Accounting Question

accounting question and need the explanation and answer to help me learn.

Assignment 1 where the material is posted under the folder of the consolidated statement of financial position in a post acquisition date – the folder we are doing now
You may start it today but will be in a better shape to do it after our class on Thursday
Deadline for Submission is Sunday March 26 2023 at 4:00 AM
We will solve it in the class on Sunday March 26
The system will not allow submission after the deadline. Any submissions sent by email or Teams after the deadline will not be accepted
Please submit using the submission link found under the folder of your own section and not under
Submissions MUST be hand written and then scanned and attached to the link
Word documents are only allowed for the table only but all entries and calculations must be hand written, scanned and then attached.
You can attach two files., one for the calculations and entries hand written, scanned and posted and the table is fine if on a word document
Requirements: 1 hour
Assignment 1
The following are the statements of financial position of Pirate plc and Saint plc for the year ended 31 December 2010.
Statement of Financial position as at 31 December 2010
The following information is also relevant
Pirate acquired 80% of the share capital of Saint in 1 January 2009 when Saint plc had the following balances
In arriving at the consideration for the shares in Saint plc, the fair value of Saint’s PPE was agreed at $ 500 below the book value. 10 year remaining life for this PPE using straight line method.
During the current year 2010 Piarte plc sold merchandise inventory to Saint at an invoice price of $ 400 on which Pirate made a gross profit of 25%. One quarter (1/4) of these goods remained in the inventory of Saint plc at 31 December 2010.
Goodwill was impaired by $ 50 during the year 2010. There was no impairment in 2009.
At 1 January 2010, Pirate sold a depreciable plant asset to Saint for $ 275. The sold plant asset had a cost of $1,000 and an accumulated depreciation of $ 750. This asset is deprecated by Saint using straight line method over its remaining useful life of 5 years including full depreciation in year of purchase.
Full goodwill method is used
Required: Prepare the consolidated Balance Sheet as at 31 December 2010 and make sure to show all calculations and journal entries
Intragroup Sale of merchandise Inventory – Consolidation – ownership more than 50%
Parent sells inventory to subsidiary at a cost of £100,000 plus 50% mark-up. At year end one-third of this remains unsold. The parent owns 80% of the subsidiary.
What are the required adjustments on consolidation?
Answer
The adjustment in consolidated income statement-Worksheet Entry- no balance sheet effect
Sales revenue 150,000
Cost of goods sold 150,000
This entry affects the consolidated income statement by causing Sales Revenue and cost of goods sold in the consolidated income statement to decrease by 150,000
This entry does not affect the consolidated balance sheet as it will cause RE to Decrease by 150,000 and RE to increase by 150,000 so no effect
Downstream transaction
SP= Cost * (1+mark-up at cost)= 100,000* (1+0.5)= 150,000
Profit= selling price- cost=150,000-100,000=50,000
One third of inventory remains unsold so 1/3 of profits in unrealised = 16,667
1/3 * 50,000 = 16,667
Cost of goods sold/parent 16,667
Inventory 16,667
The cost of goods sold for parent in worksheet consolidated income statement is increased by 16,667.
The Retained earnings of group in consolidated balance sheet to decrease by 16,667 and Inventory in consolidated balance sheet is also reduced (decrease) by 16,667
The subsidiary sells £120,000 (selling price) inventory to its parent. The sale yields the subsidiary a gross profit of 40%. By year end only one-half had been sold by the parent. The parent owns 60% of the subsidiary. What are the required balance sheet adjustments on consolidation?
Answer
The adjustment in consolidated income statement – no balance sheet effect
Sales revenue 120,000
Cost of goods sold 120,000
This entry affects the consolidated income statement by causing Sales Revenue and cost of goods sold in the consolidated income statement to decrease by 120,000
This entry does not affect the consolidated balance sheet as it will cause RE to Decrease by 120,000 and RE to increase by 120,000 so no effect
Profit= Selling price120,000*gross profit margin 0.4= 48,000
One half of inventory remains unsold so the unrealized profit is 48,000*0.5 = 24,000
Cost of goods sold/subsidiary 24,000
Inventory 24,000
The cost of goods sold for subsidiary in worksheet consolidated income statement is increased by 24,000 and this will lead to
Retained earnings of group and NCI in consolidated balance sheet will decrease
RE will decrease by 14,400 (0.6*24,000) and NCI will decrease by 9,600 (0.4*24,000).
Inventory in consolidated balance sheet is also reduced will decrease by 24,000
The Consolidation of the statement if financial position in a post-acquisition date
Partial goodwill method
P acquired 75% of S for 20$. The fair value of net assets of S at acquisition date is 13$.
According to partial goodwill method- goodwill is calculated at acquisition date as following
Purchase price (FV of consideration paid) 20
+NCI 3.25
-FV of net assets of subsidiary at the acquisition date (13)
Goodwill 10.25
All this goodwill relates to the parent (Controlling interest) and nothing is allocated to NCI
NCI is 13*0.25
Full goodwill method – this method is used in all questions
FV of the consideration paid 20
+NCI 6.67
-FV of net assets of subsidiary at the acquisition date (13)
Goodwill 13.67
NCI in full method = Purchase price/CI * NCI = 20/0.75 * 0.25= 6.67
This goodwill under full method (13.67) is attributable to both CI and NCI
The amount attributable to CI is the partial goodwill = 10.25
The amount of goodwill attributable to NCI is the difference between full goodwill and partial goodwill or the difference between full NCI and partial NCI
Goodwill allocated to NCI= 13.67-10.25= 3.42
Or 6.67-3.25= = 3.42
Full goodwill method – Example
The following are the statements of financial position of Pirate plc and Saint plc for the year ended 31 December 2010.
Statement of Financial position as at 31 December 2010
The following information is also relevant
Pirate acquired 70% of the share capital of Saint in 1 January 2009 when Saint plc had the following balances
In arriving at the consideration for the shares in Saint plc, the fair value of Saint’s PPE was agreed at $ 300 above the book value. 10 year remaining life for this PPE using straight line method.
During the current year 2010 Saint plc sold merchandise inventory to pirate at an invoice price of $ 360 on which Saint plc made a mark-up of 20%. On half of these goods remained in the inventory of Pirate plc at 31 December 2010.
Goodwill was impaired by $ 94 during the year 2009. There was no impairment in 2010.
At 1 January 2009 Saint sold a depreciable plant asset to Pirate for $ 550. The sold plant asset had a cost of $2,000 and an accumulated depreciation of $ 1,500. This asset is deprecated by pirate using straight line method over its remaining useful life of 5 years including full depreciation in year of purchase.
Saint’s plc accounts receivable at 31 December 2010 include an amount of $100 due to be received from Pirate plc while the accounts payable of Pirate plc show an amount of $70 payable to Sain plc. The difference is due to Pirate had already paid $30 of the AP to Saint plc during December which had not been received or recorded by Saint plc until after the year end in January 2011.
Full goodwill method is used
Required: Prepare the consolidated Balance Sheet as at 31 December 2010.
Answer:
The acquisition took place in 1/1/2009 and we are now in 31/12/2010 (date of financial statement) meaning two years passed since acquisition date till current date
2009 passed in full (the prior year)
2010 passed which is the current year.
Entry at acquisition date by parent (in books of parent)
Investment in Subsidiary (Saint) 5,485
Cash 5,458
FV of net assets of the subsidiary at the acquisition date 1/1/2009 must be found
We start by BV of net assets (equity) and then add or deduct any FV adjustments
BV of net assets (equity) of the subsidiary at 1/1/2009
Share capital 4,800
Share premium —-
Retained Earnings 2,400
BV of net assets 7,200
Plus FV adjustment +300
FV of net assets of sub at acquisition date 7,500
Then we must find goodwill (at the acquisition date) using full goodwill method
All goodwill calculations are based on figures on acquisition date
Fair value of consideration paid 5,485
Plus NCI 2351
FV of net assets (7,500)
= goodwill 336
Goodwill allocated to NCI is
NCI full- NCI partial= 2351- 2250= 101 NCI partial = 7500*0.3= 2250
The FULL NCI= (5485/0.7)*0.30= 2351
This is the goodwill at 1/1/2009 acquisition date. We are now in 31/12/2010 so it was tested for impairment immediately after acquisition and at the end of 2009 and 2010and the results of impairment are provided in the question
In 2009 – not during the current year – goodwill was impaired by 94 and no impairment in 2010:
Goodwill impartment entry
RE 65.8
NCI 28.2
Goodwill 94
It will be allocated between RE and NCI as it is according to Full goodwill method and in full goodwill method goodwill impairment is always allocated between RE and NCI.
If the impairment took place in current year 2010 we debit goodwill impairment expense and credit goodwill but in the table allocate between RE and NCI
Intra group sale of merchandise inventory
Profit made by the company that sold the merchandise Inventory is found
We have selling price and mark up at cost. We convert mark up to gross profit margin and multiply by selling price
(0.2/1+0.2)*360= 60 profit
Unrealized profit = profit of 60 * remaining unsold 0.5= 30 unrealized profit
To remove the effect of intra group sale of MI two entries are recorded
First entry using selling price (this is same in down and upstream)
Sales Revenue 360
Cost of Goods sold 360
Second entry for unrealized profit
Cost of goods sold-subsidiary 30
Inventory 30
If the parent sold MI instead than subsidiary we debit cost of goods sold only not for sub and in table there is no need for allocation.
The excess acquisition date fair value amortization:
The FV adjustment for PPE is +300. We divide it by the remaining useful life of PPE of subsidiary of 10. 300/10= 30
Since the FV was positive (the FV was above BV) we increase the depreciation expense of the subsidiary by 30 each year from the acquisition date of 1/1/2009 until the current date of 31/12/2010. Meaning for two years 2009 and 2010.
2009 entry. To increase depreciation expense of subsidiary in a prior year by 30 we cannot debit depreciation expense but instead debit RE and also NCI as it is for sub and credit AD
RE 21
NCI 9
AD 30
2010 entry- current year so we can debit depreciation expense for sub and credit AD
Depreciation expense-subsidiary 30
AD 30
Remember that excess acquisition date FV amortization is always for the subsidiary and is always allocated in the table between RE and NCI
Intra group Sale of PPE
Gain made by saint on 1/1/2009 on sale of plant asset (saint the sub sold the PPE to parent on 1/1/2009)
Selling price of PPE – Book value of sold PPE (cost – accumulated depreciation at date of sale)
550- (2,000-1,500) = +50 Gain
The remaining useful life is 5 years and straight line method is used for depreciation
This gain made by the subsidiary must be removed and it took place in a prior year in this example so we cannot debit the gain
So rather than debiting the gain on sale of PPE for subsidiary to remove it we debit RE and NCI as gain was made by the subsidiary and credit AD (accumulated depreciation)
RE 35
NCI 15
AD 50
If the gain was made by sub in current year let’s say in 1/1/2010 we debit Gain on sale of PPE for sub and credit AD.
If PPE was sold by parent in prior year to remove the gain you debit RE only and credit AD (no allocation as it relates to parent) and if sold by parent in current year to remove gain we debit gain on sale of PPE and credit AD
Then the gain is divided by the remaining useful life 50/5= 10. Now we decrease the depreciation expense for the company that sold the PPE (the sub) in this example by 10 each year from the date of sale of PPE until the current date. In this example 2 years as sale took place in 1/1/2009 and current date in 31/12/2010
In 2009 (prior year) we debit AD to decrease the depreciation expense of subsidiary by 10 but cannot credit depreciation expense for a prior year but instead credit RE and also NCI as it is for the subsidiary (no allocation f the parent sold)
AD 10
RE 7
NCI 3
(If the parent sold the PPE, in the prior year entry we debit AD but only credit RE and do not allocate to NCI)
In 2010
We also decrease the depreciation expense by 10 for the subsidiary (the company that sold PPE) in 2010. We debit AD but credit depreciation expense for the subsidiary – remember in the current year we can use expenses, revenues, gains and losses)
(If the PPE was sold by the parent we debit AD and credit depreciation expense for the parent)
AD 10
Depreciation expense-Subsidiary 10
Finally the intra group balance
Pirate already paid $30 of the AP to Saint which has not been received or recorded by Saint until after the balance sheet date. For consolidation purposes- we will assume that the $30 that Pirate already paid and was not received by Saint was actually received and recorded before the year end of 31/12/2010 and will record a worksheet entry for this receipt
Cash 30
AR 30
Then we eliminate the intragroup balance
AP 70
AR 70
If the accumulated depreciation for the sold PPE at date of sale was not provided – you have to find it by yourselves – in this case the question will provide the cost of PPE (the purchase price) and also the date it was purchased by the company that sold it and the full useful life
For example- the question may say the PPE was purchased originally- by the company that sold it- at 1/1/2005 for 3,000 and had a useful life of 10 years and no residual vale
Annual dep expense based on straight line will be = (3000- 0)* 1/10= 300 depreciation expense per year
Lets assume it was sold on 1/1/2009 for 1900– this means it was sold after 4 years so accumulated depreciation will be 300*4= 1200
So book value at date of sale is = 3000- 1200= 1800
And the gain on sale at 1/1/2009 is 1900-1800= 100 gain
And the remaining useful life at date of sale will be 6 years (10 years full life- 4 years from date of purchase 1/1/2005 until date of sale 1/1/2009)
The information above in Blue is not part of the question and is only explanation on how to find AD if it was not given and how to find the remaining useful life when you have intragroup sale of PPE
Review Question
Red plc acquired 80% of the share capital of Blue plc on 1 January 2006. At that date, the retained earnings of Blue plc were £250 and the share capital £100.
The summarised balance sheets of the two companies at 31 December 2008 are as follows.
Notes:
In arriving at the consideration for the shares in Blue the fair value of Blue’s PPE was agreed at £10 below the book value (10-year remaining life to compute excess acquisition date fair value amortization) and goodwill has suffered an impairment of 20% in year 2008 – Full goodwill method is used
During the year 2008 Blue sold inventory to Red for £10 after a mark-up of 60%, half of this inventory remained unsold at the year-end.
In 1 January 2007, Red sold a depreciable PPE to Blue for £150 – (the sold PPE had a cost of £160 and £30 AD at the date of sale). Blue depreciates this asset over its remaining 5 year life (including a full year of depreciation in the year of purchase) using the straight-line method of depreciation.
Red plc AR receivables at 31 December 2008 include an amount due from Blue of £5 while the AP of Blue include an amount of £3 due to RED. The difference is due to the fact that Blue already paid £2 to Red which was not recorded or received by RED until 2 January 2009.
Prepare the consolidated statement of financial position as on 31/12/2008.
Answer
Current date is 31/12/2008 and current year is 2008
Three years passed since acquisition date of 1/1/2006
The years are
2006,2007 and 2008
2006 and 2007 prior years
2008 the current year
The BV of equity of subsidiary at acq date 350 100 share capital and 250 RE
-FV adj (10)
= FV NA of sub at acq dat 340
Goodwill calculations at the acquisition date 1/1/2006
FV consideration paid 315
NCI 78.75
Minus FV of net assets of Sub at acq date (340)
Goodwill 53.75
NCI under partial method= 340*0.2= 68
NCI FULL= (315/0.8)*0.2= 78.75
NCI FULL- NCI partial= 78.75-68= 10.75

Intragroup sale of MI
Profit made by the seller – subsidiary = 10* (0.6/1+0.6)= 3.75
Unrealised profit = 3.75 * 0.5= 1.875
Cost of goods sold/subsidiary 1.875
Inventory 1.875
Upstream transaction and cost of goods sold is allocated between group RE and NCI in balance sheet
The adjustment in consolidated income statement – no effect on balance sheet
Sales revenue 10
Cost of goods sold 10
Now for excess acquisition date fair value amortization: in this example the fair value of subsidiary assets was found to be 10 below the book value.
FV ad/Remaining useful of subsidiary PPE that was re-evaluated
-10/10= -1
Since FV is negative (FV below) we decrease the depreciation expense of the subsidiary by 1 each year from the acquisition date of 1/1/2006 to the current date of 31/12/2008
Decrease by 1 for three years 2006, 2007 and 2008
For 2006 and 2007 entry- prior years
AD 2
Retained earnings 1.6
NCI 0.4
For 2008 entry
AD 1
Depreciation expense/subsidiary 1
These figures are allocated between RE and NCI
Intragroup Sale of PPE
Gain made by RED the parent on 1/1/2007 (prior year)
SP 150 – book value of sold PPE at date of sale (160-30) = 20. This gain must be eliminated- the sale took place in 2007
RE 20
AD 20 (1)
Gain/Reaming useful life of sold PPE at date of sale
20/5= 4
We decrease the depreciation expense of the company that sold the PPE by 4 annually from date of sale of PPE 1/1/2007 until current date 31/12/2008 – for two years 2007 and 2008
2007 entry- prior year
AD 4
Retained earnings 4 (2)
2008 entry – current year
AD 4
Dep expense 4 (3)
Downstream transaction so the figures in entries 1, 2 and 3 are not allocated between RE and NCI
The goodwill impairment
Goodwill impairment expense 10.75
Goodwill 10.75
The entry for goodwill impairment in current year but in balance sheet it is allocated between RE and NCI as goodwill is calculated according to Full method
The intragroup balance
Cash 2
AR 2
The entry to remove the intragroup balance (worksheet)
AP 3
AR 3

Review Question
Red plc acquired 80% of the share capital of Blue plc on 1 January 2006. At that date, the retained earnings of Blue plc were £250 and the share capital £100.
The summarised balance sheets of the two companies at 31 December 2008 are as follows.
Notes:
In arriving at the consideration for the shares in Blue the fair value of Blue’s PPE was agreed at £10 below the book value (10-year remaining life to compute excess acquisition date fair value amortization) and goodwill has suffered an impairment of 20% in year 2008 – Full goodwill method is used
During the year 2008 Blue sold inventory to Red for £10 after a mark-up of 60%, half of this inventory remained unsold at the year-end.
In 1 January 2007, Red sold a depreciable PPE to Blue for £150 – (the sold PPE had a cost of £160 and £30 AD at the date of sale). Blue depreciates this asset over its remaining 5 year life (including a full year of depreciation in the year of purchase) using the straight-line method of depreciation.
Red plc AR receivables at 31 December 2008 include an amount due from Blue of £5 while the AP of Blue include an amount of £3 due to RED. The difference is due to the fact that Blue already paid £2 to Red which was not recorded or received by RED until 2 January 2009.
Prepare the consolidated statement of financial position as on 31/12/2008.
Rules of Debits and Credits and effect of Entries on the income statement and Statement of financial position SOFP
Lets assume you were provided with two financial statements for the parent and the subsidiary dated 31 December 2020 to prepare consolidated statements on 31 December 2020. This would mean that 31 December 2020- will be the current date and the financial year 2020 the current year. Any transaction in the question that takes place in 2020 will be considered to be in the current year and if took place in 2019, 2018, 2017 or before, it is considered to be in a prior year
Any expense, loss, revenue or gain for the parent company, if it took place in the current year, you record it normally. You debit the expense or loss if they increased and credit them if decreased, Similarly, you credit any revenue or gain if they increased and debit them if they decreased.
Recording any revenue, gain, expense or loss for the parent if they take place in a prior year will be by replacing the revenue, gain expense or loss by Retained Earning alone.
Any expense, loss, revenue or gain for the subsidiary company, if it took place in the current year, you record it normally. You debit the expense or loss if they increased and credit them if decreased, Similarly, you credit any revenue or gain if they increased and debit them if they decreased. However, you have to add the word Subsidiary after the revenue, gain or loss or expense to show that they belong to the subsidiary.
Recording any revenue, gain, expense or loss for the Subsidiary if they take place in a prior year will be by replacing the revenue, gain expense or loss by Retained Earning (RE) AND Nom-Controlling interests (NCI). RE will be for the Controlling interests percentage and NCI for the NCI percentage.
Recording Goodwill impairment entry when goodwill is calculated using the FULL goodwill method that we will use in all the questions
If goodwill was impaired in the current year, you debit goodwill impairment expense and credit goodwill.
If goodwill was impaired in a prior year, you cannot debit goodwill impairment expense and instead you debit both RE (for the CI percentage) and debit NCI (for the NCI percentage) and credit goodwill.

The effect of entries on the income statement and the statement of financial position SOFP
In order for entry to affect the income statement it must have in it a revenue, gain, expense or loss. Expenses, losses increase on the debit side and decrease on the credit side. Revenues and gains increase on the credit side and decrease on the debit side.
The effect of entries on the SOFP, Expenses, losses, gains or revenues for the parent company affect the RE only, meaning for the parent company if
Expenses, losses increase, RE will Decrease
Expense, losses decrease, RE will increase
Revenues, gains increase, RE will increase
Revenues, gains decrease, RE will decrease
The effect of entries on the SOFP, Expenses, losses, gains or revenues for the Subsidiary company affect both RE and NCI, meaning the effect is allocated between RE and NCI. The RE for the CI percentage and NCI for the NCI percentage. This means for the subsidiary:
Expenses, losses increase, RE and NCI will Decrease
Expense, losses decrease, RE and NCI will increase
Revenues, gains increase, RE and NCI will increase
Revenues, gains decrease, RE and NCI will decrease
Of course, any asset in any entry will increase on the debit side and decrease on the credit side
Any liability or contra asset account in any entry will increase on the credit side and decrease on the debit side.
The effect of goodwill impairment entry on the income statement and the SOFO (FULL goodwill method that we will use in questions)
Goodwill impairment expense when debited, goodwill impairment expense will increase and its effect on the SOFP, will always be allocated between RE and NCI meaning that both RE and NCI will decrease
Of course, goodwill on the credit side of the entry will mean that it decreased as goodwill is an asset.
Assignment 1
The following are the statements of financial position of Pirate plc and Saint plc for the year ended 31 December 2010.
Statement of Financial position as at 31 December 2010
The following information is also relevant
Pirate acquired 80% of the share capital of Saint in 1 January 2009 when Saint plc had the following balances
In arriving at the consideration for the shares in Saint plc, the fair value of Saint’s PPE was agreed at $ 500 below the book value. 10 year remaining life for this PPE using straight line method.
During the current year 2010 Piarte plc sold merchandise inventory to Saint at an invoice price of $ 400 on which Pirate made a gross profit of 25%. One quarter (1/4) of these goods remained in the inventory of Saint plc at 31 December 2010.
Goodwill was impaired by $ 50 during the year 2010. There was no impairment in 2009.
At 1 January 2010, Pirate sold a depreciable plant asset to Saint for $ 275. The sold plant asset had a cost of $1,000 and an accumulated depreciation of $ 750. This asset is deprecated by Saint using straight line method over its remaining useful life of 5 years including full depreciation in year of purchase.
Full goodwill method is used
Required: Prepare the consolidated Balance Sheet as at 31 December 2010 and make sure to show all calculations and journal entries

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