and these groups form the set for the
consolidation Financial Statements. These transactions do not involve any third parties, which are outside
the scope of consolidation.
The intragroup transactions are, therefore, eliminated from one entity within the group. When the
Intragroup loans are eliminated then the notes payable, interest expense and income are off-setted.
However, in intragroup revenue and expenses, the company's profits, revenues, and cost of goods are
eliminated.
One of the main reasons for their elimination is that they are difficult to identify in the company, which
requires system of controls and to identify these transactions. Due to this complexity, intragroup
transactions are eliminated.
Secondly, the intragroup transactions might also represent the profit or loss, which is yet unrealized by
the company owing to which the transactions are eliminated from the consolidated financial statement.

Adjustments must then be made for intragroup transactions as these are internal to the economic entity,
and do not reflect the effects of transactions with external parties.

This is also consistent with the entity concept of consolidation, which defines the group as the net assets
of the parent and the net assets of the subsidiary. Transactions between these parties must then be
adjusted in full as both parties are within the economic entity.

MAC006 Trimester 1 2021 FEX Page 7 of 7

Question 5 (25%)

Sam Ltd acquired 35% interest in Song Ltd for $150,000 on 1 July 2012. Profits and Dividends
for Song Ltd for years ended 30 June 2018 to 2019 were as follows:

Profit before tax Income tax expense Dividends paid

2018 $180,000 $50,000 $100,000
2019 $170,000 $60,000 $20,000

Required:

Prepare all necessary journal entries in the records of Sam Ltd in relation to its investment in the
associate, Song Ltd based on the above information. Assume there are sufficient net assets for
dividend distribution and Sam Ltd does not prepare consolidated financial statements.

[Answer and show workings here]

1 July 2012

Dr Interest 150,000

CR Acquire 150,000

DR Div. revenue 100,000

CR Div. declared 20,000

Current liabilities Cr 180 000

Gain on bargain purchase Cr 170 000

Share capital Cr 500 000

Share capital Dr 100 000

Cash Cr 100 000

(Share issue costs)

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 END OF EXAM PAPER

[Extra writing/working space if required]

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