You are on page 1of 27

Chapter 30

Further consolidation issues II: Minority Interests


30.1

The entire proportion of the inter-entity transactions will need to be eliminated


even in the presence of minority interests. Paragraph 24 of AASB 127 states:
Intragroup balances, transactions, income and expenses shall be
eliminated in full.
A group is defined in AASB 127 as a parent and all its subsidiaries. Paragraph
25 further states:
Intragroup balances and transactions, including income, expenses and
dividends, are eliminated in full. Profits and losses resulting from
intragroup transactions that are recognised in assets, such as inventory
and fixed assets, are eliminated in full.

30.2

AASB 127 defines a minority interest as that portion of the profit or loss and
net assets of a subsidiary attributable to equity interests that are not owned,
directly or indirectly through subsidiaries, by the parent. AASB 127 requires
separate disclosure of the minority interests share of capital, retained profits
or accumulated losses. Paragraph 33 of AASB 127 states:
Minority interests shall be presented in the consolidated balance sheet
within equity, separately from the parent shareholders equity.
Minority interests in the profit or loss of the group shall also be
separately disclosed.
Pages 1043 to 1045 of the text provide possible disclosure formats.

30.3

AASB 127 requires that the consolidated financial statements be prepared


after the effects of intragroup transactions have been eliminated in full. A
number of adjustments need to be made when calculating minority interests in
the presence of intragroup transactions. As we know, minority interests in the
profit or loss of the group must be separately shown, as must the minority
interests share of the economic entitys share capital and reserves. In relation
to different types of intragroup transactions, and their impacts on minority
interests, we can consider the following:
Dividends: The minority interests share of the dividends paid by the
subsidiary will be shown in the consolidated financial statements. That is,
the minority interests share in the dividends paid or proposed by the
subsidiary will not be eliminated on consolidation. This is appropriate
because the dividends paid to the minority interests represent resource
flows away from the group. The dividends distributed to the minority
interests will act to reduce the minority interests share in the equity of the
subsidiary. The consolidated balance sheet will show any dividends
payable to the minority interests as a liability.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

301

Intragroup sale of inventory: When we calculate the minority interests


share of the profits of the subsidiary we need to calculate the subsidiarys
profit after adjustments to eliminate income and expenses of the subsidiary
that are unrealised from the economic entitys perspective.
If the gains or losses have been recognised then no adjustment is necessary
when calculating minority interest. For example, if a subsidiary sold
inventory to the parent at a gain, and the parent entity has in turn sold all
the inventory to external parties, the minority interests share of profit
would not need to be reduced as the related gain would be deemed to have
been realised from the perspective of the group. An adjustment only needs
be made to the extent that the asset sold within the economic entity, such
as inventory, is still on hand at reporting date (that is where profits
recorded in the individual accounts of a group member have not been
recognised from the perspective of the economic entity). Adjustments to
the calculation of the minority interests share of the subsidiarys profits
will be needed where some or all of the inventory sold by the subsidiary is
still on hand with the parent entity at reporting date.
If there are unrealised profits in closing inventory, this will mean that in
the next financial period there will be unrealised profits in opening
inventory. In the next financial period we would need to adjust the
minority interests share of opening retained earnings (by reducing it) and
provide a corresponding increase in the minority interests share of that
periods profits.
Intragroup sale of non-current assets: As with inventory, if a subsidiary
sells a non-current asset such as an item of property, plant and equipment
to another entity within the group, to the extent that the asset stays within
the group, then the gain or loss on sale has not been recognised from the
groups perspective and the minority interests share of profits will need to
be adjusted. However, the gain or loss is considered to be realised across
the life of the asset as the asset is used up, that is as it is depreciated. As
the assets, such as plant, are used, perhaps to produce inventory, the
intragroup profit is considered to be realised as the service potential of the
plant becomes embodied in goods produced by the plant, for example, in
inventory.
Intragroup service and interest payments: To the extent that there is no
related asset that is retained in the economic entity upon which any profit
has accrued, no adjustments are necessary in calculating the minority
interest in the subsidiarys profit (of course, consolidation adjustments will
still be required but this discussion is about calculating the minority
interests share of profits for presentation purposes and not for the purpose
of generating consolidation journal adjustments).
From the discussion so far we can summarise some rules to use when
calculating minority interests in profits or losses. The general principles
are:

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

302

We only need to make adjustments to minority interests share of


profits where an intragroup transaction affects the subsidiarys profit or
loss.

We make adjustments for profits or losses made by the subsidiary to


the extent they are unrealised from the economic entitys perspective,
that is the respective asset is still on hand at reporting date.

For profits relating to transactions that do not involve the transfer of


assets, such as those relating to interest, management fees and so forth,
no adjustments to minority interests are necessary. The related profits
are deemed to be recognised at the point of the transaction.

We do not need to make adjustments for unrealised gains or losses


made by the parent entity when calculating the minority interest in
profits.

30.4

Some of the intragroup transactions we make adjustments for were discussed


in the answer provided to Question 30.3. in calculating minority interests in
the profits of the economic entity we start with the reported after-tax profit of
the subsidiary and calculate a proportionate share in this unadjusted amount.
We then make adjustments for profits made in the accounts of the subsidiary
that are unrealised at year end from the perspective of the economic entity. In
calculating minority interests, we do not make any adjustments for unrealised
profits that were recorded in the accounts of the parent entity. Minority
interests in the economic entitys profits and reserves will be impacted by
intragroup transactions such as payments of dividends, intragroup sale of
inventory and non-current assets, and intragroup service or interest payments
to the extent that related assets are still on hand at balance date.

30.5

(a)

(b)

(c)

Purchase consideration
Company As share of the net assets of Company B at
the date of acquisition ($10m 0.7):
Goodwill acquired

$10 000 000

Purchase consideration
Company As share of the net Assets of Company B at
the date of acquisition ($10m 1.0):
Goodwill acquired

$14 285 714

$ 7 000 000
$ 3 000 000

$10 000 000


$ 4 285 714

As we know, when we consolidate the accounts of the parent entity and


its controlled entities we include 100 per cent of the identifiable assets
(tangible and intangible) of the parent entity and the controlled entities
in the consolidated financial statements. However, for goodwill, we
only include the acquired goodwill, which is based upon the parent
entitys ownership interest in the subsidiary. This is in accord with the
requirement that only purchased goodwill shall be brought to account.
Students should be encouraged to consider the conceptual logic of this
requirement.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

303

30.6

Consolidated income statement of Backbeach Limited and its controlled


entities
for the year ended 30 June 2009
Consolidated
2009
$000
Revenue
5 000
Cost of goods sold
1 500
Gross Profit
3 500
Dividend revenue
200
Interest expense
(100)
Depreciation expense
(50)
Other expenses
(10)
Profit before income tax
3 540
Income tax expense
(X)
Profit for the period
3 540
Profit attributable to minority interest
342*
Profit attributable to members of parent entity interest 3 198
* $342,000 was determined as being Consolidated profit, less the parent
entity profit multiplied by the minority interest. That is, ($3,540 - $2,400)
x 0.30 = $342,000. We can do this calculation in this manner as there were
apparently no intra-group transactions and therefore no adjustments for
unrealised profits.

30.7

Dividend out of pre-acquisition earnings


On 15 August 2008 Slater Ltd paid a dividend of $50 000 out of preacquisition earnings. Kelly Ltd would have received $35 000, being 70 percent
of these dividends. Kelly Ltd would have made the following entry in its own
journal:
Dr
Cr

Cash
Investment in Slater Ltd

35 000
35 000

Consolidation journal entries


Dr Investment in Slater
35 000
Cr Retained earnings, 1 July 2008 Slater
35 000
The above entry has the effect of reinstating the investment as if the preacquisition dividend had not been paid.
Dr
Dr
Dr
Dr
Cr

Share Capital
Retained earnings
Revaluation reserve
Goodwill
Investment in Slater Ltd

126 000
35 000
42 000
97 000
300 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

304

30.8

Consolidation adjustments and eliminations:


Fair value adjustment:
Dr Land
Cr Revaluation reserve
Dr
Cr

Revaluation reserve
Deferred tax liability

Elimination of investment
Dr Share capital
Dr Retained earnings
Dr Revaluation reserve
Dr Goodwill
Cr Investment in Beachly Ltd

50 000
50 000
15 000
15 000
315 000
90 000
31 500
63 500
500 000

Elimination of intra group sales:


Dr
Cr

Sales
Cost of goods sold

60 000
60 000

Elimination of unrealised profit in closing inventory


Dr Cost of goods sold
7 500
Cr Inventory

7 500

Consideration of the tax paid or payable on the sale of inventory that is still
held within the group
Dr Deferred tax asset
Cr Income tax expense
($7 500 x 30 per cent)

2 250

Elimination of intragroup management fees:


Dr Management fees revenue
10 000
Cr Management fees expense

2 250

10 000

Reversal of profit recognised on sale of asset and reinstatement of cost and


accumulated depreciation
Dr Profit on sale of plant
10 000
Dr Plant
10 000
Cr Accumulated depreciation
20 000
Impact of tax on profit on sale of item of plant
Dr Deferred tax asset
3 000
Cr Income tax expense

3 000

Reinstating accumulated depreciation in the balance sheet


Layne Ltd would be depreciating the asset on the basis of the cost it incurred
to acquire the asset. Its depreciation charge would be $40 000 4 = $10 000.
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

305

From the economic entitys perspective, the asset had a carrying value of
$30,000, which was to be allocated over the next four years giving a
depreciation charge of $30 000 4 = $7 500. An adjustment of $2 500 is
therefore required.
Dr
Cr

Accumulated depreciation
Depreciation expense

2 500
2 500

Consideration of the tax effect of the reduction in depreciation expense


Dr Income tax expense
750
Cr Deferred tax asset
750
Minority interests in 2009 profits

Reported profit of Beachly Ltd


Adjustments
Unrealised profit in closing inventory
Profit on sale of plant:
Unrealised portion (after tax)
Realised portion (depreciation
adjustment after tax)
Minority interests in 2009 profits
30.9

70 000

10%
Minority interest
7 000

(5 250)

(525)

(7 000)

(700)

1 750

175
5 950

Elimination of the investment in Thruster Ltd and recognition of goodwill


on consolidation
Thruster Ltd
Parent Entitys
70% interest
$
$

Share capital at acquisition date - 1 July 2007


Retained earnings at acquisition date - 1 July 2007

3 000 000
1 400 000

Investment in Thruster Ltd


Goodwill on consolidation

2 100 000
980 000
3 080 000
4 000 000
920 000

As shown above, the net assets of Thruster Ltd are $4.4 million at acquisition date.
The proportional interest acquired in these net assets (70 per cent) amounts to
$3.080 million. As $4 million is paid for the investment, the goodwill amounts to
$920 000. The consolidation entry to eliminate the investment is:
(a)Dr
Dr
Dr
Cr

Share capital
Retained earnings
Goodwill
Investment in Thruster Ltd

2 100 000
980 000
920 000
4 000 000

What should be noted at this point is that we are recognising only the goodwill that
has been purchased by Anderson Ltd. This is in accord with the requirements in
our accounting standards that only purchased goodwill be brought to account.
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

306

Implications for minority interests: Recognising minority interest in share


capital and reserves at acquisition date
In recognising the minority interests share in share capital and reserves at
reporting date we will make three initial calculations:
1.
2.

We need to determine the minority interests at acquisition date.


We need to consider the minority interest in movements in share capital and
reserves between the date of the parent entitys acquisition and the
beginning of the current reporting period.

We need to consider the minority interest in the current periods profit as


well as movements in reserves in the current period. In determining the
minority interests share of current periods profit or loss we will
subsequently need to adjust for gains and losses of the subsidiary that are
unrealised from the economic entitys perspective.
Remember that in calculating minority interests we do not make any consolidation
journal entries; we are doing the calculations so that we can disclose the relative
proportions of consolidated profits and consolidated share capital and reserves that
are attributable to parent entity interests and minority interests.
3.

Thruster Ltd

Minoritys
30% interest
$
$
Share capital at acquisition date
3 000 000
900 000(A)
Retained earnings at acquisition date
1 400 000
420 000(B)
1 320 000
(Remember, the markers A and B are used to allow us to reference the calculations
to the consolidation worksheet.). Including minority interests on the consolidation
worksheet is optional.
Recognising minority interest in movements in share capital and reserves
from acquisition date to the beginning of current financial period
Balance at 1 July Balance at 30 June
2007
$
Retained earnings1 400 000

2008
$
1 600 000

Change
$
200 000

Minority
interest 30%
$
60 000(C)

Recognition of the minority interest in current period (unadjusted) profit


The profit of the subsidiary for the current financial year as reported in the
accounts of the subsidiary is $110 000. This is our starting point, which we will
subsequently adjust for unrealised gains and losses. The minority interest in this
unadjusted balance is 30 per cent, or $33 000. When we calculate the minority
interest in profits we start with this unadjusted share of $33 000. Then we make a
number of adjustments to take account of any unrealised components - from the
perspective of the subsidiarys profits - that are included within the $33 000.
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

307

Thruster Ltd
$
Profit for year ended 30 June 2009

110 000

Minoritys
30% interest
$
33 000 (D)

We move the above calculations (A to D) of the minority interest in capital and


reserves and current period profits to the minority interest column in the
consolidation journal. It is further emphasised that the above calculations do not
lead to consolidation adjustments. They are simply part of the process of
determining the minority interests share in total equity as at reporting date.
Subsequent adjustments to the minority interest will be necessary to take account
of intragroup transactions that have created unrealised profits in the accounts of
the subsidiary. So while we have moved the $33 000 to the consolidated
worksheet to represent the minority interest in current periods profit, this
unadjusted share will be adjusted for unrealised gains or losses, as we will
demonstrate shortly.
Elimination of intercompany sales
We need to provide consolidation journal entries to eliminate the intercompany
sales because, from the perspective of the economic entity, the sales did not
involve external parties. This will ensure that we do not overstate the total sales of
the economic entity.
Sale of inventory from Thruster Ltd to Anderson Ltd

(b)Dr Sales
Cr Cost of goods sold

45 000
45 000

Under the periodic inventory system, the above credit entry would be to purchases,
which would ultimately lead to a reduction in cost of goods sold. (Cost of goods
sold equals opening inventory plus purchases less closing inventory, so any
reduction in purchases leads to a reduction in cost of goods sold.)
Elimination of unrealised profit in closing inventory
As all the inventory sold by Thruster to Anderson Ltd has since been sold by
Anderson Ltd then there is no unrealised profit in closing inventory, and therefore
no adjustments need to be made.
Impairment of goodwill

In the absence of information about the impairment of goodwill we will assume


that there has been no impairment of goodwill, and hence no adjustment is
necessary.
Dividends paid
We eliminate the dividends paid within the group. Only the dividends paid to
parties outside the entity (to the minority interests and to the shareholders of the
parent entity) are to be shown in the consolidated accounts.
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

308

(c)Dr Other revenue


Cr Dividend paid

56 000
56 000

Implications for minority interests: Dividends paid

We need to consider the impacts of the dividends on minority interests. The


payment and declaration of dividends by a subsidiary acts to reduce the interest of
the minority in the subsidiarys closing retained earnings.
Reduction in minority interest
$
Thruster Ltd
Dividend paid

$
80 000

Minoritys
30% interest
$
(24 000) (E)

Next we transfer the above consolidation journal entries and minority interest
calculations to the consolidation worksheet.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

309

Consolidation worksheet for Anderson Ltd and its controlled entity for the year ending 30 June
2010
Eliminations
and adjustments
Anderson Ltd
($000)

Thruster Ltd
($000)

Dr
($000)

Cr
($000)

Consolidated
statements
($000)

Minority
Interest
($000)
Adjustments

Reconciliation of opening and


closing retained earnings
Sales revenue
less Cost of goods sold
less Other expenses
Other revenue

800
(200)
(120)
310

200
(80)
(60)
85

45(b)

Profit before tax

790

145

879

Tax

170

35

205

Profit after tax

620

110

674

Retained earnings- 30 June 2008 2 000

1 600

45(b)
56(c)

955
(235)
(180)
339

33D

980(a)

33

60C
420B

480

2 620
3 294

2 620

1 710

400
2 220

80
1 630

2 220
8 000

1 630
3 000

120

80

200

1 200

500

1700

11 540

5 210

13 670

Current assets
Cash
Accounts receivable
Inventory

300
500
1 000

50
350
600

350
850
1 600

Non-current assets
Land
Plant (net)
Investment in Thruster Ltd
Goodwill

2 800
2 940
4 000

2 210
2 000

920(a)

4 000(a)
______

5 010
4 940
920

11 540

5 210

2 166.52

2 166.52

13 670

Dividends paid

Totals

56(c)

424
2 870

(24)E

(24)
489

Balance sheet
Shareholders equity
Retained earnings
Share capital
Current liabilities
Accounts payable
Non-current liabilities
Loans

2 870
8 900

2 100(a)

5(i)

900A

1 389

The above worksheet provides the data for the consolidated income statement and
balance sheet. As can be seen, the dividend payments total $424 000. These represent
dividends paid to parties external to the economic entity ($400 000 by Anderson Ltd,
and 30 per cent of the $80 000 paid by Thruster Ltd). AASB 127 requires that
additional disclosures be made to show the share of minority interests in capital,
retained earnings, reserves, and profit or loss. Hence we need to allocate these
accounts between the parent entity and the minority interests. The allocation is done
after making adjustments for unrealised gains or losses associated with intragroup
transactions. In this question there were no unrealised gains.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

900

3010

Summary of minority interest


30%
Minority interest
Profit
Profit of Thruster Ltd

110 000

33 000

1 600 000

480 000

Dividends
Paid by Thruster Ltd
(80 000)
Minority interest in closing retained earnings
Minority interest in share capital
3 000 000
Total minority interest

(24 000)
489 000
900 000
1 389 000

Opening retained earnings


Opening retained earnings of Thruster

We are now in a position to present the consolidated financial statements. A


suggested format for the consolidated accounts would be as follows (prioryear comparatives for the accounts of the parent entity, both of which would
be required in practice, have not been provided):
Consolidated income statement of Anderson Ltd and its subsidiaries
for the year ended 30 June 2010
$
Sales 955 000
Cost of good sold
Gross profit
Other revenue
Other expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest

235 000
720 000
339 000
1 059 000
180 000
879 000
205 000
674 000
33 000
641 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3011

Consolidated balance sheet of Anderson Ltd and its subsidiaries


as at 30 June 2010
Parent
entity
interest
$

Minority
interest
$

Current assets
Cash 350 000
Accounts receivable
Inventory

Consolidated
$
850 000
1 600 000
2 800 000

Non-current assets
Land
Plant and equipment (net)
Goodwill

5 010 000
4 940 000
920 000
10 870 000
13 670

Total assets
Current liabilities
Accounts payable

200 000

Non-current liabilities
Loan
Total liabilities

1 700 000
1 900 000

Shareholder's equity
Share capital
Retained earnings - 30 June 2009 (x)
Total shareholders equity
Total equities

8 000 000
2 381 000
10 381 000

900 000
489 000
1 389 000

8 900 000
2 870 000
11 770 000
13 670 000

Notes to and forming part of the consolidated accounts

Note x: Retained earnings


Retained earnings - 1 July 2008
Profit after income tax
Interim dividend
Retained earnings - 30 June 2009

Parent
entity
interest
$

Minority
interest
$

2 140 000
641 000
(400 000)
2 381 000

480 000
33 000
(24 000)
489 000

Consolidated
$

2 620 000
674 000
(424 000)
2 870 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3012

30.10 (a) Consolidation Worksheet Journal Entries


a Revalue Land to Fair Value (consistent with AASB116)
Dr Land
225 000
Cr Revaluation Reserve
b

Tax Effect: Revalue Land to Fair Value


Dr Revaluation Reserve
Cr Deferred Tax Liability [225,000 x 0.30]

225 000

67 500
67 500

c Eliminate Investment in Natasha against Borris Ltds share of Natasha Ltds


Owners Equity at acquisition
Dr Share Capital [5,500,000 x .8]
4 400 000
Dr Revaluation Reserve
[(225,000 67,500) x .8]
126 000
Dr Retained earnings 1/7/07
[3,500,000 x .8]
2 800 000
Dr Goodwill
674 000
Cr Investment in Natasha
8 000 000
d Impairment of Goodwill
Dr Other expenses - Impairment loss
goodwill [674,000 500,000]
174 000
Cr Accumulated Impairment Losses - Goodwill
e

Elimination of inter entity Sales


Dr Sales Revenue
Cr Cost of Goods Sold (Purchases)

174 000

290 000
290 000

Elimination of Unrealised Profit in Closing Inventory (earned by Natasha)


Dr Cost of Goods Sold (Closing Inventory
P+L) [(290,000 200,000) x 0.50]
45 000
Cr Inventory (B/S)
45 000

Tax Effect: Elimination of Unrealised Profit in Closing Inventory


Dr Deferred Tax Asset [45,000 x .3]
13 500
Cr Income Tax Expense
13 500

Reversal of profit recognised on sale of non-current asset


Dr Profit on sale of plant [250,000 200,000] 50 000
Dr Plant [400,000 250,000]
150 000
Cr Accumulated depreciation

i Impact of tax on profit on sale of item of plant


Dr Deferred tax asset [50,000 x 0.3]
Cr Income tax expense

200 000

15 000
15 000

j Reinstating accumulated depreciation in the balance sheet


Borris Ltd would be depreciating the asset on the basis of the cost it incurred to
acquire the asset. Its depreciation charge would be $250 000 5 = $50 000. From
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3013

the economic entitys perspective, the asset had a carrying value of $200 000,
which was to be allocated over the next six years giving a depreciation charge of
$200,000 5 = $40,000. An adjustment of $10,000 is therefore required.
Dr Accumulated depreciation
Cr Depreciation expense

10 000
10 000

k Consideration of the tax effect of the reduction in depreciation expense


Dr Income tax expense
3 000
Cr Deferred tax asset
3 000
l

Intragroup payment of management fees


Dr Other revenues (management fees)
Cr Other expenses (management fees)

30 000

m Elimination of Interim Dividend paid by Natasha to Borris


Dr Other Revenues (Dividend Revenue)
[100,000 x .8]
80 000
Cr Interim Dividend (P + L Appropriation)
n

Elimination of Final Dividend declared by Natasha to Borris


Dr Other Revenues (Dividend Revenue)
[50,000 x .8]
40 000
Cr Final Dividend (P + L Appropriation)

30 000

80 000

40 000

Elimination of inter-entity Debt: Borriss Share of Natashas declared Final


Dividend
Dr Dividends Payable (Liability)
[50,000 x .8]
40 000
Cr Dividends Receivable (Asset)
40 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3014

Eliminations
and adjustments
Borris Ltd
($000)

Ntasha Ltd
($000)

Dr
($000)

Detailed reconciliation of opening


and closing retained earnings
Sales revenue
5200

1550

290(e)

Cost of goods sold

(3000)

(500)

45(f)

Gross profit
Other revenue

2200
200

1050
150

Other expenses

(400)

(200)

Profit before tax

2000

1000

Tax expense

(500)

(350)

50(h)30(l)
80(m),40(n)
174(d)

Cr
($000)

6460
290(e)

Interim dividend
Final Dividends paid

650
4000

(500)
-

(100)
(50)

Retained earnings - 30 June 2009 7000

4500

3255
3205
150

10(j),30(l)

(734)
2621

3(k)

13.5(g),
15(i)

Profit for the year


1500
Retained earnings 1 July 2008 6000

Consolidated
statements
($000)

824.5

1796.5
7200

2800(c)
80(m)
40(n)

(520)
(10)
8466.5

Balance sheet
Shareholders equity
Retained earnings
Revaluation reserve
Share capital
Current liabilities
Accounts payable
Dividends payable
Non-current liabilities
Deferred tax liability
Loans
Current assets
Cash
Accounts receivable
Dividends receivable
Inventory
Non-current assets
Deferred tax asset
Land
Plant
Accumulated depreciation
Investment in Natasha Ltd
Goodwill
Accumulated amortisation

7000

4500

15000

5500

67.5(b)
126(c)
4400(c)

250

100
50

40(o)

225(a)

8466.5
31.5
16100
350
10

650

150

67.5(b)

67.5
800

22900

10300

25825.5

250
650
40
2800

300
250
1200

40(o)
45(f)

550
900
3955

250

1100

13.5(g)
15(i)

3(k)

1375.5

4910
7500
(1500)
8000

3450
5000
(1000)

225(a)
150(h)
10(j)

200(h)
8000(c)
174(d)

8585
12650
(2690)
674
(174)

9233

25825.5

674(c)
22900

10300

9233

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3015

Calculation of Minority Interest


minority interest

Minority Interest in 2009 Profit after Income Tax


Natashas Reported Profit after Income Tax Expense
Less
Unrealised Profit in Closing Inventory
Tax Effect of Unrealised Profit in Closing Inventory
Profit on sale of plant:
Unrealised portion
Realised portion

650,000
(45,000)
13,500

(31,500)

(35,000)
7,000

(28,000)

Natashas Adjusted Profit after Income Tax Expense

590,500

Minority Interest in (Opening) Retained Earnings 1/7/08

118,100

4,000,000

800,000
918,100

Minority Interest in Dividends


Natashas Reported Interim Dividend
Natashas Reported Final Dividend
Minority Interest in Closing Retained Earnings

100,000
50,000

Minority Interest in Share Capital


Natashas Reported Share Capital
Minority Interest in Revaluation Reserve
Natashas revaluation reserve recognised on acquisition

150,000

(30,000)
888,100

5,500,000

1,100,000

157,500

Minority Interest in Natashas Equity 30 June 2009

2,019,600

c.
Consolidated income statement of Borris Ltd and its subsidiaries
for the year ended 30 June 2009
$
Sales 6,460,000
Cost of good sold
Gross profit
Other revenue
Other expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest

3,255,000
3,205,000
150,000
(734,000)
2,621,000
824,500
1,796,500
118,100
1,678,400

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3016

Consolidated balance sheet of Borris Ltd and its subsidiaries


as at 30 June 2009
Parent
entity
interest
$

Minority
interest
$

Current assets
Cash 550,000
Accounts receivable
Inventory

900,000
3,955,000
5,405,000

Non-current assets
Land
Plant and equipment
less Accumulated depreciation
Goodwill
less Accumulated impairment loss
Deferred tax asset

8,585,000
12,650,000
(2,690,000)
674,000
(174,000)
1,375,500
20,420,500
25,825,500

Total assets
Current liabilities
Accounts payable
Dividends payable

350,000
10,000
360,000

Non-current liabilities
Loan
Deferred tax liability

800,000
67,500
867,500
1,227,500

Total liabilities
Shareholders equity
Share capital
Retained earnings - 30 June 2009 (x)
Revaluation reserve
Total shareholders equity
Total equities

Consolidated
$

15,000,000
7,578,400
_________
22,578,400

1,100,000
888,100
31,500
2,019,600

16,100,000
8,466,500
31,500
24,598,000
25,825,500

Notes to and forming part of the consolidated accounts

Note x: Retained earnings


Retained earnings - 1 July 2008
Profit after income tax
Interim dividend
Final dividend
Retained earnings - 30 June 2009

Parent
entity
interest
$

Minority
interest
$

Consolidated
$

6,400,000
1,678,400
(500,000)
________
7,578,400

800,000
118,100
(20,000)
(10,000)
888,100

7,200,000
1,796,500
(520,000)
(10 000)
8,466,500

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3017

30.11 Elimination of the investment in Richards Ltd and the recognition of


goodwill on consolidation
Richards Ltd
Parent entitys
80% interest
$
$
Share capital at acquisition date - 1 July 2000500 000
400 000
Retained earnings at acquisition date - 1 July 2000425 000
340 000
740 000
Investment in Richards Ltd
890 000
Goodwill on consolidation
150 000
As shown, the net assets of Richards Ltd are $925 000 at acquisition date. The
proportional interest acquired in these net assets (80 per cent) amounts to $740000.
As $890 000 is paid for the investment, the goodwill amounts to $150 000. As we
know, this represents only the portion of goodwill acquired by Mark Ltd and not
the entire goodwill of Richards Ltd at acquisition date. The consolidation entry to
eliminate the investment is:
(a)Dr
Dr
Dr
Cr

Share capital
Retained earnings
Goodwill
Investment in Richards Ltd

400 000
340 000
150 000
890 000

Implications for minority interests: Recognising minority interest in share


capital and reserves at acquisition date
To recognise the minority interests share in share capital and reserves at reporting
date, we make three calculations:
(i)
We need to determine the minority interests at acquisition date.
(ii)

(iii)

We need to consider the minority interest in movements in share capital


and reserves between the date of the parent entitys acquisition and the
beginning of the current reporting period.
We need to consider the minority interest in the current periods profit, as
well as movements in reserves in the current period. In determining the
minority interests share of current period profit or loss we will need to
adjust for gains and losses of the subsidiary that are unrealised from the
economic entitys perspective.

Richards Ltd
$
Share capital at acquisition date
Retained earnings at acquisition date

500 000
425 000

Minoritys
20% interest
$
100 000 (A)
85 000(B)
185 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3018

Recognising minority interest in movements in share capital and reserves


from acquisition date to the beginning of current financial period
Balance at 1 July

Balance at 30 June

2000
Retained earnings425 000

Change

2008
598 000

Minority

interest 20%
173 000 34 600 (C)

Recognition of the minority interest in current period (unadjusted) profit


The profit of the subsidiary for the current year is $252 000. The minority interest
in this is 20 per cent, or $50 400.
Richards Ltd
$
Profit for year ended 30 June 2009

252 000

Minoritys
20% interest
$
50 400 (D)

Elimination of intercompany sales


We need to eliminate the intragroup sales because, from the perspective of the
economic entity, no sales have in fact occurred. This will ensure that we do not
overstate the turnover of the economic entity.
Sale of inventory from Richards Ltd to Mark Ltd

(b)Dr Sales
Cr Cost of goods sold

130 000
130 000

Under the periodic inventory system, the above credit entry would be to purchases,
which would ultimately lead to a reduction in cost of goods sold. (Cost of goods
sold equals opening inventory plus purchases less closing inventory, so any
reduction in purchases leads to a reduction in cost of goods sold.)
Elimination of unrealised profit in closing inventory
In this case, the unrealised profit in closing inventory amounts to $14 000. In
accordance with AASB 102 Inventories, we must value the inventory at the
lower of cost and net realisable value. Hence on consolidation we must reduce the
value of recorded inventory, as the amount shown in the accounts of Mark Ltd
exceeds what the inventory cost the economic entity.
(c)Dr Cost of goods sold
14 000
Cr Inventory
14 000
Under the periodic inventory system, the above debit entry would be to closing
inventory - profit and loss. We increase cost of goods sold by the unrealised profit
in closing inventory because reducing closing inventory effectively increases cost
of goods sold. (Remember, cost of goods sold equals opening inventory plus
purchases less closing inventory.) The effect of the above entries is to adjust the
value of inventory so that it reflects the cost of the inventory to the group.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3019

Consideration of the tax paid or payable on the sale of inventory that is still held
within the group
From the groups perspective, $14 000 has not been earned. However, from
Richards Ltds individual perspective (as a separate legal entity), the full amount of
the sale has been earned. This will attract a tax liability in Richards Ltds accounts
of $4 200 (30 per cent of $14 000). However, from the groups perspective, some
of this will represent a prepayment of tax, as the full amount has not been earned
by the group even if Richards Ltd is obliged to pay the tax.
(d)Dr Deferred tax asset
Cr Income tax expense
($14 000 x 30 per cent)

4 200
4 200

Implications for minority interest: Adjustment to minority interest for unrealised


profit in closing inventory

This sale was made by the subsidiary and is unrealised - therefore requiring us to
adjust minority interest. If we look at the above consolidation adjustments we see
that the after-tax impact of the intragroup transaction is $9 800.
Richards Ltd
$
After-tax profit on unrealised component of sale(9800)

Minoritys
20% interest
$
(1 960) (E)

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3020

Sale of inventory from Mark Ltd to Richards Ltd


During the current financial period Mark Ltd sold inventory to Richards Ltd at a
price of $162 500. At year end Richards Ltd has $30 000 of this inventory on
hand, which portion of inventory cost Mark Ltd $24 000 to produce.
(e) Dr Sales
Cr Cost of goods sold

162 500

(f) Dr Cost of goods sold


Cr Inventory

6 000

(g) Dr Deferred tax asset


Cr Income tax expense
($6000 x 30 per cent)

1 800

162 500

6 000

1 800

We do not need to make any adjustments to minority interests as profit was not
recorded in the accounts of the subsidiary.
Unrealised profit in opening inventory

At the end of the preceding financial year, Mark Ltd had $105 000 of inventory on
hand, which had been purchased from Richards Ltd. The inventory cost Richards
Ltd $87 500 to produce.
It is assumed that the inventory has been sold to an external party in the current
period and hence is realised - so there is no need to adjust closing balance of
inventory. Therefore, we need to increase the minority interests share of current
periods profits.
(h) Dr Retained earnings - 30 June 2008
Dr Income tax expense
Cr Cost of sales

12 250
5 250
17 500

Implications for minority interest: Unrealised profit in opening inventory


Regarding the impact on minority interest, in the last period it was considered as
unrealised from the perspective of the minority interest and hence their share of
opening retained earnings is decreased and their share of current period profit is
increased. Specifically, we increase minority interest share in profit by 20 per cent
of $12 250, which equals $2 450, and make a corresponding reduction in minority
interests share of opening retained earnings.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3021

Richards Ltd

Reduction on opening retained earnings


Increase in current period profit

$
(12 250)
12 250

Minoritys
20% interest
$
(2 450)(F)
2 450(G)

Adjustments for intragroup sale of plant

On 1 July 2008 Mark Ltd sold an item of plant to Richards Ltd for $290 000 when
its carrying value in Richards Ltds accounts was $202 500 (cost of $337 500 and
accumulated depreciation of $135 000). This item of plant was being depreciated
over 10 years, with no expected residual value.
Reversal of profit recognised on sale of asset and reinstatement of cost and
accumulated depreciation

The result of the sale of the item of plant to Richards Ltd is that the profit of $93
500 - the difference between the sales proceeds of $290 000 and the carrying
amount of $202 500 - will be shown in Mark Ltds financial statements. However,
from the economic entitys perspective there has been no sale and, therefore, no
gain on sale given that there has been no transaction with a party external to the
group. The following entry is necessary so that the accounts will reflect the
balances that would have been in place had the intragroup sale not occurred.
(i) Dr Profit on sale of plant
Dr Plant
Cr Accumulated depreciation

87 500
47 500
135 000

The result of this entry is that the intragroup profit is removed and the asset and
accumulated depreciation accounts revert to reflecting no sales transaction. The
profit of $87 500 will be recognised progressively in the consolidated financial
report of the economic entity by adjustments to the amounts of depreciation
charged by Richards Ltd in its accounts. As the service potential or economic
benefits embodied in the asset are consumed, the $87 5000 profit will be
progressively recognised from the economic entitys perspective. This is shown in
journal entry (k).
Impact of tax on profit on sale of item of plant
From Richards Ltds individual perspective it would have made a profit of $87 500
on the sale of the plant and this gain would have been taxable. At a tax rate of 30
per cent, $26 250 would be payable by Mark Ltd. However, from the economic
entitys perspective no gain has been made, which means that the related tax
expense must be reversed and a related deferred tax benefit recognised. A deferred
tax asset is recognised because, from the economic entitys perspective, the amount
paid to the Tax Office represents a prepayment of tax.
(j) Dr Deferred tax asset
Cr Income tax expense

26 250
26 250

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3022

Reinstating accumulated depreciation in the balance sheet

Mark Ltd would be depreciating the asset on the basis of the cost it incurred to
acquire the asset. Its depreciation charge would be $290 000 6 = $48 333. From
the economic entitys perspective, the asset had a carrying value of $202 500,
which was to be allocated over the next six years giving a depreciation charge of
$202 500 6 = $33 750. An adjustment of $5833 is therefore required.
(k)Dr Accumulated depreciation
Cr Depreciation expense

14 583
14 583

Consideration of the tax effect of the reduction in depreciation expense

The increase in the tax expense from the perspective of the economic entity is due
to the reduction in the depreciation expense. The additional tax expense is $4 375,
which is $14 583 x 30 per cent. This entry represents a partial reversal of the
deferred tax asset of $26 250 recognised in the earlier entry. After 10 years the
balance of the deferred tax asset relating to the sale of the item of plant will be
$nil.
(l) Dr Income tax expense
Cr Deferred tax asset

4 375
4 375

Implications for minority interest: Intragroup sale of a non-current asset

Because the profit was in the accounts of Mark Ltd there is no adjustment to the
minority interest in profits.

Impairment of goodwill
(m)Dr Retained earnings 1 July 2008
56 250
Dr Impairment loss - goodwill
7 500
Cr Accumulated impairment losses - goodwill
63 750
There is no implication for the minority interest as this only relates to the parent
entitys share.
Elimination of intragroup transactions - management fees
All of the management fees paid within the group will need to be eliminated on
consolidation.
(n)Dr Management fee revenue
66 250
Cr Management fee expense
66 250
Implications for minority interests: Intragroup payment of management fees

It is not necessary to make any adjustments to minority interest of profits as the


profits associated with the management are deemed to be recognised.
Dividends paid
We eliminate the dividends paid within the group. Only the dividends paid to
parties outside the entity (the minority interests) are to be shown in the
consolidated accounts.
(o)Dr Dividend revenue
Cr Dividend paid

186 000
186 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3023

Implications for minority interests: Dividends paid and declared

We need to consider the impacts of the dividends on minority interests. The


payment and declaration of dividends by the subsidiary act to reduce the interest of
the minority in the subsidiary.
Reduction in minority interest
Richards Ltd
Dividend paid

$
232 500

Minoritys
20% interest
$
46 500 (J)

Now we can post the consolidation journal entries and the minority interest
calculations to the consolidation worksheet.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3024

Eliminations
and adjustments
Mark Ltd
($000)

Richards Ltd
($000)

Dr
($000)

Cr
($000)

Consolidated
statements
($000)

Minority
Interest
($000)
Adjustments

Detailed reconciliation of opening


and closing retained earnings
Sales revenue
1 725

1 450

Cost of goods sold

(1 160)

(595)

565

855
-

186
66.25
87.5

(77)
(61.25)
(252.75)

(96.75)
(142))
(66.25)
(192.5)

Profit before tax

513.75

357.5

Tax expense

153.75

105.5

Gross profit
Other revenue
Dividends received - from
Richards
Management fee revenue
Profit on sale of plant
Expenses
Administrative expenses
Depreciation
Management fee expense
Other expenses

130(b)
162.5(e)
14(c)
6(f)

2 882.5
130(b)
162.5(e)
17.5(h)

1465
1 417.5

186(o)
66.25(n)
87.5(i)

14.583(k)
66.25(n)

7.5(m)

(173.75)
(188.667)
(452.75)
602.333

5.25(h)

4.2(d)

4.375(l)

1.8(g)

236.625

26.25(j)
Profit for the year

360

252

365.708

50.4(D)
(1.96)(E)
2.45(F)

50.89
Retained earnings - 30 June 2008 798.5

598

340(a)
12.25(h)
56.25(m)

988

85(B)
34.6(C)
(2.45)(G)

117.15
Dividends paid

1 158.5
(343.5)
(46.5)

Retained earnings - 30 June 2009

850
(232.5)

186(o)

1 353.708
(390)

815

617.5

815
875
100

617.5
500

Current liabilities
Accounts payable
Tax payable

136.75
103.25

115.75
62.5

252.5
165.75

Non-current liabilities
Loans

433.75

290

723.75

2 363.75

1 585.75

3 080.708

148.5
230

155.75
72.5

(46.5)(H)

963.708

Balance sheet
Shareholders equity
Retained earnings
Share capital

Current assets
Accounts receivable
Inventory
Non-current assets
Deferred tax asset
Land and buildings
Plant - at cost
Accumulated depreciation

14(c)
6(f)
4.2(d)
1.8(g)
26.25(j)

560
749.625
(214.375)

815
889.5
(347)

963.708
975

400(a)

47.5(i)
14.583(k)

100(A)

304.25
282.5

4.375(l)

27.875

135(i)

1 375
1 686.625
(681.793)

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3025

Totals

Investment in Richards Ltd


Goodwill
Accumulated amortisation

890

890(a)
63.75(m)

150
(63.75)

1 722.208

3 080.708

150(a)
2 363.75
221.54

1 585.75

1 722.208

Summary of minority interest


20%
minority interest
Profit
Profit of Richards Ltd
Adjustments
Unrealised profit in opening inventory
Unrealised profit in closing inventory

252 000

50 400

12 250
(9 800)

2 450
(1 960)

50 890

Opening retained earnings


Opening retained earnings of Richards Ltd 598 000
Unrealised profit in opening inventory
(12 250)

119 600
(2 450)

117 150

Dividends
Paid by Richards Ltd

(232 500)

(46 500)

(46 500)

Minority interest in closing retained earnings


Minority interest in share capital
500 000
Total minority interest

100 000

121 540
100 000
221 540

We are now in a position to present the consolidated financial statements. A


suggested format for the consolidated accounts would be as follows (prior year
comparatives for the accounts of the parent entity, both of which would be
required in practice, have not been provided):
Consolidated income statement of Mark Ltd and its subsidiaries
for the year ended 30 June 2009
$
Sales 2 882 500
Cost of good sold
Gross profit
Administrative expenses
Depreciation
Other expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest

1 465 000
1 417 500
(173 750)
(188 668)
(452 750)
602 332
236 625
365 707
50 890
314 817

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3026

Consolidated balance sheet of Mark Ltd and its subsidiaries


as at 30 June 2009
Parent
entity
interest
$

Minority
interest
$

Current assets
Accounts receivable
Inventory

304 250
282 500
586 750

Non-current assets
Land and buildings
Plant and equipment
less Accumulated depreciation
Goodwill
less Accumulated impairment loss
Deferred tax asset

1 375 000
1 686 625
(681 192.5)
150 000
(63 750)
27 875
2 493 957.5
3 080 707.5

Total assets
Current liabilities
Accounts payable
Tax payable

252 500
165 750
418 250

Non-current liabilities
Loan
Total liabilities
Shareholders equity
Share capital
Retained earnings - 30 June 2009 (x)
Total shareholders equity
Total equities

Consolidated
$

723 750
1 142 000
875 000
842 167.5
1 717 167.5

100 000
121 540
221 540

975 000
963 707.5
1 938 707.5
3 080 707.5

Notes to and forming part of the consolidated accounts

Note x: Retained earnings


Retained earnings - 1 July 2008
Profit after income tax
Final dividend
Retained earnings - 30 June 2009

Parent
entity
interest
$

Minority
interest
$

Consolidated
$

870 850
314 817.5
(343 500)
842 167.5

117 150
50 890
(46 500)
121 540

988 000
365 707.5
(390 000)
963 707.5

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

3027