Identifiable assets: 4 steps to apply the acquisition method

1. Identifying the acquirer

2. Determining the acquisition date: the date on which the acquirer obtains control of the
acquire ( not the date money is transferred or the transaction date…
3. Recognizing and measuring identifiable asset acquired
4. Recognizing and measuring goodwill or gain from a bargain purchase

Example: recognizing the identifiable assets acquired and liabilities assumed

Assume that A ltd acquired the business of B ltd, which ran a store sought after location that ensured
customers enjoy shopping there. At acquisition date, the statement of financial position prepared by
B recorded the following assets and liabilities at fair value:

Accounts receivable $400 000

Inventory $600 000 All of these are easy to identify

P&E $2 000 000

Land & Building $ 7 000 000

Accounts payable $500 000

Bank loan $4 500 000

On top of that, a identified that B had a trademark with a fair value of $1 000 000 not recognised in
its financial statement. Also, customer satisfaction with B was extremely good due to the after sale
service that B provided, and customers were wiling to pay more for a products sold by B,
eventhough there were cheaper options available on the market

Assets identified: AR, Inventory, P&E , Land and building

Liabilities identified: AP, Bank loan ( also keep an eye on contingent liability as well .. if you have a
contingent liability, it is saver to pay it out . not mention about contingent asset as we may not have
it… so it s better to rocognise contingent liability (bad news may happen…) rather than pay too much
attention on contingent Assets ( which we may not have receive… )

What is about non controlling interest ( if we buy a 100% non controlling is 0%, but if we buy 80%
the non controlling interest would be 20%

Then we have to work out:

Measure NCI at either: Fair value or NCI’s % of identifiable net assets ( Partially goodwill method or
full goodwill method)

Focusing on step 4: Goodwill

Goodwill is measured at acquisition date as the fair value of the consideration transferred plus the
amount of any non controlling interest, plus the fair value of any previously held equity interest in
the acquire, less the fair value of identifiable net assets acquired (IFRS 3 )

Unidentifiable assets (intangible asset)

Future economic benefits other than those expected to arise from the identifiable assets acquired

Assets that cannot be separately recognised and / or sold

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We have identifiable asset, and what ever we paid on top of identifiable asset is unidentifiable asset(
goodwill)

Calculating goodwill:

Shoes ltd obtains 90% of the shares in Socks Ltd ( and control) for $500 000

Net identifiable assets of Socks ltd was $600 000

The fair vale of NCI was $120 000

So, what is the total value of this organisation when working out goodwill ?

 Is it $600 000 the net identifiable assets, of which we bought 90%

Then 90% of $600 000 would have cost us $540 000 ( but we paid $500 000 ). So wa have
saved $40000 ( Bargain )
 Or is it $500 000 +$120 000 = $620 000
Then $620 000 ( $500 000 + $120 000) - $600 000 of net identifiable assets = $20000 of
unidentifiable assets

They are both correct (because they use 2 different methods: full goodwill method or partial
goodwill method)

Partial goodwill method : only acquirer’s share of goodwill is recignised

Full goodwill method: acquirer’s goodwill and NCI’s goodwill

Full goodwill method

Goodwill = Consideration + FV of previous interest + NCI - FV of net assets

= $500 000 + $0 + $120 000 - $600 000

= $20 000

Partial Goodwill method (use NCI % x Identifiable net assets)

Goodwill = Consideration + FV of previous interest + NCI – FV of net assets

= $500 000 +$0 + (10% of $600 000 = $60 000 ) - $600 000

= - $40 000 (gain of purchase)

So what is consideration?

IFRS 3, Consideration = Assets transferred + Liabilities incurred + Equity in used

(FV at acquisition date)

Question: Salt & Pepper Ltd

Pepper Ltd is an event management organization that runs corporate events. Two years ago, Pepper
Ltd acquired a 25 % interest in Salt Ltd, which is a provider of hospitality services for corporate
events, for $28 000 (this information is not important as it was historical cost, 25% is the important
information)

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On 1 Jan this year, Pepper Ltd acquired an additional 60% of the shares in Salt Ltd for $86 000, which
effectively gave Pepper Ltd control over Salt Ltd. Pepper Ltd paid a premium in order to gain control,
as the fair value of Salt Ltd’s net identifiable assets was only $120 000

The fair value of Pepper Ltd ‘s 25% interest in Salt Ltd on 1 Jan was $32000 (this is a fair value) and
the fair value of non controlling interest was $24000

a. Calculate the goodwill or bargain purchase using the partial goodwill method
b. Calculate the goodwill or bargain purchase using the full goodwill method

a/ Partial Goodwill method (use NCI % x Identifiable net assets )( NCI = $120000 x 15%)

Total bought 25% + 60% = 85% - NCI = 15%

Element Amount

Consideration transferred $86000

FV of previously held interest $32000
Non controlling interest ($120 000 x 15%) = $18000
$136 000
Fair value of net identifiable assets ($120 000)
Goodwill $16000
b/ Full goodwill method

Element Amount

Consideration transferred $86000

FV of previously held interest $32000
Non controlling interest $24000 (use full fair value of NCI)
$142 000
Fair value of net identifiable assets ($120 000)
Goodwill $22 000
IFRS 3 – CONSIDERATION – WHAT IS NOT INCLUDED?

Acquisition related costs are not consideration transferred

Accounted for as expenses in the period

Example (IFRS 3 )

 Finder fees
 Advisory
 Legal
 Valuation
 Professional or consulting fees
 General administrative costs
 Cost of maintaining an internal acquisition department

Why

Because it is extra cost it was not part of the cost of taking control so it will go to general expenses

Deferred Tax ?

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 1. Assets and liabilities are measured at fair value at acquisition date
2. This will create ‘temporary difference’ where
 The tax base is not changed or
 Is affected to the carrying amount

Example: $70 000 asset ( carrying amount and tax base)

Indirect acquisition occurs – fair value if is now $100 000

Tax base does not change

Temporary difference = $30 000

DTL = $30 000 x 30% = $9000

$50 000 warranty expense / Provision is recognised by acquirer

Carrying amount will now go from $0 to $50 000

Tax base does not change

Temporary difference = $ 50 000

DTA = $50 000 x 30% = $ 15 000

1. If you have a DTA it will increase your identifiable net assets and reduce your goodwill
2. If you have a DTL it will decrease your identifiable net assets
3. You cannot recognize a DTL arising from goodwill
4. If you have a DTA you cannot always recognize it – because it may not be probable you will
have profits in the future
5. But if you are the acquirer and you had some unrecognized DTAs – these become
‘identifiable assets’ and are included in the goodwill calculation
6. If you recognize a contingent liability (which you do because of IFRS 3 ) then you will
expect to have DTA as well if it has a zero tax base  it is a trap

Example: purchase of a business from another entity with deferred tax effects

On 1 jul 20x6 , High Ltd purchased the business of Low Ltd. The consideration transferred was
$2800000 in cash

Low disclosed in the notes to its financial statements a contingent liability with a fair value of
$300000. This liability was contingent as it was not probable that an outflow of resources would
occur and therefore, was not recognised as a liability prior to the acquisition. On acquisition, in
accordance with IFRS 3, High recognised a liability for this contingent liability in its statement of
financial position, even though it was not probable. In addition, as the tax base of this liability was $0
(carrying amount $300 000 less future deductible amount of $300 000). There was a deduction
temporary difference of $300 000. Therefore, a deferred tax asset of $90 000 ( $300 000 x 30%) also
had to be recognised by High in relation to this provision as part of the accounting for the business
combination.

1. Use a template similar to the top page 392 in your CPA exam

Fair value of previously recognised identifiable assets

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Less : Fair value of contingent liability

Add: deferred tax assets relating to contingent liability

Fair value of identifiable net assets in the acquire

The goodwill would be calculated as follows:

Fair value of the consideration transferred

Less: fair value of identifiable net assets in the acquire

 goodwill

Fair value pf previously recognised identifiable net assets $2 660 000

Less: Fair value of contingent liability ($ 300 000)

Add: deferred tax assets relating to contingent liability $90 000

- Fair Value of identifiable net assets in the acquire $2 450 000

The goodwill would be calculated as follows:

Fair value of the consideration transferred $2 800 000

Less: fair value of identifiable net assets in the acquire ($2 450 000)

Goodwill $350

Do include Contingent liability in acquisition but not Contingent Asset

Question: Cumin & Coriander

Cumin ltd purchased 80% the shares in Coriander Ltd on 1 Jan, which effectively gave Cumin Ltd
control over Coriander Ltd. On 1 Jan the following information about Coriander Ltd was available:

The applicable tax rate is 30% and the tax base of all assets and liabilities were equal to their carrying
amount prior to the acquisition

The notes to the financial statements indicated that Coriander Ltd had a separately identifiable
intangible asset of $20 000

In addition, the notes to the financial statements identified the following

Contingent liability: Coriander Ltd is being sued for $30 000 for allegedly making disparaging remarks
against a competitor

Contingent asset: Coriander Ltd is suing a supplier for $25 000 ( this information is not useful -
irrelevance )for non performance of the supplier’s contractual obligation

Coriander Ltd Book Value Fair Value

Assets
Plant – carrying amount $85 000 $91 000
Vehicle – carrying amount $20 000 $25 000

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 Inventory – Cost $ 15 000 $15 000

Liabilities
Loan $ 15 000 $15 000
Inventory value did not change -- > do nothing

Calculate the DTA and DTLs that will arise from the business combination on 1 Jan

Item Original CA Carrying Tax Base Temporary Deferred DTA / DTL

amount Difference Tax
Plant $ 85 000 $91 000 $ 85 000 $ 6 000 $ 1 800 DTL
Vehicle $20 000 $25 000 $ 20 000 $ 5 000 $ 1 500 DTL
Intangible $0 $20 000 $0 $ 20 000 $ 6 000 DTL
asset
Contingent $0 $30 000 $0 $ 30 000 $9 000 DTA
liability
Original CA: Intangible Asset and Liability was not recognised

Calculate the net identifiable assets of Coriander Ltd that will be used in the calculation of goodwill
or bargain purchase

Element Amount
Plant $ 91 000
Vehicle $ 25 000
Inventory $15 000
Intangible Asset $ 20 000
Deferred tax asset arising from recognition of $ 9 000
liability
Loan ( $15 000 )
Contingent Liability ($ 30 000 )
Deferred tax liability arising from FV ( $ 1 800 )
adjustment of plant
Deferred tax liability arising from FV ($ 1 500 )
Adjustment of vehicle
Deferred tax liability arising from recognition ( $ 6 000)
on intangible asset
$ 105 700
Tasks question – Pluto Ltd

On 1 jan 20x5, Pluto Ltd acquired 100 % of the shares capital of Saturn Ltd for $ 120 000 . Extracts of
the financial statements for both companies prior to the acquisition was as follows:

Pluto Purchase Pluto Saturn

Issued Capital $ 85 000 $ 85 000 $ 10 000
Retained Earnings $ 150 000 $ 150 000 $ 85 000
Liabilities $ 54 000 $ 54 000 $ 26 000
$ 289 000 $ 289 000 $ 121 000
Current assets $ 269 000 ( $120 000 ) $ 149 000 $ 26 000
Non – current $ 20 000 $ 120 000 $ 140 000 $ 95 000
assets
$ 289 000 $ 289 000 $ 121 000

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On 1 jan 20x5, the fair value of the current assets and non current assets were $36 000 and $115
000 respectively. Current assets were adjusted to its fair value in Saturn’s records but non current
assets were revalued in the consolidated worksheet. The application tax rate is 30%

a. what is the goodwill / bargain purchase relating to this business combination?

Pluto Saturn
Issued Capital $ 85 000 $ 10 000
Retained Earnings $ 150 000 $ 85 000
Liabilities $ 4 000 $ 26 000
$ 289 000 $ 121 000
Current assets $ 149 000 $ 26 000
Non – current assets $ 140 000 $ 95 000
$ 289 000 $ 121 000
Goodwill = Consideration + FV of previous interest + NCI – FV of net Assets

= $ 120 000 + 0 + 0 - $116 000

= $ 4 000

Fair value of net identifiable assets:

Current assets $ 26 000

Revaluation adjust ( from $26 000 to $36 000) $ 10 000
Less: DTL on revaluation ($ 10000 x 30%) ( $ 3 000)
Non current assets $ 95 000
Revaluation adjust (from $95 000 to $ 115 000)
Less: DTL on revaluation ($20 000 X 30%) ( $ 6 000)
Less: Liabilities ( $ 26 000)
Total $ 116 000
b. Prepare consolidation worksheets

Revaluation adjust from $26 00 to $ 36 000 ( increase $ 10 000 )

Dr Current Assets $10 000

Cr Revaluation Surplus (OCI) $7 000

Cr DTL (OCI) $ 3 000

Revaluation adjust from $ 95 000 to $ 115 000 ( increase $ 20 000)

Dr other NCA $20 000

Cr Business combination reserve $ 14 000

Cr DTL $ 6000

Pluto Ltd

Accounts Pluto Saturn Adjust – Dr Adjust - Cr Consolidated

Issued share 85 000 10 000 have ( 10 000 ) 85 000
capital to eliminate

Retained 150 000 85 000 have ( 85 000 ) 150 000

earnings to eliminate

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 Liabilities 54 000 26 000 80 000
Reval surplus 7 000 need to (7 000) 0
eliminate
DTL 3000 6 000 9000
Business com (14000 ) 14 000 need 0
reverse to eliminate
so do Dr
289 000 131 000 ( not 324 000
121 000)

Current asset 149 000 36 000 (not 185 000

26 000)
Other NCA 20 000 (total 95 000 20 000 135 000
non current
assets $140
000)
Investment in 120 000 (120 000 ) 0
Sud need to
eliminate
Goodwill 4000 4000
289 000 131 000 ( not 140 000 140 000 324 000
121 000 )
On 1 Jan 20x5 the fair value of the:

1. Current Assets $ 36 000 ( adjusted in Saturn ‘ s records)

Equity increase by $10 000 as well as the Asset ( from $ 26 000 to $ 36 000 )

2. Non current assets $ 115 000 ( revalued in the consolidation worksheet)

Consolidated: both entity comes under 1 so all of the following need to eliminate

Dr issued share capital $10 000

Dr Retained earnings $85 000

Cr investment in Sud $ 120 000

Need to make adjustment : eliminate all the amount in Adjustment

Dr Goodwill $ 4000

Dr Reval surplus $ 7000

Dr Business Combination Reserve $ 14000

Dr Issued share capital $ 10000

Dr Retained earnings $ 85000

Cr investment in sud $120 000

Eliminate intra group transactions

Sale of inventory

Parent bought inventory for $ 15 000

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Parent sold it to Subsidiary for $ 20 000. Parent makes $ 5000 unrealised profit

At the end of period 1 you have to eliminate the $5000 unrealised profit

In period 2 Subsidiary sells the inventory for $ 22 000. It makes $ 7000 profit (it cost $22000 and
sold for $22000 )

This is a combination of $2000 profit for itself.. and $5000 profit from parent – Sud sale

Parent Sud Total Adjust Total

Sale of $ 20 000 $ 22 000 real $42 000 Total $22 000
inventory sale number external
sale are
$22000 not
$42000 so
Dr sales
$20000
COGS ($15 000) real ($20 000) ($35 000) Total COGS ($15 000)
sale number is $15000
(not
$35000) so
Cr COGS
$20000
Profit $5 000 (does $2 000 $7 000 $7 000
not exist)
Unrealized Realised

Depreciable Assets

Parent purchases a motor vehicle for $100 000

Parents sells this to Subsidiary for $130 000 (unrealised profit of $30 000)

Useful life of 5 years. After 1 year, 20 % of the asset is used up

Profit of 20% of the depreciation of the extra portion can be realized

This is adjusted on consolidation by decreasing depreciation expense by $6000 each year

Parent Dep Year 1 Dep Year 2 Dep Year 3 Dep Year 4 Dep Yea
r5
Moto $10000 - $80000 - $6000 - $4000 - $2000 - 0
r 0 2000 2000 0 2000 0 2000 0 2000
vehicl 0 0 0 0 0
e
Moto $13000 - $10400 - $7800 - $5200 - $2600 - 0
r 0 2600 0 2600 0 2600 0 2600 0 2600
vehicl 0 0 0 0 0
e (sub
Profit $30000 - $24000 - $1800 - $1200 - $6000 - 0
on 6000 6000 0 6000 0 6000 6000
sale

The profit on sale $30 000 will disappear over 5 years

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Management Services

Parent provides $40 000 in management services to Subsidiary

There is no unrealised profit

Parent reveue of $40000 of it offset against the Subsidiary expenses of $40000

It total profit for parent is $100 000 and Subsidiary is $80 000 then total profit is $180 000

Intra group dividends & intra group interest

Parent Sub Total

Revenue $40 000 $40 000
Expenses ($40 000) ($40 000)
Net transaction $0
Total Profit $100 000 $80 000 $180 000
Adjusted profit $60 000 $120 000 $180 000
Tax effects of intra-group transactions

Individual entity makes profit = income tax expense

Assume tax is paid at the individual entity level

If the group had not made a profit, then the tax paid would be a prepayment of tax which is a DTA

The group or consolidated accounts recognize the DTA

This will be eliminated in future when the group pays less tax in furture

Parent
Sale (of inventory to sub ) $80 000
COGS ($60 000)
Profit $20 000
Income tax expenses ($6000)
Net profit $14000
Inventory sold for a profit of $20 000. Tax of $6000 is paid

All inventory is still held by Sub

DTA will be $6000

Income tax expense needs eliminating on consolidation as not yet incurred

Case study:

On 1 jul 20x3, a parent entity sold inventory to a subsidiary for $40000. The cost of the inventory to
the parent was $30000. Assume tax rate of 30%. The inventory was still on hand at the end of the
financial year 30 Jun 20x3

Parent journal

Dr Bank $40 000 (will offset)

Cr Sales $40000

Dr COGS $30 000

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 Cr inventory $30 000

Parent Sub Adjust Elimination Journal

Sale of $40 000 0 Zero external sales so Dr $40000 Dr Sales $40000
inventory (does not
exist
have to
eliminate
COGS ($30 000) 0 Inventory is still on hand so Cr COGS $30 000
COGS is zero
Profit $10 000 0
Income tax ($3000) Cr income tax
expense expense $3000
Net profit $7000
Inventory 0 $40 000 Inventory asset is only supposed Cr Inventory $10000
to be $30000 so reduce
Dr DTA $3000
Inventory Asset $0 in Parent account, but in Subsidiary : inventory asset Dr $40000

Subsidiary Journal

Dr inventory $40 000

Cr Bank $40 000 (this will be offset when they do consolidate )

Account Parent Subsidiary Elimination Adjustments Consolidated

($) ($) ($) Dr Cr ($)
Sales 40 000 40 000 0
Less : COGS (30 000 ) 30 000 0
Gross Profit 10 000 0

Profit before 10 000 0

tax
Income tax (3000) 3000 0
expense
Profit for the 7000 0
year

Statement of
financial
position
Inventory 40 000 10 000
Deferred tax 3000
asset
Assumption”

1 . All of the inventory held by the subsidiary as at 30 Jun 20x3 was sold to parties external to the
group in jul 20x3 for $50 000

Parent Sub Total Adjust Total

Sale of $40 000 $50 000 $90 000 Total external $50 000
inventory external sale sale are $50
000 ( not $90

11
 000) so Dr
Sales $40000
COGS ($30 000) ($40 000) (70000) Total COGS is ($30 000)
Real cost $30000 (not
$70000) so cr
COGS $40000
Profit $10 000 $10 000 $20 000 All profit is $20 000
realized
2 . Half of the inventory held by subsidiary as at 30 jun 20x3 was sold to parties external to the group
by 30 jun 20x4 for $25 000

Parent Sub Total Adjust Total

Sale of $40 000 $25 000 $65 000 Total external $25 000
inventory sales are
$25000 not
65000 so Dr
4000
COGS (30 000) (20 000) (50 000) Total COGS is (15000)
$15000 not
$50000 so CR
35000
Profit 10000 5000 15000 Actual profit $10000
is reduced by
$5000

INTRAGROUP TRANSACTION

There are 5 types of intra group transaction you need to know for consolidation purposes

Question 5.13: ex, Revaluation of plant increase fair value by $20,000, hence this brings carrying
amount of plant from $60,000 to $80,000

Can you explain why there is a decrease accumulated depreaciation by $40,000 (from $40,000 to nil?

If revaluation plant increase by $20,000, shouldnot the accumulated depreaciation only reserved by
$20,000 (to a capped $80,000 new carrying value )?

As the asset is now revalued to fair value any prior carrying amount or accumulated depreciation is
irrelevant and needs to be eliminated. The new carrying amount is the fair value so it should have
no accumulated depreciation attached

If a depreciation non current asset purchased from an external entity for $100,000 is sold
immediately intra group for $130,000, the intra group profit of $30,000 is considered unrealised
from the group ‘s perspective. However, assuming that the useful life of the asset is 5 years, with
economic benefits from the asset to be consumed evenly, at the end of one full year after the intra
group sale, one fifth of the asset’s economic benefits have been consumed.

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As such, profit of $6000 ($30,000 / 5 years ) each year can be considered realized and recognised in
the group’s account. Note that the group does not recognize this as directly affecting profit, rather,
the depreciation expense recognised by the intra group buyer of $26,000 ($130,000 / 5years), being
overstated from the point of view of the group (which will only recognize $20,000, based on the
original cost of $100,000 / 5years), will be adjusted on consolidation, resulting in a decrease in
depreciation expense by $6,000 that will indirectly affect the profit, increasing it by $6,000 ( $26,000
- $20,000 ) each year.

Case: Bully & Timid

Sale of depreciable asset

On 1 Jan 20x4, Builly Ltd (parent company) sold a delivery machine to Timid Ltd (Sub) for $60,000.
The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20 %
annum while Timid depreciates its fixed asset at a rate of 10% p. a. Both have a 31 Dec financial year
end

1. At what rate will the machine be depreciated in 20x4? Justify your answer

The machine will be depreciated at a rate of 10% per annum.

The rule is that the asset must be depreciated in a manner that reflects the way it would be used up

It is irrelevant that the Parent company has a different depreciation rate or that the parent was
depreciating the asset as a rate of 20%. The subsidiary company is now in control of the asset and
the depreciation rate that it use will apply

2. What is the unrealised profit or loss on 1 jan 20x4 (ignore tax effects )

On 1 jan 20x4, all the profit or loss would be unrealised

Sale price $60,000 (10% depreciation = $6,000)

Carrying amount $50,000 (10 % depreciation = $5,000)

Unrealised profit $10,000 the difference in depreciation is $1,000

3. What is the unrealised profit or loss on 31 Dec 20x4 (ignore tax effect )

On 31 dec 20x4, one year of depreciation would be recognised. Hence, this would be realized

Unrealise profit 1 jan 20x4 $10,000

Less: depreciation in 20x4 ($1,000) ($10,000 *10%)

Unrealise profit 31 dec 20x4 $9,000

From 1 jan 20x4 – 31 dec 20x4 (full 1 year), so the unrealised profit dropped by $1,000 so.. by the
time the unrealized profit will disappeared when the asset is fully depreciated

The depreciation for the group is $1,000 less than for the individuals

4. What will be the carrying amount of the machine in book of Timid Ltd on 31 dec 20x4 ?

Cost $60,000

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Less: depreciation in 20x4 ($60,000 * 10%)

Carrying amount 31 dec 20x4 $54,000

5. What will be the carrying amount of the machine for the group on 31 dec 20x4

Carrying amount for group $50,000

Less: Depreciation in 20x4 (5,000) ($50,000 * 10%)

Carrying amount 31 dec 20x4 $45,000

6. What will the net effect on profit on 31 dec 20x4 when this intragroup is eliminated ?
(include tax effect )

Elimination of profit on sale ($10,000)

Realisation of profit through dep $1,000

Decrease in profit ($9,000)

Tax ($9,000 * 30%) $2,700

Net effect on profit ($6,300)

Case: Lion & Zebra

Sale of depreciable asset – eliminated journals

On 1 jan 20x4, Lion Ltd (parent company ) sold a delivery truck to Zebra Ltd ( Sussidiary company )
for $40,000. The truck had a carrying amount of $30,000. Lion Ltd depreciates fixed asset at a rate
20% per annum while Zebra Ltd depreciates its fixed asset as at rate of 10 % per annum. Both have a
31 Dec financial year end

1. What are the consolidation eliminated journals on 31 Dec 20x4?

Dr Profit on sale of truck $10,000

CR Vehicle $10,000 (reduce value of vehicle)

Dr Accummulated Dep $1,000

Cr Depreciation $1,000

Dr Deferred tax asset $2,700 (unrealised profit of $10,000 - $1000 Dep = $9000

Cr Tax expense $2,700 ($9000 * 30% = $2700)

2. What is the consolidation elimination jurnal on 31 dec 20x5 ?

The end of 2nd years, the consolidated workwheet is new every year

Retained earning = $10,000profit - $1,000 extra dep -$2,700 income tax expense

= 6300

Need to eliminated $6300 from last year

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Depreciation for this year need to include the 2 year eliminate

DR Retained earning $6300

Cr vehicle $10,000

Dr Accumulated Dep $2,000 (2 years)

Cr Depreciation $1000

Dr Tax expense $300

Dr Deferred tax asset $2,400 (2700 – (1000 dep * 30%) = $2400

Case: City Group & Town Ltd

Sale of depreciable asset – elimination journals

The financial period for the City Group is from 1 jul to 30 jun

Only 1 jul 20x6, town ltd (sub) sold a plant with carrying amount of $350,000 to City (parent
company) for $600,000. On the date of sale, the plant had a remaining useful life of 7 years.
However, City Ltd intends to depreciate the plant over useful file 10 years

1. What are the consolidation elimination journal on 30 Jun 20x7 ?

Dr Profit on sale of plant $250,000

Cr plant $250,000

($600,000 selling price - $350,000 carrying amount)

Dr Accummulated Dep $25,000

Cr Depreciation $25,000

(60,000 dep by town ltd – 35,000 dep by group)

Dr Deferred tax asset $67,500

Cr Tax expense $67,500

(250,000- 25,000) * 30%

2. What are the consolidation elimination journal on 30 jun 20x8?

Retained earning = Profit before tax last year – Depreciation- deferred tax asset

= $250,000 - $25,000 - $67,500

= $157,500

2 years worth’s of depreciation

Dr Retained earning $157,500 ($250,000dr – 25,000 cr – 67500cr)

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 Cr Plant $25,000

Dr Accummulated Dep $50,000 ($25,000 depreciation * 2 years)

Cr Depreciation $25,000

Dr Tax expense $7500 ($25,000 * 30%)

Dr Deferred tax asset $60,000 ( profit before tax last year 250,000 – 2 years depreciation
$50,000)*30%

Case: Angel & Demon

Sale of inventory – elimination journals

On 1 oct 20x8, Angel ltd (parent company) sold inventory costing $6,000 to Demon Ltd ( Sub) for
$8,000. Both companies have a 31 dec year end.

1. Assuming all the inventory was on hand on 31 Dec 20x8, what are the consolidation
eliminated journals?

Adjustment Consolidated
Account Parent Sub Dr Cr
Sales 8000 8000 0
Less: COGS (6000) 6000 0
Gross profit 2000

Profit before 2000

tax
Income tax (600) 600 0
expense
Profit for the 1400
year

Statement of
Finanical
position
Inventory 8000 2000 6000
Deferred tax 600 600
asset
Consolidation journal entry:

Dr Sales $8000

Cr Cost of sale $6000

CR Inventory $2000

Dr Deferred tax asset $600

Cr Income tax expense $600

2. Assuming half the inventory was on hand on 31 dec 20x8, what are the consolidation
elimination journal ?

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Dr Sales $8000

CR Cost of sale $6000

Cr inventory $1000 (2000 * 50% which was sold and thus realized )

CR COGS $1000 (realizing profit from intra group sale of inventory)

Dr deferred tax asset $300 (CA < TB = DTA)

Cr Tax expense $300 ($1000 * 30%)

Or

Dr Sale $8000

Cr Cost of sale $7000 (6000 + 1000)

Cr Inventory $1000

Dr Deferred tax asset $300

Cr Tax expense $300

3. Following from 2, what are the elimination journals on 31 dec 20x9, if the remaining
inventory was sold in the 20x9 finanial year ?

Dr Retained earning $700 (carry forward effects of 20x8 profit: 8000dr – 7000cr-300cr

Cr COGS $1000 (realizing profit from intra group sale of inventory)

Dr Tax expense $300 ($1000 * 30%)

Case: Son & Father

Sale of inventory – elimination journals

On 1 Aug 20x7, Son ltd (Sub) sold inventory costing $15,000 to Father Ltd (parent) for $20,000. Both
companies have a 31 dec year end.

1. Assuming all the inventory was on hand on 31 dec 20x7, what are the consolidation
elimination journal?

Dr Sale $20,000

Cr COGS $15,000

Cr Inventory $5000 (5000 unrealised profit)

Dr Deferred tax asset $1500 (we pay early tax – dta)

Cr Tax expenses $1500

All the profit on intra group sale of inventory would be unrealised so need to be eliminated from the
cost of the inventory

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 2. Assuming 25 % of inventory was on hand on 31 dec 20x7, what are the consolidation
elimination journal ?

Dr Sale $20,000 (the first 2 steps was no change, eliminate original sale and COGS)

Cr COGS $15000

Cr Inventory $1250 (5000 * 25%)

Cr COGS 3750 (Realising profit from intra group sale of inventory 5000 * 75%

Dr Deferred tax asset $375 (1250 reduction in inventory * 30%)

Cr tax ecpense $375 (20,000 – 15,000 – 3750 ) * 30%

Unrealised profit that is included in the cost of the inventory is $5000. If 75% is sold, it means that
the cost of inventory still includes 25% of the $5000 unrealised profit and thus this needs to be
eliminated $5000 * 25%

The journal for COGS can be combined to reflect the net effect:

Dr Sales $20,000

Cr COGS $18,750 ($15,000 + 3750)

Cr Inventory $1250

DR Deferred tax asset $375

Cr Tax ecpense $375

3. Following from 2, what would be the elimination journals on 31 dec 20x8 if the remaining
inventory was sold in the 20x8 financial year?

Dr Retained earning $875 (carry forward effects of 20x8 profit: 20000dr – 18750cr-375
cr

Cr COGS $1250 (realizing profit from intra group sale of inventory $5000*25%

Dr Tax expense $375 ($1250 * 30%)

Case : Low & High

Intra group dividend elimination

On 20 dec 20x1, Low ltd (Sub) declared and paid dividends of $15,000. 90% of the dividends paid
was made to High ltd (parent) while the remaining 10% was made to individual non controlling
shareholders

What is the journal entry to eliminate the intra group dividend ? (ignore the effects of tax)

Dr Dividen income $13,500 (15,000 * 90%)

Cr Dividend – retained earning $13,500

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Note: the other 10% of dividends were paid to non-controlling interest shareholders and thus are
not require be eliminated

Case: Happy and Sad

Intra group dividend elimination

Sad ltd is wholly owned subsidiary of Happy Ltd and both companies have a 31 Dec year end. On 20
Dec 20x1, Sad Ltd declared devidends of $30,000. On 16 jan, Sad Ltd paid the dividend. Happy Ltd
recognised the dividend declared on the accrual basic.

What are the journals to eliminate the intra group dividend ? (ignore the effect of tax).

DR Dividend income $30,000

Cr Dividend – retained earnings $30,000

Dr Dividend Payable $30,000

Cr Dividend receivable $30,000

(because it said the dividend declared on the accrual basic)

Case: Shark & Dolphin

Shark Ltd acquired 80% of Dolphin Ltd on 1 Jan 20x1

For year end 30 jun 20x1, Dolphin sold inventory to Shark for $20,000 . The inventory cost was
$5,000

1. All the inventory was on hand at year end 30 30 jun 20x1

What are the journal entries ?
The tax rate applicable is 30%

Dr Sales $20,000

Cr COGS $5000

CR Inventory $15,000

Dr Deferred tax asset $4500

Cr Tax expense $4500

2. 30% of the inventory was on hand at 30 jun 20x1

Dr Sale $20,000 (eliminate the original sale and COGS

CR COGS $5000

Cr Inventory 4500 (30% of unrealised $15,000 on hand )

Cr COGS $10500 (70% of inventory was sold)

DR Deferred tax asset $1350

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 Cr Tax expenses $1350

Or

Dr Sale $20,000

Cr COGS $15,500

Cr Inventory $4500

DR Deferred tax asset $1350 (profit of $15,000 but only 70% realised

Cr Tax expenses $1350

3. 70% of inventory was sold by 30 jun 20x1. During year ended 30 jun 20x2 all inventory was
sold to external parties

Do the same step like previous question for the year end 20x1

Dr Sale $20,000

Cr COGS $5000

Cr COGS $10,500

Cr Inventory $4500

Dr DTA 1350

Cr Tax Expense 1350

For the year end 30 jun 20x2 (the next year)

Retained earning = $20,000 - $5,000 - $10,500 - $1350 = $3,150

Cr Inventory $4500 -- > COGS

Dr Retained earnings $ 3150

Cr COGS $4500

Dr Tax Expense $1350 ($4500 * 30%)

Case: Snakes & Ladders

Snakes Ltd acquired 80 % of the shares in Ladder Ltd on 1 jan 20x1. This gave it control over Ladder
Ltd

On 1 jan 20x2, Ladder Ltd sold an truck with a carrying amount of $30,000 to Snake Ltd for $50,000

According to Ladders Ltd, the truck had a remaining useful life of 8 years but Snakes is going to
depreciate the truck over a useful life of 10 years

1. What are the consolidation elimination journals on 31 Dec 20x2?

Dr Gain on sale of truck $20,000

Cr Truck $20,000

(need to eliminate the gain ..

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Next reduce truck carrying amount back to $30,000

Dr Accumulated Depreciation $2000

Cr Dep expense $2000

(Group depreciation is $30,000 / 10 years = $3000

Snakes Depreciation is $50,000 / 10 years = $5000

Need to reduce the $2000 over depreciation )

Dr DTA $5,400

CR Tax Expense $5,400

Tax is paid on unrealised profit on sale of $20,000 adjusted for the $2000 over depreciation

($20,000 - $2,000) * 30% = $5,400

This leads to a DTA of $5400

2. What are the consolidation elimination journals on 31 dec 20x3 ?

Unchanged like the previous entries

Dr Gain on sale $20,000

Cr Truck $20,000

Dr Accum Dep $2000

Cr Dep expense $2000

Dr DTA $5400

Cr Tax expense $5400

Retained earnings = $20,000 - $2000 - $5400 = $12,600

The $2000 Depreciation expense is the same calculation as 20x2, and accum dep goes from $200 to
$4000 (2 years)

Dr Retained earning $12600

Cr Truck $20,000

Dr Accumm Dep $4000

Cr Dep Expense $2000

Dr DTA 4800

Cr Tax Expense $600

($20,000 unrealised profit - $4000 accum Dep = $16,000 * 30% = $4800)

Tax expense is $2000 dep expense * 30% = $600)

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Intra group transaction that do not affect profits

Loan from A to B

Management fee for HR Services

Loan from P to S

Loan from A to B – elimination

On 1 jan 20x3 entity A (perant ) loaned $40,000 to entity B ( Sub)

The term of the loan indicated that no interest would be charged provided that entity B repays half
the loaned by 31 dec 20x3. This condition was satisfied since entity B repaid $20,000 of the loan to
entity A on 21 Dec 20x3

What are the consolidation elimination journals in respect of the intra group loan ?

There are no journal entries relating to the payment and repayment of the loan

When entity A paid the loan to entity B, there would be a debit and credit to bank with the same
group and for the same amount and thus, no journals are required as the net effect would be zero

For the loan asset and liability

Dr Loan Payble $20,000

Cr Loan receivable $20,000

Management fee for HR services – elimination

Alpha Ltd (parent) agreed to perform all the human resources functions for Omega Ltd (Sub) in
return for a management fee of $25,000 . on 31 Dec 20x3, (year end date) , Omega Ltd was still
owning $6,000 of the agreed fee

1. What are the journals to eliminate the intra group transaction?

Dr Management fee income $25,000

Cr Management fee expense $25,000

Dr Management fee payable $6000

Cr Management fee receivable $6000

2. What are the tax effect relating to the elimination of this intra group transaction ?

There are no tax effects for the elimination journal entry relating to this transaction

When consolidating the management fee income of $25,000 and management fee eapense of
$25,000 is eliminated. Thus the net effect on profits is zero. Accordingly, there are no tax effects

Loan from P to S

P Ltd (parent) provided a loan of $100,000 to S Ltd (Sub) on 1 jan 20x3. The interest on the loan is
10% per annum . on 30 jun 20x3 (year end date) the interest on the loan was not yet paid.

What are the journals to eliminate the intra group transaction?

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Interest for the period 1 jan 20x3 to 30 jun 20x3 is $5000 ( $100,000 *10%) * 6 months / 12months

Dr interest income $5000

Cr Interest expense $5000

The question also indicates that the interest was not yet paid so we need to eliminate the receivable
and payable relating to the interest as well as the original loan amount

Dr Loan payable $105,000 ($100,000 + $5,000 )

CR Loan Receivable $105,000

3 NCI Modification for Consolidation

Pre-acquisition elimination entry

Treatment of dividends

Measurement of NCI

Pre-acquisition elimination entry

Only eliminate the Parent’s portion of equity in the Sudsidiary

100 % ownership look like this:

Elimination Adjustments
Accounts Holding Subsidiary Dr CR Consolidated
Issued Capital 230,000 12,000 12,000 230,000

Retained 140,000 83,000 83,000 140,000

earnings
Only eliminate the Parent’ portion of equity in the Subsidiary

Parent holds 70% (take the amount in equity accounts * 70%, the other 30% belong to someone else

Elimination Adjustment Non Parent

s control equity
ling
Account Holding Subsidia Dr CR Consolidate Interes Interest
s ry d t

Issued 300,00 100,000 70,000 330,000 30,000 300,00

Capital 0 0
(100,000*70% (300,000+1
00,000*30%
Retained 200,00 100,000 70,000 230,000 30,000 200,00
earnings 0 0
(100,000*70%

Previously 100% of the business combination reserve was eliminated

Here you would only eliminate the parent’s share

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Treatment of dividends

Dividends paid by Sudsidiary

Only eliminate the dividend paid ( or payable) within the group

The NCI portion is not eliminated

EX: Sussidiary processed the following entry for the dividend declared

Dr Final Dividends (Retained earnings) $10,000

Cr Final Dividends Payable $10,000

Parent processed the following entry in relation to the dividends declared by Subsidiary (70%)

DR Dividend receivable $7,000

CR Dividends Income $7,000

Consolidation Eliminate entries (in consolidated worksheet you have to eliminate the income
dividends as you can not earn income by paying yourself) only 70%, the other 30% belong to
someone else

Dr Dividend Income $7000

CR Final dividends (retained earnings) $7,000

Dr Final dividends payable $7,000

CR Dividends income $7,000

Summary Final outcome for Subsidiary

Dividends Payable balance & Final Dividends (retained earnings) reduction are both $10000-$7000=
3000

Summary Final outcome for Parent book

Closing balance in P of dividend income and dividend receivable is $7,000 - $7,000 = 0

NCI needs to be shown in the consolidated balance sheet

 Separate from the equity of the owners of the parent

 P&L must also be allocated to owners and NCI

NCI interest in net assets has two parts:

1. The amount of NCI at the original combination date (pre-acquisition equity)

Measured at Share of Fair Value of identifiable net assets
2. The NCI share of changes in equity since combination (post-acquisition changes in equity)
Measured as its portion of the aggregate amount of equity adjusted for unrealised profits or
losses

Why adjust for unrealised profit ?

 Entity concept of consolidation

 The non controlling interest is seen as an owner in the group

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  Determining an NCI focuses on its share of the equity of the group, not its share of the
equity recorded in the financial statements of the subsidiary
 The equity of the group is affected by the elimination of intra group profits or loss. As such,
the calculation of an NCI must also be adjusted for unrealised profit or losses

Remember:

1. Only intra group transaction that affect the Subsidiary’s equity require adjustment. So, the
original transaction must have been “From the Subsidiary”
If the plant is sold from S to P, this is unrealised and should be eliminated
If the sale is form P to S there is no effect on equity of S, so no adjustment
2. Only some tranations cause unrealised profit (losses)

Sale of assets like inventory, lant and plant

Dividends, interest and services do not apply

NCI Calculation

Step 1: Start with Subsidiary ‘ s profit

Adjust for tax if applicable

Step 2: Adjust for un/realized p&L for transactions From Subsidiary To Parent

Remember tax

Step 3: Multiply by the NCI percentage

Case: Big Ltd & Little Ltd

Big Ltd owns 80% of Little Ltd

On 1 Jul 20x3 Little sold equipment to Big for $40,000. At the time of sale the carrying amount of the
equipment in the books of Little was $30,000. Both entities depreciate the equipment at 10% on
cost.

During the year ended 30 jun 20x5, big sold Little land at a profit of $5,000. The profit was taxable.

The 20x5 consolidation worksheet contains the following:

Big Ltd Little Ltd

Net Profit after tax for the $80,000 $20,000
year
Retained earnings (closing $25,000 $10,000
balance)
What is the non controlling interest in the profit for the year of the group ?

Step 1: Subsidiary ‘ profit after tax $20,000

Step 2: Adjust for un/realized p&L for transactions From Subsidiary To Parent

Land sold was irrelevant information, only unrealized profit form Sub to Parent

The question is about profit for this year, not 20x3 year (Equipment was sold on 1 jul 20x3)

Subsidiary made $10,000 unrealised profit in 20x3

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In 20x4, $1,000 of this is realized (based on 10% depreciation )

Adjustment for unrealised P&L $1000

(from Sub to Parent)

Adjustment for Tax ($300)

$20,700

Step 3: Multiply by NCI percentage x 20%

NCI Portion of profits $4,140

Case : Shark v Dolphin

Shark Ltd acquired 80% of Dolphin Ltd on 1 Jan 20x1. For the year ended 30 jun 20x1, Dolphin sold
inventoty to Shark Ltd for $20,000. The cost of the inventory was $5,000

30% of the inventory was on hand at 30 jun 20x1

What is the NCI portion of profits on 30 Jun 20x1 if Dolphin’s profits before tax was $150,000 ?

Step 1: start with profit of S and adjust for tax

Subsidiary ‘s profit $150,000

Less tax @ 30% ($45,000 )

Profit after tax $105,000

Step 2: Adjust for unrealised P&L for S to P transaction

Adjustment for unrealised P&L ($4500)

From Sub to Parent

Adjusment for Tax at 30% $1,350

$101,850

Step 3: Multiply by NCI percentage * 20%

NCI Portion of profits $20,370

Workings: Next is to adjust unrealised profit:

Step 1: reverse the sale (70% of the good were sold)

Dr Sales $20,000

Cr COGS $5000

Cr Inventory $4500

CR COGS $10,500

($20,000 * 70% = $14,000 - $5000*70% = $3,500

($14,000 - $3,500 = $10,500)

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Step 2: adjust COGS

($20,000 * 30% = $6,000 is the inventory on hand based on the book, it is overstated, the actual
inventory on hand is $5000 * 30% = $1500, so we need to adjust it, reduce inventory CR inventory
$4,500)

Step 3: Account for tax effects

Dr Deferred tax asset $1,350

Cr Income tax expense $1,350

Now we need to deal with the tax effects

Unrealised profits were $15,000

30%tax = DTA of $4500

However, 70% of the stock is sold externally now

So, only 30% of the profit is unrealised

30% of $15,000 = 4500 unrealised

30% tax of $4500 unreliased profit = $1350

Question: Measure NCI & Pre acquisition elimination

On 1 jul 20x4, Entity A ltd purchased 80% of the shares in entity B Ltd for $250,000

The following information is relevant at acquisition date:

Issued capital of entity B $150,000

Retained earnings of Entity B $50,000

Issued capital of Entity A $480,000

Retained earnings of Entity A $220,000

Other net assets of Entity A $450,000

The assets & Liabilities of entity B are recorded at fair value (and tax base is equal to their fair value)

Non controlling interest in the group is $40,000 (measured at fair value of the share of net assets of
Entity B)

Required:

a. Calculate the goodwill or bargain purchase on acquisition of Entity B

b. Prepare the acquisition elimination entries using the worksheet method

A.

We paid $250,000

We know that the fair value of 20% on Entity B is $40,000 (the NCI share)

So we can work out that 100% of the fair value is $200,000 ( $40,000 / 20%)

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We purchased 80% of Entity B. Our portion of the fair value is $160,000 ( 80%*200,000)

Goodwill = $250,000 - $160,000 = $90,000

Formula:

Consideration transferred $250,000

Non controlling interest

(@ share of net assets of Entity B) +$40,000

Less: Fair value of identifiable net assets -$200,000

Goodwill $90,000

B.

Pre acquisition elimination entry required

Allocation of consolidated equity between the non controlling interest and Parent equity interest

Consolidated Parent
Account Entity A Entity B Dr Cr Financial NCI Equity
statement Interest
Issued $480,000 $150,000 $120,000 $510,000 30,000 $480,000
Capital (80%)
Retained $220,000 $50,000 $40,000 $230,000 10,000 220,000
earnings (80%)
$700,000 $200,000 $160,000 $740,000 40,000 $700,000
Other net $450,000 $200,000 $650,000
assets
Investment $250,000 $250,000 0
in Entity B
Goodwill $90,000 $90,000

NCI = $150,000 * 20% = $30,000

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