Reference no: EM132953364

ACCT6005 Company Accounting - Laureate International Universities

Part A: Case study analysis - Theory

Learning outcome 1: Prepare consolidated financial statements and related accounting entries for incorporated entities.

Learning outcome 2: Generate and communicate strategic recommendations in various inter-entity relationship scenarios with reference to relevant accounting standards.

Context:

• Assessment coverage: Module 1-2 Fair Value adjustment and Intra group transactions.
• You are required to demonstrate: the assumed knowledge and skills from Module 1 Introduction and Principles of Consolidation; understanding and ability to account for fair value adjustments and intra group transactions.
• You are able to prepare: acquisition analysis, adjustment entries for group using the consolidation worksheet, and consolidated financial statements.
• You are able to recommend and communicate strategic recommendations regarding fair value adjustment entries.
Instructions:
• Show all relevant workings where required.
• Combine the answers for both Part A and Part B into one assessment document.

Case Scenario

PART A

Galway Ltd acquired all the issued shares of Dublin Ltd for $240 000 cash on 1 July 2019.

The following information is available at this acquisition date:

The equity of Dublin Ltd is provided below:

Share capital	$95 000
Retained earnings	80 000
General reserve	25 000

All the identifiable assets and liabilities of Dublin Ltd were recorded at fair value in the statement of financial position. The company income tax rate is 30%.

The following transactions and events occurred for the year ended 30 June 2020:

1. Goodwill: Goodwill related to the acquisition of Dublin Ltd was impaired by $5 000.

2. Dublin Ltd sold inventories to Galway Ltd for $25 000, which had originally cost Dublin Ltd $22 000. At 30 June 2020, 75% of these inventories were sold externally.

3. On 1 July 2019, Galway Ltd sold one piece of its existing equipment to Dublin Ltd for $120 000. Galway Ltd purchased the equipment for $160 000 on 1 July 2016 and depreciated it over the original useful life of 10 years at zero residual value. Dublin Ltd plans to depreciate the equipment over its remaining useful life at zero residual value.

4. Dividends: Dublin Ltd paid $18 000 interim dividends in September 2019, and Galway Ltd declared $26 000 dividends in May 2020 (to be paid in October 2020).

5. Galway Ltd charged Dublin Ltd $90 000 for service fees. At 30 June 2020, 90% of this amount was paid by Dublin Ltd.
Required:

Analyse the completed worksheet attached for the Galway Group. Using the information provided in the worksheet, prepare an evaluation report, detailing each omission and error. For each error:

1. List the accounts and amounts, which are incorrect for each consolidation adjustment.
2. Explain WHY the entry is incorrect. Include formulas where possible in your explanation.
3. Provide the correct entry that should have been in the worksheet and explain each account and amount for this entry.
4. Explain the overall effect each error or omission will have (in amount) on the Group financial statements if it is not corrected.

Part A: Worksheet analysis

	Galway Ltd ($)	Dublin Ltd ($)	Ref	Adjustments		Ref
				Dr ($)	Cr ($)
Sales revenue	180 000	131 000	2	25 000
Cost of sales	(88 000)	(58 000)			22 000	2
Gross profit	92 000	73 000
Dividend revenue	24 000	--	4 4	18 000 26 000
Service fee revenue	90 000		5	90 000
Proceeds from sale of equipment	--	148 000	3	120 000
Depreciation	(12 000)	(8 000)			1 000	3
Impairment loss - Goodwill	--	--	1c	5 000
Carrying amount of equipment sold	--	(40 000)			118 000	3
Service fee expense		(90 000)			90 000	5
Other expenses	(32 000)	(15 000)
Profit before tax	162 000	68 000
Less: Income tax expense	(48 600)	(20 400)	3	300	2 100	2
Profit for the year	113 400	47 600
Retained earnings (1/7/19)	72 000	80 000	1b	80 000
Dividend paid	--	(18 000)			18 000	4
Dividend declared	(26,000)	--			26 000	4
Retained earnings (30/6/20)	159 400	109 600
Share capital	165 000	95 000	1b	95 000
General reserve	30 000	25 000	1b	25 000
BCVR	--	--	1b	45 000	45,000	1a
Shareholders' equity	354 400	229 600
Liabilities
Accounts payable	37 000	3 000
Other Payables	24 600	9 000
Dividend payable	26 000	--	4	26 000
Deferred Tax Liability	50 000	11 000
Total liabilities	137 600	23 000
Total liabilities & Equity	492 000	252 600

Assets	Galway Ltd ($)	Dublin Ltd ($)	Ref	Dr ($)	Cr ($)	Ref
Cash	25 000	22 600
Accounts receivable	12 000	8 000
Dividend receivable	52 000	--			26 000	4
Other receivables	9 000	12 000
Inventories	45 000	22 000			3 000	2
Investment in Dublin Ltd	240 000	--			240 000	1b
Land	52 000	84 000
Equipment	60 000	78 000			2 000	3
Acc'd depreciation	(38 000)	(26 000)	3	1 000
Buildings	55 000	62 000
Acc'd depreciation	(20 000)	(15 000)
Goodwill	--	5 000	1a	45 000
Less: Acc'd imp't loss - Goodwill	--	--			5 000	1c
Deferred tax asset	--	--	2	2 100	300	3
Total assets	492 000	252 600

Answer example:

Intragroup example (unrelated to this Case study): Debentures issued within the group accrued $300 interest at year-end. Assuming this adjustment was not made in a worksheet the answer would be:

1. The accounts: Interest expense, Interest Revenue, Interest receivable and Interest payable are incorrect.
2. The above accounts have not been adjusted to eliminate the intragroup interest accrued of $300.
The individual companies would have passed the following entries:
Company A Company B
Dr Interest Receivable $300 Dr Interest expense $300
Cr Interest Revenue $300 Cr Interest Payable $300

3. The elimination entry that should have been passed in the worksheet to eliminate this intragroup transaction as it is not a transaction with an external party:
Dr Interest payable
Cr Interest Expense
Dr Interest Revenue
Cr Interest Receivable

4. If this error is not corrected, net assets and equity will not change for the Group, however total assets and total liabilities will be overstated by $300 each in the Balance sheet. The Group profit overall will not change, however total revenue and total expenses would both be overstated by $300 in the Group's Income statement. 

PART B Worksheet

Required

Prepare the consolidation worksheet as at 30 June 2020, showing all entries including the corrected entries discussed in Part A. Round your answers to zero decimal places.

	Galway Ltd ($)	Dublin Ltd ($)	Ref	Adjustments		Ref	Group ($)
				Dr ($)	Cr ($)
Sales revenue	180 000	131 000
Cost of sales	(88 000)	(58 000)
Gross profit	92 000	73 000
Dividend revenue	24 000	--
Service fee revenue	90 000
Proceeds from sale of equipment	--	148 000
Depreciation	(12 000)	(8 000)
Impairment loss - Goodwill	--	--
Carrying amount of equipment sold	--	(40 000)
Service fee expense		(90 000)
Other expenses	(32 000)	(15 000)
Profit before tax	162 000	68 000
Less: Income tax expense	(48 600)	(20 400)
Profit for the year	113 400	47 600
Retained earnings (1/7/19)	72 000	80 000
Dividend paid	--	(18 000)
Dividend declared	(26,000)	--
Retained earnings (30/6/20)	159 400	109 600
Share capital	165 000	95 000
General reserve	30 000	25 000
BCVR	--	--
Shareholders' equity	354 400	229 600
Liabilities
Accounts payable	37 000	3 000
Other Payables	24 600	9 000
Dividend payable	26 000	--
Deferred Tax liability	50 000	11 000
Total liabilities	137 600	23 000
Total liabilities & Equity	492 000	252 600

	Galway Ltd ($)	Dublin Ltd ($)	Ref	Dr ($)	Cr ($)	Ref	Group ($)
Assets
Cash	25 000	22 600
Accounts receivable	12 000	8 000
Dividend receivable	52 000	--
Other receivables	9 000	12 000
Inventories	45 000	22 000
Investment in Dublin Ltd	240 000	--
Land	52 000	84 000
Equipment	60 000	78 000
Acc'd depreciation	(38 000)	(26 000)
Buildings	55 000	62 000
Acc'd depreciation	(20 000)	(15 000)
Goodwill	--	5 000
Less: Acc'd imp't loss - Goodwill	--	--
Deferred tax asset	--	--
Total assets	492 000	252 600

Attachment:- Company Accounting.rar