Advanced Accounting II (2024/25 Semester 1)

Assignment One

Instructions to Students:

1) This assignment contains ONE comprehensive question (with two parts) which accounts for 10% of the final grade.

2) Deadline of submission: 10am, 14 October 2024 (Monday)for both hard copy and soft copy.

3) For students of Section 1001, 1005 to 1006:

Please submit the hard copy to: Ms. Doris Liu (Office:T1 – 301 – R5 – H18)

For students of Section 1002 to 1004:

Please submit the hard copy to: Ms. Judy Xu (Office:T1 – 301 – R5 – H15)

4) The answers presented should be in handwritten format and you should show your computations clearly.

5) For the soft copy uploaded to the ISpace, please use the PDF version. No photo is allowed.

6) Use of Generative AI Tools is NOT allowed.

Question

PartI (70 marks)

Purple Company is a manufacturer of electronic home appliances. Yellow Company is a manufacturer of electronic ovens and is renowned for its high quality of materials used in its production.   Because of its expansion of business, Purple Company acquired 70% ownership interests of Yellow Company on 1 January 20X3.

Green Company is a retailer of electronic ovens established eight years ago.   For the sake of effectively launching the electronic oven products in the target market, Yellow Company acquired 90% ownership interests of Green Company on 1 April 20X4.  Red Company is an advertising company which specializes in the  promotion  of  electronic  home  appliances.     On   1  January  20X4,  Purple  Company  acquired  30% ownership interests of Red Company.

The details of acquisition of Red Co., Yellow Co., and Green Co. are shown below. (All figures are in $)

The fair value (FV) and book value (BV) of net identifiable assets of each company at the date of acquisition are shown below:

The financial statements of each company for the year ended 31 December 20X5 are shown below:

Additional information:

a)   Inventory of Yellow Co. at the acquisition date was disposed of in 20X4, while inventory of Green Co. was disposed of in January 20X5.

b)  The intangible asset of Red Co. at the date of acquisition had no definite useful life and was tested for impairment on an annual basis.  So far, there is no impairment loss for the intangible asset.

c)   On 1 January 20X5, Red Co. transferred a fixed asset to Purple Co. at a transfer price of $600,000. The original  cost  of  this   asset   was   $720,000  and  its  accumulated  depreciation  (using  straight-line depreciation method and no residual value) was $240,000 at the date of transfer. The original useful life of the asset was six years and the remaining life as at 1 January 20X5 was four years.

d)  In May 20X4, Yellow  Co. transferred inventory to Red Co. at an invoiced price of $780,000. The original cost of the inventory was $546,000.

e)  Assume a tax rate of 20%

Required:

1)  Prepare the following consolidation and equity accounting entries for Purple Co. and its subseries and associate for the year ended 31 December 20X5. (35 marks)

●   CJE1: Elimination of investment in Yellow Co.;

●   CJE2: Adjustment of sale of Yellow Co.’s under-valued inventory;

●   CJE3: Tax effects of CJE2;

●   CJE4: Allocation of Yellow Co.’s post-acquisition RE to Yellow Co.’s NCI;

●   CJE5: Adjustment for NCI’s share of unrealized profit in the beginning RE (sale from Yellow Co. to Red Co.);

●   CJE6: Elimination of dividend declared by Yellow Co.;

●   CJE7: Allocation of Yellow Co.’s current year profit (after tax) to NCI of Yellow Co.;

●   CJE8: Elimination of investment in Green Co.;

●   CJE9: Allocation of Green Co.’s post-acquisition RE to total NCI of Green Co.;

●   CJE10: Adjustment of excess cost of sales on Green Co.’s over-valued inventory;

●   CJE11: Tax effects of CJE10;

●   CJE12: Elimination of dividend declared by Green Co.;

●   CJE13: Allocation of Green Co.’s current year profit (after tax) to total NCI of Green Co.;

●   EA1: Recognition of share of post-acquisition RE of Red Co.;

●   EA2: Adjustment for unrealized profit (after tax) in the beginning RE of Red Co.;

●   EA3: Reclassification of dividend income as a reduction of investment in Red Co.;

●   EA4: Recognition of share of current year profit (after tax) of Red Co.

2)  Perform. an Analytical Check of the year end balances of:

a)      Non-controlling interests

b)      Investment in Associate

c)      Consolidated Retained Earnings (15 marks)

3) Prepare the consolidation worksheets for Purple Co., Yellow Co. and Green Co. for the year ended 31 December 20x5. (20 marks)

Part II (30 marks)

1)

Company A purchased 35% equity interest in Company B, a publicly traded company, for $20 million on

1 January 20X4.   As such, Company A accounts for its 35% equity interest in Company B by using the equity method of accounting.

On 31 December 20x4, Company A acquired the remaining 65% equity interest in Company B for $65 million and thus, obtains control of Company B. Company A accounts for the transaction as a business combination.  Company B’s identifiable net assets were recognized at $80 million on 31 December 20x4. The fair value of Company A’s 35% equity interest in Company B was $35 million, and the carrying amount (book value) of that equity interest was $25 million on 31 December 20x4.

Company B declared a dividend of $5 million for the year ended 31 December 20X4. The deferred tax accounting implications are ignored.

Required:

How should company A accounts for all the above mentioned equity interest in Company B for the year ended 31 December 20X4? (Please show your computations in supporting your explanations.) (10 marks)

2)

On 31 December 2021, Pet Company paid $36 million in order to acquire 80% interest of Smile Company. On 30 June 2024, it decided that the ownership interest should be reduced to 30%.

With regard to the disposal of 50% interest in Smile Company, Pet Company obtained $18 million from those investors who purchased the said interest.  The fair value of the 30% investment on 30 June 2024 was $10 million.  The reserves of Smile Company on different dates were as follows:

Retained Earnings

31 December 2020:  $6m

31 December 2021:   $7m

30 June 2024:  $9.5m

Revaluation Reserves

31 December 2020: $1m

31 December 2021: $1.2m

30 June 2024:   $3m

Required:

Explain how the accountant of Pet Company should deal with the followings (from the Consolidation Financial Statement perspective):

(a) Retained investment

(b) Sale of the 50% interest in Smile Company

(Please show your computations in supporting your explanations.) (10 marks)

3)

On 1 January 2023, P Ltd acquired a 30% investment in Z Ltd for $20,000. This investment balance, based on equity accounting principle, was recorded as $35,000 in P Ltd’s accounts on 31 December 2023.

On 1 January 2024, P made a further acquisition of 50% of Z Ltd's shares for $160,000. The previously acquired investment had a fair value of $50,000 on  1 January 2024.   P has a policy of valuing the non- controlling interest (NCI) at fair value at the date of acquisition. The fair value of the identifiable net assets was valued at $200,000 and the NCI at $30,000.

Required:

Explain how control was gained, referencing the facts of the case and IFRS  10.  Discuss  how P  Ltd’s accountant should calculate the goodwill arising from the acquisition of Z Ltd when control was achieved on 1 January 2024. (Please show your computations in supporting your explanations.) (10 marks)