Question 1: Accounting for investment in Fry Ltd by Small Ltd
1.The following are the desired calculations:
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Part a: |
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When consolidation is not done |
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Particulars |
Debit |
Credit |
|
|
01.07.2017 |
Investment in Fry Ltd |
50,000.00 |
|
|
Cash |
50,000.00 |
||
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01.07.2018 |
Cash |
24,000.00 |
|
|
Investment in Fry Ltd |
24,000.00 |
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01.07.2019 |
Cash |
4,500.00 |
|
|
Investment in Fry Ltd |
4,500.00 |
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01.07.2019 |
Cash |
3,000.00 |
|
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Investment in Fry Ltd |
3,000.00 |
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Part b |
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When consolidation is done |
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Particulars |
Debit |
Credit |
|
|
01.07.2017 |
Share Capital |
9,000.00 |
|
|
Retained earnings |
36,000.00 |
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|
Goodwill |
5,000.00 |
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To Investment in Fry Ltd |
50,000.00 |
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01.07.2018 |
Cash |
24,000.00 |
|
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Profit and Loss |
24,000.00 |
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01.07.2019 |
Cash |
4,500.00 |
|
|
Profit and Loss |
4,500.00 |
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01.07.2019 |
Cash |
3,000.00 |
|
|
Profit and Loss |
3,000.00 |
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2.The following are the desired calculations:
|
Particulars |
Amounts in $ |
Rank |
Amounts to be paid |
|
|
Secured creditors |
90,00,000.00 |
2.00 |
90,00,000.00 |
|
|
Receivers cost |
1,50,000.00 |
Pro rata |
33,333.33 |
|
|
Liquidators costs |
6,00,000.00 |
1.00 |
6,00,000.00 |
|
|
Unsecured trade payables |
24,00,000.00 |
7.00 |
24,00,000.00 |
|
|
Tax payable |
10,50,000.00 |
Pro rata |
2,33,333.30 |
|
|
Local government rates |
3,00,000.00 |
Pro rata |
66,666.67 |
|
|
Staff wages payable |
9,00,000.00 |
3.00 |
9,00,000.00 |
|
|
Executive directors wages payable |
4,50,000.00 |
5.00 |
4,50,000.00 |
|
|
Staff leave entitlements |
1,50,000.00 |
4.00 |
1,50,000.00 |
|
|
Executive directors leave entitlements |
1,50,000.00 |
6.00 |
1,50,000.00 |
|
|
Unsecured bank overdraft |
7,50,000.00 |
Pro rata |
1,66,666.70 |
|
|
Dividend payable |
4,50,000.00 |
Pro rata |
1,00,000.00 |
|
|
Total |
163,50,000.00 |
142,50,000.00 |
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|
– |
||||
|
Particulars |
Amounts due |
Weighted average |
Amount payable |
|
|
Receivers cost |
1,50,000.00 |
33,333.33 |
0.05556 |
|
|
Tax payable |
10,50,000.00 |
2,33,333.33 |
0.38889 |
|
|
Local government rates |
3,00,000.00 |
66,666.67 |
0.11111 |
|
|
Unsecured bank overdraft |
7,50,000.00 |
1,66,666.67 |
0.27778 |
|
|
Dividend payable |
4,50,000.00 |
1,00,000.00 |
0.16667 |
|
|
Total |
2700000 |
600000 |
1 |
|
(Australia debt solvers, 2018).
3.The following are the desired journal entries and the workings:
Acquisition analysis:
|
Particulars |
Amounts in $ |
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Investment in Steven |
3,06,160.00 |
|
share capital |
1,37,600.00 |
|
Total investment |
4,43,760 |
Calculation of Goodwill
|
Particulars |
Amounts in $ |
|
Investment in Steven |
3,06,160.00 |
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Less: share capital |
1,37,600.00 |
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Retained earnings |
1,16,960.00 |
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Goodwill |
51,600.00 |
Pre-acquisition entries:
|
Particulars |
Debit |
Credit |
|
Share capital |
1,37,600.00 |
|
|
Retained earnings |
1,16,960.00 |
|
|
Goodwill |
51,600.00 |
|
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To Investment in steven Ltd |
3,06,160.00 |
Calculation of non-controlling interest:
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Non-controlling interest: |
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|
Share capital |
27,520.00 |
|
Retained earnings |
23,392.00 |
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Total |
50,912.00 |
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Dividend adjustments and intra sales and transfers |
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Transaction |
Particulars |
Debit |
Credit |
|
|
3 |
Sales |
31,304.00 |
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To Accounts receivables |
31,304.00 |
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4 |
Profit and Loss |
4,214.00 |
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To Accounts receivables |
4,214.00 |
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5 |
Profit and Loss |
3,371.20 |
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To Accounts receivables |
3,371.20 |
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6 |
Profit and Loss |
1,444.80 |
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To Accounts receivables |
1,444.80 |
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|
7 |
Impairment of Goodwill |
2,580.00 |
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To Goodwill |
2,580.00 |
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8 |
Profit and Loss |
21,070.00 |
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To Plant and equipment |
21,070.00 |
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|
9 |
Profit and Loss |
15,953.00 |
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To Management fees |
15,953.00 |
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4.To Bill,
XYZ Company,
DFS Street, Australia-xxxxxx
Subject: clarification on the types of investments and the relevant treatment of the same
I do understand your concern and I am very much happy to help your goodself in making the relevant decision with regard to the accounting treatment for each one of the below stated investment.
As per AASB 10 which deals with the consolidation of the financial statements, an investor would have the control over the investee only when the same has been exposed or when the investor has the rights over the variable returns from the involvement with the investee and has the ability to affect the investee through its power.
Hence, it would be stated that an investor would have the control over the investee when the following occurs:
- An investor has the power over the investee
- There is an exposure of rights on the variable returns from the involvement with the investee
- There is an ability of the investor to use his power over the investee that would affect in the amount of the returns from the investor
For an investor to have a control over the investee, there is a wide range of operating and financing activities that effects their returns. The examples includes in the sale and purchase of the goods and services, management of the financial assets during the lifetime of the assets, selection, acquisition or the disposal of the assets, research and the development of the new products or the processes and determination of the structure of funding or obtaining of this funding.
The examples of the rights that would be able to give an investor power over the investee includes the rights in the form of voting rights on an investee, rights to appoint, reassign or remove in the key management personnel of the investee, right to appoint or remove in another entity that directs in the business activities of the business, right to direct in the investee to enter into the transaction for the benefits of the investor or any other rights as could have been specified in by the management (AASB, 2018).
Part a:
In the given case, NAGIL does not have say in the business operations or in the day to day management or in any other relevant business operations of Struggle Ltd. And so, the investment shall not be treated as that of a subsidiary. Hence, no consolidation shall be done.
Part b:
In the given case, Very Big Company Ltd shall be treated as a subsidiary and its financial statements shall be consolidated with that of NAGIL. This is mainly due to the reason that for the next 4 years, Very Big would be controlled in terms of the financial operations by NAGIL and no payments shall be made without its prior approval. This means a financial interest in the Very Big Limited.
Part c:
In the present case, MSCL will just obtain some expertise form NAGIL and there is nowhere mentioned that NAGIL shall have a say in its day to day business operations or would control in the same. In the absence of such an information, it cannot be stated that the MSCL is investee and NAGIL is an investor. And hence, no consolidation of the financial statements shall be done.
Part d:
In the present case, NAGIL shall be stated to have a control over Tom and Marjory Legless since it has a substantial say in the day to day functioning of the company. The company NAGIL also has 3 seats on the board and Tom and Marjory also has keeps a close eye on the business and the decisions takes in by NAGIL. This means that NAGIL has power over the investee which makes it important for the company to get their financial statements consolidated.
I hope that the above is helpful.
Regards,
ABC
References:
Australian Debt Solvers. (2018). Who Gets Paid First When a Company Goes into Liquidation? – Australian Debt Solvers. [online] Available at: https://australiandebtsolvers.com.au/research-centre/gets-paid-first-company-goes-liquidation/ [Accessed 2 Oct. 2018].
www.aasb.gov.au. (2018). https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 2 Oct. 2018].
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