SMU Classification: Restricted

Advanced Financial Accounting Workbook 2

Question 1

P Co acquired Y Co and Z Co as follows:

Y Co Z Co
Date of acquisition 01-01-20x4 01-01-20x5
Percentage acquired by P Co 90% 30%
Shareholders' equity at date of acquisition
Share capital 600,000 400,000
Retained earnings 600,000 400,000
1,200,000 800,000

Fair and book values of net identifiable assets of each company at date of acquisition
Y Co------------------------> Z Co----------------------->
Book value Fair value Book value Fair value
FVOCI debt securities 200,000 160,000
Inventory 300,000 250,000
Other net assets 1,000,000 1,000,000 500,000 500,000
Total net assets 1,200,000 1,160,000 800,000 750,000

The FVOCI securities were sold to third parties for $180,000 in 20x4. The inventory of Z Co as at
acquisition date was sold to third parties during 20x5.

The fair value of non-controlling interests in Y Co as at acquisition date was $160,000.

The financial statements of P Co, Y Co and Z Co are shown below.

Income Statement for the year ended 31 December 20x6

P Co Y Co Z Co
Profit before tax 3,000,000 1,200,000 600,000
Tax -600,000 -240,000 -100,000
Profit after tax 2,400,000 960,000 500,000
Dividends declared -300,000 -200,000 -90,000
Profit retained 2,100,000 760,000 410,000
Retained earnings, 1 Jan 20x6 500,000 900,000 600,000
Retained earnings, 31 Dec 20x6 2,600,000 1,660,000 1,010,000

Balance sheet as at 31 Dec 20x6 P Co Y Co Z Co

Fixed assets, net book value 3,000,000 1,500,000 950,000
Investment in Y Co, at cost 1,500,000
Investment in Z Co, at cost 500,000
Amount due from P Co 90,000
Amount due from Z Co 60,000
Inventory 800,000 600,000 300,000
Accounts receivable 520,000 200,000 400,000
Cash 100,000 50,000 20,000
6,480,000 2,440,000 1,670,000

2020 © Pearl Tan

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 SMU Classification: Restricted

Advanced Financial Accounting Workbook 2

Accounts payable 1,790,000 180,000 200,000
Amount due to Y Co 90,000
Amount due to P Co 60,000
Share capital 2,000,000 600,000 400,000
Retained earnings 2,600,000 1,660,000 1,010,000
6,480,000 2,440,000 1,670,000
Additional information:

1. On 1 January 20x6, Y sold fixed assets to P at an invoiced price of $200,000. The original
cost of the fixed asset was $240,000 and its accumulated depreciation was $144,000 as at
the date of transfer. The original useful life of the fixed asset was 5 years and the remaining
useful life as at the date of transfer was 2 years. Assume negligible residual value.

2. During November 20x5, P sold inventory to Z at an invoiced price of $220,000. The

original cost of the inventory to P was $180,000. Subsequent to the transfer:

Percentage re-sold during 20x5 20%

Percentage re-sold during 20x6 70%
Percentage unsold as at end of 20x6 10%

3. On 1 July 20x6, P sold inventory to Y at an invoiced price of $200,000. The original cost
of the inventory was $180,000. The following relates to the inventory:

Percentage re-sold during 20x6 60%

Percentage deemed as obsolete during 20x6 10%
Percentage of good inventory unsold as at end of 20x6 30%

4. Assume a tax rate of 20%. Recognize tax on fair value adjustments.

Required

(a) Prepare consolidation and equity accounting entries for the year ended 31 December 20x6,
with narratives (brief headers) and workings.

(b) Perform an analytical check of the following balances in the consolidated financial statements
of P Co as at 31 December 20x6, showing workings clearly:
• Balance in Non-controlling Interests;
• Investment in Associate; and
• Consolidated Retained Earnings.

2020 © Pearl Tan

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 SMU Classification: Restricted

Advanced Financial Accounting Workbook 2

Question 2

P Co acquired an interest in X Co and Z Co. Details of the acquisitions are as follows:

X Co Z Co
Date of acquisition 01-Jan-20x3 01-Jan-20x4
Percentage acquired by P Co 90%
Percentage acquired by P Co 30%
Shareholders' equity at date of acquisition
Share capital 600,000 300,000
Retained earnings 600,000 400,000
1,200,000 700,000

Differences between fair value and book value at acquisition date were for the following:
X Co--------------------- Z Co-------------------------
Book value Fair value Book value Fair value
Fixed assets 1,000,000 1,400,000
Intangible asset 0 150,000
Other net assets 200,000 200,000 700,000 700,000
1,200,000 1,600,000 700,000 850,000

Fixed assets had a useful life of 10 years as at the date of acquisition. The fixed assets were disposed
at a price of $300,000 to third parties on 1 January 20x6. The unrecognized intangible asset suffered
a 20% impairment loss during 20x6.
Fair value of non-controlling interests as at acquisition date was $180,000. The financial statements
for the year ended 31 December 20x6 are shown below.

Income Statement for year ended 31 December 20x6

P Co X Co Z Co
Profit before tax 4,200,000 2,400,000 700,000
Tax (840,000) (480,000) (200,000)
Profit after tax 3,360,000 1,920,000 500,000
Dividends declared (200,000) (100,000) (60,000)
Profit retained 3,160,000 1,820,000 440,000
Retained earnings, 1 Jan 20x6 1,500,000 800,000 500,000
Retained earnings, 31 Dec 20x6 4,660,000 2,620,000 940,000

Balance sheet as at 31 Dec 20x6 P Co X Co Z Co

Fixed assets, net book value 4,800,000 2,600,000 1,300,000
Investment in X, at cost 1,800,000
Investment in Z, at cost 400,000
Inventory 300,000 340,000 170,000
Accounts receivable 500,000 250,000 150,000
Cash 100,000 70,000 30,000
7,900,000 3,260,000 1,650,000
Accounts payable 2,240,000 40,000 410,000
Share capital 1,000,000 600,000 300,000
Retained earnings 4,660,000 2,620,000 940,000
7,900,000 3,260,000 1,650,000
2020 © Pearl Tan

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 SMU Classification: Restricted

Advanced Financial Accounting Workbook 2

Additional information:

1. During December 20x6, P Co sold excess inventory to X Co as follows:

Transfer price of inventory $100,000

Original cost of inventory $120,000
Percentage re-sold to third parties during 20x6 10%
Percentage in inventory as at 31 December 20x6 90%

The loss on transfer was indicative of an impairment loss relating to the inventory.

2. On 1 January 20x6, X Co transferred fixed assets to P Co at an invoiced price of

$35,000. The original cost of the fixed assets was $50,000 and the net book value at
the date of transfer was $20,000. The original useful life of the asset was 5 years while
the remaining useful life as at the date of transfer was estimated at 3 years. Residual
value was zero.

3. During 20x6, P Co sold to Z Co inventory at an invoiced price of $200,000. The original

cost of the inventory was $140,000. The percentage of inventory that is unsold is as
follows:

As at 31 Dec 20x6 20%

4. Assume a tax rate of 20%. Recognize tax on fair value adjustments.

Required

(a) Prepare consolidation and equity accounting entries for the year ended 31 December
20x6, with narratives (brief headers) and workings.

(b) Perform an analytical check of the following balances in the consolidated financial
statements of P Co as at 31 December 20x6, showing workings clearly:
• Balance in Non-controlling Interests;
• Investment in Associate; and
• Consolidated Retained Earnings.

2020 © Pearl Tan

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 SMU Classification: Restricted

Advanced Financial Accounting Workbook 2

Question 3

P Co acquired interests in Y Co and Z Co as follows:

Y Co Z Co
Date of acquisition 01-01-20x4 01-01-20x5
Percentage acquired by P Co 90% 30%
Shareholders' equity at date of acquisition
Share capital 900,000 600,000
Retained earnings 300,000 200,000
1,200,000 800,000

The fair values and book values of identifiable net assets of Y Co and Z Co at acquisition
dates are shown below:
Y Co-------------------------------> Z Co-------------------------->
Book value Fair value Book value Fair value
Litigation claims 0 (200,000)
Inventory 200,000 300,000
Other net assets 1,200,000 1,200,000 600,000 600,000
Total net assets 1,200,000 1,000,000 800,000 900,000

Y Co recognized a litigation expense of $180,000 in July 20x5 on the final award of

damages to the plaintiff by the courts. Z Co sold the under-valued inventory to third
parties during 20x5 at fair value of $280,000.

Fair value of non-controlling interests on the date of acquisition of Y Co was $120,000.

The financial statements for the current year ended 31 December 20x6 are shown below:
Income Statement for year ended 31 December 20x6
P Co Y Co Z Co
Profit before tax 5,000,000 2,000,000 1,000,000
Tax (1,000,000) (400,000) (150,000)
Profit after tax 4,000,000 1,600,000 850,000
Dividends declared (300,000) (120,000) (50,000)
Profit retained 3,700,000 1,480,000 800,000
Retained earnings, 1 Jan 20x6 1,200,000 800,000 500,000
Retained earnings, 31 Dec 20x6 4,900,000 2,280,000 1,300,000

Balance sheet as at 31 Dec 20x6 P Co Y Co Z Co

Fixed assets, net book value 3,500,000 2,500,000 1,900,000
Investment in Y Co, at cost 1,800,000
Investment in Z Co, at cost 600,000
Amount due from P Co 90,000
Amount due from Z Co 60,000
Inventory 800,000 600,000 300,000
Accounts receivable 520,000 200,000 400,000
Cash 100,000 50,000 20,000
7,380,000 3,440,000 2,620,000
Accounts payable 390,000 260,000 660,000
Amount due to Y Co 90,000
Amount due to P Co 60,000
Share capital 2,000,000 900,000 600,000
Retained earnings 4,900,000 2,280,000 1,300,000
7,380,000 3,440,000 2,620,000
2020 © Pearl Tan

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 SMU Classification: Restricted

Advanced Financial Accounting Workbook 2

Additional information:

1. Y Co sold fixed assets (a group of identical manufacturing equipment) to P Co on

1 January 20x6 at an invoiced price of $400,000. Y Co acquired the fixed assets
at an original cost of $500,000 on 1 January 20x3 when the estimated useful life
was 6 years. On 1 January 20x6, the estimated remaining useful life of the asset
was 2 years. Estimated residual value was negligible. P Co re-sold 40% of the
fixed assets to a third party on 30 June 20x6 for $140,000. The remaining 60%
were held by P Co at 31 December 20x6.

2. On 1 July 20x6, P Co sold inventory to Y Co at the transfer price of $300,000.

The original cost of the inventory was $250,000. Thirty percent of the inventory
remained unsold as at 31 December 20x6.

3. During August 20x5, P Co recognized gross profit of $80,000 from the transfer of
inventory to Z Co. The original cost of the inventory was $220,000. Subsequently:

% re-sold to third parties during 20x5 60%

% re-sold to third parties during 20x6 10%
% held in inventory as at 31 December 20x6 30%

Due to poor market conditions, Z Co had to write off fifty percent of the quantity
of the inventory as at 31 December 20x6 as obsolete stocks.

Required

(a) Prepare consolidation and equity accounting entries for the year ended 31 December
20x6, with narratives (brief headers) and workings in accordance with IFRS 3
(Revised).

(b) Perform an analytical check of the following balances in the consolidated financial
statements of P Co as at 31 December 20x6, showing workings clearly:
• Balance in Non-controlling Interests;
• Investment in Associate; and
• Consolidated Retained Earnings.

2020 © Pearl Tan