AC3102 SemGrp 2 Presentation 3

AC3102 Presentation Group 3
Date and time of class: Monday 8 February 2018 (12.30pm to 2.30pm)

Venue: Seminar Room 9
Group members: Chan Zhe Kai 20%
Cheong Jack Foong 20%
Nicholas Neo Wei Hsien 20%
Tong Kuang Yi 20%
Wong Ye Wen 20%
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Question 1: P5.1 consolidation adjustments and worksheet – TLK page 298.
Fair value differential of WALL identifiable net assets (buildings) 40,000

Deferred tax liability of fair value differential (8,000)
Fair value differential of WALL identifiable net assets after tax 32,000
Share capital of WALL at acquisition date 160,000
Retained earnings of WALL at acquistion date 40,000
Fair value differential of WALL identifiable net assets after tax 32,000
Fair value of identifiable net assets of subsidiary (100%) FVINA 232,000
Fair value of identifiable net assets of subsidiary (70%) 162,000
Fair value of identifiable net assets of subsidiary (30%) 69,600
Investment by FIRE in WALL (given) 196,000 (Given)
Fair Value of non-controlling interest (FVNCI) at acquistion date (30% x 84,000

280K)
Total consideration by Fire and NCI 280,000
Less: Fair value of identifiable net assets of subsidiary (232,000)
Goodwill on consideration (FIRE and NCI) 48,000
Consideration paid by FIRE to buy 70% of WALL 196,000
Less: 70%*FVINA of subsidiary -162,400
Goodwill on consolidation (FIRE) 33,600
Fair value on non-controlling interest (FVNCI) on acquisition date 84,000
Less: 30%*FVINA of subsidiary -69,600
Goodwill on consolidation (NCI) 14,400
CJE 1 Initial Consolidation Adjustments: Eliminating investment in WALL

Dr Share Capital 160,000
Dr Retained Earnings 40,000
Dr Building 40,000
Dr Goodwill (balancing figure) 48,000
Cr Deferred Tax Liability 8000
Cr Investment in WALL 196000
Cr NCI (B/S) 84000
CJE 2 Goodwill impairment in 20x2 for prior year
Dr Retained Earnings – 70% 6,720
Dr NCI (B/S) – 30% 2,880
Cr Goodwill (20% Impairment on 20x2) 9600
CJE 3 NCI share of change in RE post-acquisition
Opening RE 1/1/20x3 100,000 Given
RE @ 1/1/20x2 40,000 Given
Adjustment for RE 60,000 Given
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NCI Share – 30% 18,000 Given
Cr NCI (B/S) 18,000
CJE 4 20x2 Depreciation of FV differential
Dr NCI (B/S) – 30% 1,200
Cr Accumulated Depreciation (Building) 4,000
prior excess depreciation of excess fair value of building = 40000/10= 4000
CJE 5 Tax effect of CJE 4
Dr Deferred Tax Liability (taxed 20%) 800
Cr Retained Earnings – 70% 560
Cr NCI (B/S) – 30% 240
CJE 6 20x3 Depreciation of FV differential
Dr Depreciation 4,000
Cr Accumulated Depreciation 4,000
current year depreciation of excess fair value of building = 40000/10=4000
Dr DTL (taxed 20%) 800
Cr Tax Expense 800
CJE 8 Dividends declared by WALL
Dr Dividend Income (P) (given) 21,000 Given
Dr NCI (B/S) (0.3*30000) 9,000 0
Cr Dividend declared by WALL (given) 30,000 Given
CJE 9 Upstream sale of inventory from WALL to FIRE in 20x2, unsold portion
Dr NCI (B/S) – 30% 4,200
Cr Inventory 14,000
Dr Deferred Tax Asset (taxed 20%) 2,800
Cr Retained Earnings – 70% 1,960
Cr NCI (B/S) – 30% 840
CJE 11 Upstream sale of inventory from WALL to FIRE in 20x2, sold portion
Dr NCI (B/S) – 30% 5,400
Cr COGS (Adjusted fur to partial sale) 18,000
Dr Tax Expense (taxed 20%) 3,600
Cr Retained Earnings – 70% 2,520
Cr NCI (B/S) – 30% 1,080
CJE 13 Downstream sale of building from FIRE to WALL in 20x2
Dr Retained earnings (Derecognise 20x2 profit) 32,000
Cr Building (Reduce to original cost of 40000) 24,000
Cr Accumulated Depreciation (given) 8,000 Given
Dr Deferred Tax Asset (20% taxed) 6,400
Cr Retained earnings 6,400
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CJE 15 Adjust for 20x2 depreciation on downstream sale
New annual depreciation (64k over 8 years) 8,000
Original annual depreciation (40k over 10 years) 4,000
Adjustment for depreciation from new to original basis 4,000
Dr Accumulated depreciation 4,000
Cr Retained earnings 4,000
Dr Retained earnings 800
Cr Deferred Tax Asset (20% taxed) 800
CJE 17 Adjust for 20x3 depreciation on downstream sale
Dr Accumulated depreciation 4,000
Cr Depreciation expense 4,000
Dr Tax Expense (taxed 20%) 800
Cr Deferred tax asset 800
CJE 19 Downstream sale of inventory from FIRE to WALL in 20x3
Dr Sales 180,000 Given
Cr COGS 144,000
Cr Inventory (Unrealised profit from 60% unsold
inventory) 36,000
Dr Deferred Tax Asset (taxed 20%) 7,200
Cr Tax expense 7,200
CJE 21 Allocate Net Income of WALL to NCI
WALL's net profit after tax in 20x3 48,000
Less: Depreciation of FV differential -4,000 CJE 6
Add: Tax effect of depreciation of FV 800 CJE 7
Add: Realised profit from upstream sale 18,000 CJE 11
Less: Tax effect of realised profit from upstream sale -3,600 CJE 12
WALL's adjusted net profit 59,200
NCI share of net profit – 30% 17,760
Dr NCI (P/L) 17,760
Cr NCI (B/S) 17,760
2. Analytical Check
Share capital of WALL as at 31 Dec 20x3 160,000

Opening Retained earning of WALL as at 1 Jan 20x3 100,000
Add: Net income 48,000
Less: Dividend (30,000)
Ending RE as at 31 Dec 20x3 118,000
Book Value of net assets of WALL 278,000
Less: Balance of unrealized profit from upstream sale of inventory (After-tax) (11,200)
(14,000 x 80%)
Book Value of net assets of WALL 266,800
Unamortised FV differential of Building (40,000 x 8/10) 32,000
Tax rate 20%
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Total unamortised FV differential after tax 25,600
FV of identifiable net assets of WALL 292,400
NCI share of FVINA (30%) 87,720
Goodwill attributable to NCI (less of impairment loss 2,880) 11,520

[14,400 – (20% x 14,400)]
NCI (B/S) at 31 Dec 20x3 under analytical check 99,240
CJE Method:
CJE 1 Initial Consolidation Adjustments: Eliminating investment in WALL 84,000

CJE 2 Goodwill impairment in 20x2 for prior year (2,880)
CJE 3 NCI share of change in RE post-acquisition 18,000
CJE 4 20x2 Depreciation of FV differential (1,200)
CJE 5 Tax effect of CJE 4 240
CJE 8 Dividends declared by WALL (9,000)
CJE 9 Upstream sale of inventory (9,600)
CJE 10 Tax effect of CJE 9 1,920
CJE 21 Allocate Net Income of WALL to NCI 17,760
Total NCI @ 31 Dec 2013 under CJE Method 99,240
3. Income statement 1/1/20x3 to 31/12/20x3
FIRE WALL DR CR NOTE CONSOL

Sales 520,000 250,000 180,000 19 590,000
COGS (372,000) (159,600) 18,000 11 (369,600)
144,000 19
Other Income 79,250 50,000 129,250
Dividend Income 21,000 21,000 8 0
Depreciation (40,000) (30,000) 4,000 6 (70,000)
4,000 17
Interest Exp (32,000) (10,400) (42,400)
Other Exp (12,000) (40,000) (52,000)
Tax Exp (32,850) (12,000) 3,600 + 800 800 + 7,12, (41,250)
7,200 18,20
Profit After Tax 131,400 48,000 144,000
NCL (P/L) 17,760 21 (17,760)
Profit attributed to S/H 126,240
Opening RE 241,600 100,000 122,720 15,440 1-5, 9, 234,320
10-16
Less Dividend (60,000) (30,000) 30,000 8 (60,000)
Closing RE 313,000 118,000 300,560
Balance sheet as at 31/12/20x3
FIRE WALL DR CR NOTE CONSOL

Cash 19,800 3,200 23,000
AR 32,000 38,000 70,000
Inventory 330,000 170,000 50,000 9,19 450,000
Land 160,000 80,000 240,000
Building 680,000 520,000 40,000 1 1,216,000
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24,000 13
Accumulated Depre (280,000) (160,000) 8,000 16,000 4,6,13,15,17 (448,000)
Investment in WALL 196,000 196,000 1 0
Goodwill 48,000 1 38,400
9,600 2
Deferred Tax Asset 14,800 1,600 10,14,16,18,2 14,800
0
Total Asset 1,137,800 651,200 1,604,200
AP 184,800 70,000 254,800
Bonds Payable 400,000 300,000 700,000
Bonds Premium 3,200 3,200
DTL 6,400 1,5,7 6,400
Share Capital 240,000 160,000 160,000 1 240,000
RE 313,000 118,000 349,880 219,440 300,560
NCI (B/S) 22,680 121,920 1-5, 8-9,10- 99,240
12,21
Total Liability and 1,137,800 651,200 532,560 347,760 1,604,200
Equity
4. a) Cost of Sale
FIRE COGS (given): 372,000

WALL COGS (given): 159,600
Less: upstream sale of inventory (18,000)
Less: downstream sale of inventory (realised) 40%*180k (72,000)
Less: downstream sale of inventory(unrealised) 60%*120k (72,000)
Consolidated figure 369,600
b) Depreciation expenses: At acquisition, building had (FV-BV) of $40k, useful life of 10 years from 20x2
FIRE Depreciation (given) 40,000
WALL Depreciation (given) 30,000
Add: additional depreciation 4,000
Less: overstated depreciation -4,000
Consolidated figure 70,000 Consol Amount: 70,000
c) Inventory balance
FIRE inventory (given) 330,000
Less: Inventory recorded (42,000)
Add: value of inventory left 28,000
Adjusted Inventory 316,000 (a)
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WALL inventory (given) 170,000
less: inventory recorded (108,000)
Add: value of inventory left 72,000
Adjusted inventory 134,000 (b)
Total Inventory (a+b) 450,000 Consol Amount: 450,000
d) Building and Equipment
FIRE buildings and equipment (given) 680,000
add: FV differential 40,000
Less: additional depreciation due to FV differential (8,000)
Less: Accum Dep (given) (280,000)
WALL buildings and equipment (given) 520,000
Less: FV of building recognised (64,000)
Add: accum depreciation of building 16,000
Add: carrying amount on 20x3 24,000
Less: Accum Dep (given) (160,000)
Consolidated figure 768,000 Consol Amount: 768,000
e) Retained Earning
FIRE retained earnings 313,000
Add: FIRE's share of WALL's post-acquisition retained earnings 54,600 70%x(118000-40000)
Less: Goodwill impairment (6,720)
Less: Cumulative depreciation of FV differential (after tax) (4,480)
Less: Unrealised profit on inventory upstream sale (after tax) (7,840)
Less: Unrealised profit on building downstream sale (after tax) (19,200)
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Less: Unrealised profit on inventory downstream sale (after tax) (28,800)
Consolidated retained earnings as at 31 Dec 20x3 300,560 Consol amount: 300,560
Question 2 (TLK P5.3 Page 301)
Part 1) Step 1: Identify the acquirer: Prism Co | Step 2: Date of acquisition: 1 January 20x7 | Step 3: Total
consideration: $300,000 | Step 4-5 Determine FV of net assets, NCI and goodwill
The excess consideration paid by Prism was assigned to buildings and equipment which had useful life of
10 years, and deferred tax liability. This indicates no goodwill was paid.
Prism's share of Sapphire Co's FV (80%) 300000

NCI share of Sapphire Co's FV (20%) 75000
Fair value of Sapphire on acquisition date 375000
Less: Retained earnings 150000
Less: Share capital 200000
FV differential (building) including tax 25000
CJE 1: Initial consolidation adjustments
Dr Share Capital (given) 200,000

Dr Retained Earnings (given) 150,000
Dr Building (25000/0.8) 31,250
Cr Deferred Tax Liability (25000/0.8*0.2) 6,250
Cr Investment in Sapphire (given) 300,000
Cr NCI (B/S) 75,000
CJE 2 NCI Share of Change in RE Post-acquisition
Opening RE, 1/1/20x9 (given) 300,000
Less: RE at acquisition date (given) 150,000
Increase in RE Post-acquisition 150,000
NCI (20%) 30,000
Cr NCI (B/S) 30,000
CJE 3 Prior years' (20x7 and 20x8) depreciation of FV differential
Dr Retained earnings- 80% 5,000
Dr NCI (B/S)- 20% 1,250
Cr Accumulated depreciation (2/10 years depreciation)*31250 6,250
Dr Deferred tax liability (20% tax on depreciation) 1,250
Cr Retained earnings- 80% 1,000
Cr NCI (B/S)- 20% 250
CJE 5 Current year (20x9) depreciation of FV differential
Dr Depreciation expense (1/10 years depreciation) 31250/10 3,125
Cr Accumulated depreciation 3,125
Dr Deferred tax liability 625
Cr Tax expense 625
CJE 7 Upstream sale of inventory (20x8)
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20x8: Cost 10,000
20x8: Purchase price (100% sold in 20x9) 15,000
Dr NCI (B/S) 1,000
Cr COGS (COGS overstated by 15k-10k) 5,000
Dr Tax expense 1,000
Cr Retained Earnings 800
Cr NCI (B/S) 200
CJE 9 Upstream sale of inventory (20x9)
20x9: Cost 40,000
20x9: Purchase price (60% sold in 20x9) 60,000
Dr Sales 60,000
Cr COGS 52,000
Cr Inventory (unrealised profit of 40%) 40%*(60k-40k) 8,000
Dr Deferred tax asset 1,600
CJE 11 Dividends declared
Dr Dividend Income (given) 16,000
Dr NCI (B/S) 4,000
Cr Dividend Declared by Sapphire (given) 20,000
CJE 12 Allocate net income of Sapphire to NCI
Dr NCI (P/L) 11,020
Cr NCI (B/S) 11,020
Net profit of Sapphire 60,000
Less: Depreciation of FV differential -3,125
Add: Tax effect of depreciation of FV differential 625
Add: Unrealised profit from upstream sale in 20x8 realised in 20x9 5,000
Less: Tax effect of Unrealised profit from upstream sale in 20x8 realised in 20x9 -1,000
Less: Unrealised profit from upstream sale in 20x9 -8,000
Add: Tax effect of Unrealised profit from upstream sale in 20x9 1,600
Adjusted profit of Sapphire 55,100
NCI- 20% share of adjusted profit 11,020
Part 2) Consolidated worksheet for year ended 31 Dec 20x9
Income statement
Prism Sapphire Consolidation Not Consolidate
Entries e d Total
Dr Cr
Sales 1,000,000 480,000 60,000 9 1,420,000
COGS (640,000) (320,000) 5,000 7 (903,000)
52,000 9
Dividend income 16,000 0 16,000 11 0
Depreciation (100,000) (10,000) 3,125 5 (113,125)
Interest expense (72,000) (14,000) (86,000)
Tax and other expenses (44,000) (76,000) (120,000)
Tax expense (adjustments) 625 6 1,225
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1,000 8
1,600 10
Profit after tax 160,000 60,000 199,100
NCI (P/L) 11,020 12 (11,020)
Profit attributable to 188,080
shareholders
Opening retained earnings 580,000 300,000 150,000 1 692,800
30,000 2
5,000 3
1,000 4
4,000 7
800 8
Dividends declared (40,000) (20,000) 20,000 11 (40,000)
Closing Retained earnings 700,000 340,000 840,880
Balance sheet
Cash and receivables 620,000 420,000 1,040,000
Inventory 640,000 270,000 8,000 9 902,000
Land 260,000 150,000 410,000
Buildings and Equipment 1,500,000 200,000 31,250 1 1,731,250
Accumulated Depreciation (1,000,000) (80,000) 6,250 3 (1,089,375)
3,125 5
Deferred Tax Asset 1,600 10 1,600
Investment in Sapphire 300,000 300,000 1 0
Total Assets 2,320,000 960,000 2,995,475
Accounts payable 1,220,000 420,000 1,640,000
Deferred tax liability 6,250 1 4,375
1,250 4
625 6
Share capital 400,000 200,000 200,000 1 400,000
Retained earnings 700,000 340,000 840,880
Non-controlling interests 75,000 1 110,220
30,000 2
1,250 3
250 4
1,000 7
200 8
4,000 11
11,020 12
Total Liabilities and Equity 2,320,000 960,000 521,120 521,120 2,995,475
Part3) Performing analytical check for NCI balance as at 31 Dec 20x9
Listing of CJE method for NCI (B/S) Dr Cr

CJE 1 Initial Consolidation Adjustments Cr NCI (B/S) 75,000
CJE 2 NCI Share of Change in RE Post-acquisition Cr NCI (B/S) 30,000
CJE 3 Prior years' (20x7 and 20x8) depreciation of FV Dr NCI (B/S) 1,25
differential 0
CJE 4 Tax effect of CJE 3 Cr NCI (B/S) 250
CJE 7 Upstream sale of inventory (20x8) Dr NCI (B/S) 1,00
0
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CJE 8 Tax effect of CJE 7 Cr NCI (B/S) 200
CJE 11 Dividends Dr NCI (B/S) 4,00
0
CJE 12 Allocate net income of Sapphire to NCI Cr NCI (B/S) 11,020
Total NCI 110,220
NCI (B/S) analytical check method
Share capital of Sapphire as at 31 Dec 20x3 200,000
Retained earning of Sapphire as at 31 Dec 20x3 340000
Book Value of net assets of Sapphire 540,000
Less: Balance of unrealized profit from upstream sale of inventory (After-tax) -6400
CJE 9 and 10 (-8k+1.6k)
533,600
Unamortised FV differential of Building (31250/10*7) 21875
Tax rate 20%
Total unamortised FV differential after tax 17500
FV of identifiable net assets of Sapphire 551,100
NCI share of FVINA (20%) 110,220
Goodwill attributable to NCI 0
NCI (B/S) at 31 Dec 20x3 under analytical check 110,220
Part 4) Analytical checks
a) Inventory
Prism inventory balance (given) 640,000
Less: 20x9 inventory left that was recorded, 0.4*60k (24,000)
Add: Carry amount of inventory left 0.4*40k 16,000
Sapphire inventory balance (given) 270,000
Consolidated inventory balance as at 31 Dec 20x5 902,000
b) Buildings and equipment, net accumulated depreciation
Prism Buildings and equipment cost (given) 1,500,000
Add: FV differential (from part 1) 31,250
Less: excess depreciation from x7-x9 (3 years) 31250/10*3 (9,375)
Less: accumulated depreciation (given) (1,000,000)
Sapphire Buildings and equipment cost 200,000
Less: Accumulated depreciation (given) (80,000)
Consolidated net building and equipment as at 31 Dec 20x5 641,875
c) Retained earnings
Prism retained earnings (given) 700,000
Prism's share of Sapphire's post-acquisition retained earnings 80%*(340k- 152,000
150k)
Less: Cumulative depreciation of FV differential (after tax) 80% (6,000)
[CJE 3 and 5: (6250+3125)*0.8*0.8]
Less: Unrealised profit on inventory upstream transfer (after tax) 80% (5,120)
[CJE 9: 8000*0.8*0.8]
Consolidated retained earnings as at 31 Dec 20x3 840,880
P5.9 Capitalization of intragroup interest and consolidation (Page 309)
1. If the cost of the warehouse (including the capitalized interest) in P Co’s books as at 1 October 20x6
was $3,500,000, determine the:

i. Cost of the warehouse for the economic entity as at 1 October 20x6:
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Notes
Cost of Warehouse in P's books 3,500,000 Given
Less: Interest capitalised by P (350,000) 200,000 + 150,000
Add: Interest charged by bank 200,000 120,000 + 80,000
Cost of Warehouse for the Group 3,350,000
ii. Net book value of the warehouse for the legal entity (P Co) and the economic entity as at 31
December 20x6:
Notes
Cost of Warehouse in P's books 3,500,000 Given
Less: Accumulated Depreciation (43,750) 3 Months/240 Months depreciation
NBV of warehouse for P 3,456,250
Notes
Cost of Warehouse in P's books 3,350,000 Answer in part (i)
Less: Accumulated Depreciation (41,875) 3 Months/240 Months depreciation
NBV of warehouse for group 3,308,125
Difference: 3,456,250 – 3,308,125 = 148,125
2. Consolidation Journal Entries for the year ended 31 December 20x6:
CJE 1 Initial Consolidation Entries

Fair Value of X’s net assets 1,020,000 Given
Less: Book Value of X’s net assets (900,000) Given
Fair Value Differential of Identifiable Net Assets 120,000
DTL on FV Differential (24,000) 20% tax
Fair Value Differential after Tax 96,000
Share Capital @ Acquisition date 500,000 Given

RE @ Acquisition date 400,000 Given
FV Differential (after-tax) 96,000
FVINA - 100% 996,000
FVINA - 90% 896,400
FVINA - 10% 99,600
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Investment by P 1,200,000 Given
Less: FVINA - 90% (896,400)
Goodwill on consolidation (P) 303,600
FV of NCI 118,000 Given

Less: FVINA - 10% (99,600)
Goodwill on consolidation (X) 18,400
Dr Share Capital 500,000 Given

Dr Retained Earnings 400,000 Given
Dr Equipment 120,000 FV differential
Dr Goodwill 322,000 Balancing figure
Cr Deferred Tax Liability 24,000 20% tax on FV differential
Cr Investment in X 1,200,000 Given
Cr NCI (B/S) 118,000 Given
CJE 2 NCI Share of changes to RE post-acquisition

Opening retained earnings, 1/1/20x6 650,000 Given
Less: Retained earnings on acquisition date, 1/1/20x3 (400,000) Given
Increase in RE post-acquisition 250,000
NCI share of increase in RE 25,000 10% share
Dr Retained earnings 25,000

Cr NCI (B/S) 25,000
CJE 3 Prior year depreciation of equipment's FV differential

Dr Retained Earnings 54,000 90% of depreciation
Dr NCI (B/S) 6,000 10% of depreciation
3 years of depreciation
Cr Accumulated depreciation (Equipment) 60,000
over 6 years

Dr Deferred tax liability 12,000 20% tax on depreciation
Cr Retained earnings 10,800 90% of tax
Cr NCI (B/S) 1,200 10% of tax
CJE 5 Current year depreciation of equipment's FV differential
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Dr Depreciation expense 20,000 1 year of depreciation
Cr Accumulated depreciation (Equipment) 20,000 over 6 years

Dr Deferred tax liability 4,000
20% tax on depreciation
CJE 7 Upstream sale of raw materials in 20x5

Dr Retained Earnings 8,100 90% of 7,500 + 1,500
Dr NCI (B/S) 900 10% of 7,500 + 1,500
50% sold to 3rd parties
Cr COGS 7,500
this year
Cr Inventory 1,500 10% unsold

20% tax on unsold
Dr Deferred Tax Liability 300
inventory
20% tax on adjusted
Dr Tax Expense 1,500
COGS
Cr Retained Earnings 1,620 90% of 300 + 1,500
Cr NCI (B/S) 180 10% of 300 + 1,500
CJE 9 Intercompany Loan

Dr Loan Payable to X Co 1,000,000 Given
Cr Loan Receivable from P Co 1,000,000 Given
CJE 10 Adjustment of P’s capitalised interest in warehouse

90% of X's interest
income in 20x5
10% of X's interest
Dr NCI (B/S) 20,000
income in 20x5
X's interest income in
Dr Interest Income 180,000
20x6
Total interest capitalised
Cr Warehouse 350,000
by P
P's interest expense in
Cr Interest Expense 30,000
20x6

Dr Deferred Tax Asset 70,000
Cr Retained Earnings 36,000 20%*180,000
Cr NCI (B/S) 4,000 20%*20,000
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Cr Tax Expense 30,000 20%*(180,000 – 30,000)
CJE 12 Depreciation of warehouse capitalised interest (as recorded by P)

Dr Accumulated depreciation 4,375 3 months/20 years
Cr Depreciation 4,375 depreciation of 350,000

Dr Tax Expense 875
Cr Deferred Tax Asset 875
CJE 14 Recognise group’s capitalised interest in warehouse

Total interest expense
Dr Warehouse 200,000
incurred by X
Interest expense incurred
Cr Interest Expense 80,000
by X in 20x6
90% of interest expense
Cr Retained Earnings 108,000
incurred by X in 20x5
10% of interest expense
Cr NCI (B/S) 12,000
incurred by X in 20x5

Dr NCI (B/S) 2,400
Dr Tax Expense 16,000 20% tax on interest
Cr Deferred Tax Asset 40,000 expense
CJE 16 Depreciation of warehouse capitalised interest (for the group)

Dr Depreciation 2,500 3 months/20 years
Cr Accumulated depreciation 2,500 depreciation of 200,000

Dr Deferred Tax Asset 500
Cr Tax Expense 500
CJE 18 Dividends
Dr Dividend Income 81,000 90% of dividends
Dr NCI (B/S) 9,000 10% of dividends
Cr Dividends declared 90,000 Given
CJE 19 Allocate current year net profit of X to NCI
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Unadjusted Net Profit of X 640,000 Given
Less: Current year depreciation of FV differential (20,000)
Add: Tax effect of depreciation of FV differential 4,000
Add: Profit realised on upstream sale 7,500
Less: Tax effect of profit realised (1,500)
Less: Interest income capitalised (150,000)
Add: Tax effect of interest income capitalised 30,000
Add: Interest expense capitalised 80,000
Less: Tax effect of interest income capitalised (16,000)
Add: Excess depreciation 4,375
Less: Tax effect of excess depreciation (875)
Less: Depreciation on capitalised interest (2,500)
Add: Tax effect of capitalised interest 500
Adjusted Net Profit of X 575,500
NCI (10%) 57,550
Dr NCI (P/L) 57,550

Cr NCI (B/S) 57,550
3. Analytical Check on the balance of Non-Controlling Interests as at 31 December 20x6
Share capital of X @ 31/12/x6 500,000 Given

Retained Earnings of X @ 31/12/x6 1,200,000 Given
Book Value of net assets of X 1,700,000
Less: Unrealised profit in fixed assets (after tax) (118,500) Part 1: 148,125 * (1 – 20%)
Less: Balance of unrealised profits from unsold inventory
(1,200) CJE 7: 1500 * (1 - 20%)
(after tax)
1,580,300
Unamortised FV of Equipment 40,000 120,000 * 2 years / 6 years
Less: Tax (8,000) 20% tax
Total Unamortised FV Differential After tax 32,000
FV of Net Identifiable asset of X 1,612,300
NCI Share of 10% 161,230
Goodwill attributed to NCI 18,400 Calculated in Q2
NCI @ 31/12/x6 under analytical check 179,630
NCI Balance from Journal Entries:
CJE 1 Initial Consolidation Entries 118,000
CJE 2 NCI Share of changes to RE post-acquisition 25,000
15 | P a g e
CJE 3 Prior year depreciation of equipment's FV differential (6,000)
CJE 7 Upstream sale of raw materials in 20x5 (900)
CJE 10 Adjustment of capitalised interest in warehouse (20,000)
CJE 14 Recognise capitalised interest in warehouse 12,000
CJE 15 Tax effect of CJE 14 (2,400)
CJE 18 Dividends (9,000)
CJE 19 Allocate current year net profit of X to NCI 57,550
NCI as at 31/12/x6 179,630
4. Analytical check on the following balances:

i. Consolidated retained earnings as at 31 December 20x6
P Co's RE, 31/12/x6 2,860,000 Given

P Co’s share of X Co’s post acquisition RE 720,000 90%*(1,200,000 – 400,000)
Less: Cumulative depreciation of FV differential (after tax) (57,600) 90%*120,000*(1 – 20%)
Less: Unrealised profit on inventory upstream sale (after tax) (1,080) 90%*1,500*(1 – 20%)
Less: P's Share of X's unrealised interest income (after tax) (106,650) 90%*142,125*(1 – 20%)
Consolidated retained earnings @ 31 Dec 20x6 3,414,670
P Co's RE, 31/12/x6 2,860,000

X Co's RE, 31/12/x6 1,200,000
CJE 1 Initial Consolidation Entries (400,000)
CJE 2 NCI Share of changes to RE post-acquisition (25,000)
CJE 5 Current year depreciation of equipment's FV differential (20,000)
CJE 7 Upstream sale of raw materials in 20x5 (600)
CJE 12 Depreciation of warehouse capitalised interest (as recorded by P) 4,375
CJE 13 Tax effect of CJE 12 (875)
CJE 15 Tax effect of CJE 14 (37,600)
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CJE 16 Depreciation of warehouse capitalised interest (for the group) (2,500)
CJE 18 Dividends 9,000
CJE 19 Allocate current year net profit of X to NCI (57,550)
Consolidated retained earnings @ 31 Dec 20x6 3,414,670
ii. Consolidated fixed assets as at 31 December 20x6
P Co's Fixed Assets, 31/12/x6 3,800,000 Given

X Co’s Fixed Assets, 31/12/x6 2,800,000 Given
Add: Remaining balance of FV differential 40,000 2/6 * 120,000
Less: Unrealised interest income (148,125) Calculated in Part 1
Consolidated fixed asset balance @ 31/12/x6 6,491,875
P Co's Fixed Assets, 31/12/x6 3,800,000

X Co's Fixed Assets, 31/12/x6 2,800,000
CJE 1 Initial Consolidation Entries 120,000
CJE 5 Current year depreciation of equipment's FV differential (20,000)
CJE 12 Depreciation of warehouse capitalised interest (as recorded by P) 4,375
CJE 16 Depreciation of warehouse capitalised interest (for the group) (2,500)
Consolidated fixed asset balance @ 31/12/x6 6,491,875
iii. Consolidated inventory as at 31 December 20x6
P Co's Inventory Balance, 31/12/x6 554,000 Given

X Co's Inventory Balance, 31/12/x6 320,000 Given
Less: Overvalued unsold inventory from upstream sale (1,500) Calculated in CJE 7
Consolidated fixed asset balance @ 31/12/x6 872,500
P Co's Inventory Balance, 31/12/x6 554,000

X Co's Inventory Balance, 31/12/x6 320,000
CJE 7 Upstream sale of raw materials in 20x5 (1,500)
Consolidated fixed asset balance @ 31/12/x6 872,500
17 | P a g e
Question 4 (TLK P5.11 Page 313)
1. Step 1: Identify the acquirer: P Co | Step 2: Determine the date of acquisition: 1 Jan 20x3
Step 3: Total consideration = 2,200,000 (as stated in B/S) | Step 4 & 5 - Determine the FV of net assets,
NCI and goodwill
Share capital of Silver Co at acquisition date $900,0000

Retained earnings of Silver Co at acquisition date $800,000
Fair value differential of inventory (after tax) ($50k x 80%) $40,000
Fair value differential of Silver Co identifiable net assets – 100% $1,740,000
FV of NCI (as stated in qn) $220,000
Goodwill on consolidation ($2,200k + 220k - $1,740k) $680,000
Goodwill on consolidation (P) ($2,200k – 90% x $1,740k) $634,000

Goodwill on consolidation (Silver Co) ($220k – 10% x $1,740k) $46,000
Journal entries for year ended 31 Dec 20x6
CJE 1: Elimination of investment accounts
Dr Share capital $900,000
Dr Retained earnings $800,000
Dr Inventory $50,000
Dr Goodwill $680,000
Cr Investment in Silver Co $2,200,000
Cr DTL $10,000
Cr NCI $220,000
CJE 2: Allocation of post acquisition RE to NCI
Dr Retained Earnings $52,000
Cr Non-Controlling Interest (NCI) $52,000
($1,320k - $800k) x 10% = $52,000)
CJE 3: Adjustment for undervalued inventory
Dr Beginning RE $40,500
Dr NCI $4,500
Cr Inventory $45,000
CJE 4: Tax effect for CJE 3
Dr Deferred Tax Liability $9,000
Cr Beginning RE $8,100
Cr NCI $900
18 | P a g e
CJE 5: Adjustment for impairment of Inv in 20x6
Dr Impairment Loss for write down of inventory $3,000
Cr Inventory $3,000
(Actual BV of inventory = $23k; NRV of inventory = $20k
Dr DTL $600
Cr Tax Expense $600
CJE 7: Elimination of intercompany payable
Dr Intercompany Payable $500,000

Cr Intercompany Receivable $500,000
CJE 8: Unrealized profit from upstream sale of inventory for prior year
Dr NCI $800
Cr Inventory [40% X ($120K - $100K)] $8,000
Dr DTL (20% x $8k) $1,600
Cr NCI $160
CJE 10: Realized profits from sale of inventory in 20x6
Dr Inventory $4,000
Cr COGS $4,000
Dr Tax expense $800
Cr DTL $800
CJE 12: Adjustment entry for impairment of inventory
Dr Inventory $2,000
Cr Impairment loss $2,000
CJE 13: Tax effect
Dr Tax expense $400
Cr DTL $400
CJE 14: Unrealized profit from prior year construction revenue
19 | P a g e
Dr NCI $20,000
Cr Asset under construction $200,000
Dr DTL $40,000
Cr NCI $4,000
CJE 16: Reversal of construction revenue in 20x6
Dr Construction Revenue $850,000
Cr Cost of sales $750,000
Cr Asset under construction $100,000
CJE 17: Tax effect on CJE 16
Dr DTL $20,000
Cr Tax Expense $20,000
CJE 18: Realized profits from sale of development properties in 20x6
Dr Development properties (60% x [$200k +$100k]) $180,000
Cr Cost of Sales $180,000
CJE 19: Tax effect on CJE 18
Dr Tax expense $36,000
Cr DTL $36,000
CJE 20: Eliminate dividend declared by subsidiary
Dr Dividend income $81,000
Dr NCI $9,000
Cr Dividend declared $90,000
CJE 21: Allocation of current profit after tax to NCI
Dr NCI (P/L) $140,240
Cr NCI (B/S) $140,240
Workings : Silver’s Unadjusted profit for 20x6 $1,336,000
Impairment of inventory ($3,000)
Decrease in tax expense $600
Decrease in COGS $4,000
Increase in tax expense ($800)
Impairment of inventory (upstream) $2,000
Increase in tax expense ($400)
Reversal of Construction revenue ($850,000)
20 | P a g e
Reversal of cost of sales $750,000
Decrease in tax expense $20,000
Decrease in Cost of sales $180,000
Increase in tax expense ($36,000)
Silver’s Adjusted profit for 20x6 $1,402,400
Adjusted profit attributable to NCI $140,240
2. Analytical check for balance of NCI as at 31 Dec 20x6
Listing of CJE method
FV of NCI at Acquistion date $220,000
CJE 2: Allocation of Post acq RE to NCI $52,000
CJE 3: Adj for undervalued inventory ($4,500)
CJE 4: Tax effect $900
CJE 7: Unrealized profit ($800)
CJE 8: Tax effect $160

CJE 13: Unrealized profit from construction rev ($20,000)
CJE 14: Tax effect $4,000
CJE 17: Eliminate dividend ($9,000)
CJE 18: Allocation of profit to NCI $140,240
NCI (B/S) at 31 Dec 20x6 by listing CJE method $383,000
Analytical check (independent proof of balances) of NCI (B/S) at 31 Dec 20x6

BV of Net Asset of Silver as reported as at 31 Dec 20x6 $3,466,000
Unrecognized profit in sale of development properties (upstream) ($96,000)
(40% x $300k) x 80%
FV differential in inventory with impairment of inv $1,600
($5,000-$3,000) x 80%
Remaining undervalued inventory after tax ($1,600)

FV identifiable net asset -100% $3,370,000
NCI – 10% $337,000
Goodwill attributable to NCI $46,000
NCI (B/S) at 31 Dec 20x6 under analytical check $383,000
3. Analytical check for Consolidated RE
Analytical approach
P’s retained earnings as at 31 Dec 20x6 $6,000,000
P’s share of Silver’s post-acquisition RE $1,589,400
($2,566k – 800k) x 90%
21 | P a g e
P’s share of FV differential in inventory (90% x $1,600) ($1,440)
P’s share of unearned construction profit (90% x $96,000) ($86,400)
P’s share of S’ post-tax cumulative amortization of FV-BV differential ($34,560)
([$45,000 + $3,000) x 90% x 80%]

Consolidated RE as at 31 Dec 20x6 $7,464,000
Listing of CJE method
P’s RE at acquisition date $6,000,000
Silver’s RE at acquisition date $2,566,000
CJE 1: Elimination of investment ($800,000)
CJE 2: Allocation of Post acq RE to NCI ($52,000)
CJE : Adj for undervalued inventory and impairment ($43,500)
CJE : Tax effect $8,700
CJE : Unrealized profit on upstream sale of inventory and impairment ($1,200)

($7,200 - $4,000 - $2,000)
CJE : Tax effect $240
CJE 16: Reversal of construction revenue ($850,000)
CJE 16: Reversal of Cost of sales $750,000
CJE 14: Unrealized profit from construction rev ($180,000)
CJE 18: Realized profit from sale of development properties $180,000
CJE19: Tax effect ($36,000)
CJE 20: Eliminate dividend $9,000
CJE 21: Allocation share of current income to NCI ($140,240)
Consolidated RE as at 31 Dec 20x6 $7,464,000
Question 5
Three reasons why acquirer’s gains in M&A is lower than the target’s gains in M&A:
1. M&A is financed by the acquirer’s stock (Source: New evidences and perspectives on mergers)
 Two simultaneous transactions in a stock financed M&A: a merger and an equity issue.
 Due to information asymmetry between managers and investors, investors think that managers
are more likely to issue equity when they perceive that it is overvalued by the stock market.
 Consequently, these investors observing an equity issue will bid down the stock price, taking a
toll on the acquirer’s gains in M&A. (3-day returns of equity financed M&A is -1.5% vs 0.4%)
2. Agency Motives (Source: Motives for takeovers)
 Some takeovers are primarily motivated by self-interest of the acquirer management.
22 | P a g e
 For example, some management with "specialised skills" acquire firms in their own lines of
business so that the success of the combined entity will depend even more on the
management's specific skills. The acquirer’s management then exploit this dependency to
increase perquisite consumption or defeat rivals within the firm who are better than themselves
in running some of the operations of the firm.

 Target shareholders who realize their value to the acquirer’s management will attempt to obtain
some of the value that would otherwise attribute to the acquirer management.
 If the target shareholders have bargaining power, they will succeed in obtaining such value.
 Therefore, the more severe the agency problem, the higher the target gain at the expense of
the acquirer as value is extracted from the acquirer shareholders by their management.
3. Effects of Competition (Source: Motives for takeovers)
 Division of gains in takeovers is affected by the number of bidders.
 From the target’s perspective, the average target gain is higher when there are multiple bids
(target gains are higher in the multiple-bid sample in the case with $75m versus $36m).
 These additional gains are captured entirely by the targets.
 These gains come with the expense of the acquirer’s potential gains, because the bidder
whose management can appropriate the most wealth from its stockholders is likely to win as
they can pay the most for the target.
23 | P a g e

AC3102 SemGrp 2 Presentation 3

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AC3102 Presentation Group 3

Date and time of class: Monday 8 February 2018 (12.30pm to 2.30pm)

Fair value differential of WALL identifiable net assets (buildings) 40,000

Share capital of WALL at acquisition date 160,000

Retained earnings of WALL at acquistion date 40,000

Fair value of identifiable net assets of subsidiary (100%) FVINA 232,000

Fair value of identifiable net assets of subsidiary (70%) 162,000

Fair value of identifiable net assets of subsidiary (30%) 69,600

Investment by FIRE in WALL (given) 196,000 (Given)

Fair Value of non-controlling interest (FVNCI) at acquistion date (30% x 84,000

Less: Fair value of identifiable net assets of subsidiary (232,000)

Goodwill on consideration (FIRE and NCI) 48,000

Consideration paid by FIRE to buy 70% of WALL 196,000

Less: 70%*FVINA of subsidiary -162,400

Goodwill on consolidation (FIRE) 33,600

Fair value on non-controlling interest (FVNCI) on acquisition date 84,000

Less: 30%*FVINA of subsidiary -69,600

Goodwill on consolidation (NCI) 14,400

CJE 1 Initial Consolidation Adjustments: Eliminating investment in WALL

Share capital of WALL as at 31 Dec 20x3 160,000

Book Value of net assets of WALL 266,800

Unamortised FV differential of Building (40,000 x 8/10) 32,000

Tax rate 20%

FV of identifiable net assets of WALL 292,400

NCI share of FVINA (30%) 87,720

Goodwill attributable to NCI (less of impairment loss 2,880) 11,520

CJE 1 Initial Consolidation Adjustments: Eliminating investment in WALL 84,000

CJE 4 20x2 Depreciation of FV differential (1,200)

CJE 5 Tax effect of CJE 4 240

CJE 8 Dividends declared by WALL (9,000)

CJE 9 Upstream sale of inventory (9,600)

CJE 10 Tax effect of CJE 9 1,920

CJE 21 Allocate Net Income of WALL to NCI 17,760

Total NCI @ 31 Dec 2013 under CJE Method 99,240

3. Income statement 1/1/20x3 to 31/12/20x3

FIRE WALL DR CR NOTE CONSOL

FIRE WALL DR CR NOTE CONSOL

FIRE COGS (given): 372,000

FIRE Depreciation (given) 40,000

WALL Depreciation (given) 30,000

Add: additional depreciation 4,000

Less: overstated depreciation -4,000

Consolidated figure 70,000 Consol Amount: 70,000

FIRE inventory (given) 330,000

Less: Inventory recorded (42,000)

Add: value of inventory left 28,000

Adjusted Inventory 316,000 (a)

less: inventory recorded (108,000)

Add: value of inventory left 72,000

Adjusted inventory 134,000 (b)

Total Inventory (a+b) 450,000 Consol Amount: 450,000

d) Building and Equipment

FIRE buildings and equipment (given) 680,000

add: FV differential 40,000

Less: additional depreciation due to FV differential (8,000)

Less: Accum Dep (given) (280,000)

WALL buildings and equipment (given) 520,000

Less: FV of building recognised (64,000)

Add: accum depreciation of building 16,000

Add: carrying amount on 20x3 24,000

Less: Accum Dep (given) (160,000)

Consolidated figure 768,000 Consol Amount: 768,000

FIRE retained earnings 313,000