Explain what i need to do with the transaction

Assignment Help Financial Accounting

Reference no: EM133772881 , Length: word count:1500

Assessment - Statement of Advice

Assessment - Provision of advice on accounting issues

Your Task

You are required to prepare a business letter to answer key accounting issues in regards to an acquisition analysis of a wholly owned subsidiary and various intragroup transactions.

Assessment Description
Assume that you are a graduate accountant working for Grey Fox, a public accounting firm situated at 372 Docklands Drive, Melbourne, VIC 3008. The Manager of your firm, Mr. Adam Pennyworth, has asked you to prepare a statement of advice in response to an email received from a client, Wayne Grayson, the Managing Director of Gotham Ltd, raising several accounting issues. Please refer to the email on the next page.

The maximum length for the body of the letter is 1,500 words. You should address all the technical issues and discussion in your advice, followed by a Reference List.

Part A: Technical component - This mark covers the technical content of your advice and the explanation of each of the issues, the calculations and journal entries (where applicable).

Part B: Communication Skills - This mark covers the generic skills of writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling, and punctuation throughout the whole assignment. It also includes referencing.

Case Study
Founded in 1940, Gotham Ltd is an Australian-owned company that specialises in providing monitored security solutions for businesses, homes, and individuals. With shares listed on the ASX trading at $1.15 on 1 July 2022, the company has a strong commitment to research and development in order to enhance its products and meet the evolving security needs of customers. Operating 24 hours a day, 365 days a year, Gotham's monitoring centres vigilantly watch over thousands of alarm events, responding to situations ranging from burglary attempts to fire alarms. Under the leadership of a new CEO, the company has implemented a strategy of investing in smart and innovative products to drive profitability. Recently, Gotham acquired Penguin Ltd to broaden its product portfolio and further expand its business. With an incremental borrowing rate of 8% and a corporate tax rate of 30%, Gotham Ltd continues to prioritise safety and security for its users.

Draft a business letter in reply and make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant sources. See the email below.

Dear Adam,

I am contacting your for help as our Chief Accountant is currently on long service leave. I need to understand the accounting implications of our recent takeover of Penguin Ltd so that I can present the consolidated financial statements to the Board of directors and address any additional questions they may have regarding the accounts for the year ending 30 June 2024. Being inexperienced in accounting, please explain the principles and concepts in simple language.

As you are aware, we purchased 100% of the shares of Penguin Ltd on 1 July 2022 on a cum- dividend basis. The terms of the acquisition were that shareholders of Penguin Ltd would receive
$3.75 cash per Penguin share along with 2 shares in Gotham Ltd for each Penguin Ltd share. Prior to the takeover, Penguin Ltd had declared a final dividend of $0.05 cash per share which was paid on 1 September 2022. The acquisition of Penguin Ltd aligns with our strategic goals of expanding our AI-powered security systems and growing our business.

The Statement of Financial Position of Penguin Ltd as a 1 July 2022 included the following information:

Cash	$15,000
Accounts receivable(net)	31,000
Inventories	22,000
Property, plant and equipment(net)	215,000
Goodwill	7,000
	$290,000
Accounts payable	$4,500
Wages payable	2,000
Dividend payable	3,500
Borrowings	28,000
Share capital-$1 share	70,000
Retained earnings	182,000
	$290,000

Our Chief Accountant has confirmed that Penguin Ltd's balance sheet accurately reflects the fair value of all assets, except for $37,000 worth of inventories and equipment valued at $52,000, which exceeds its carrying amount of $19,000. This equipment which originally cost $95,000 is depreciated on a straight line basis over a 5 year period after acquisition. Additionally, it was found that the company had disclosed by way of note a 10 year patent for its wireless Freedom camera, with a fair value of $180,000. Penguin Ltd also disclosed a contingent liability related to a cybersecurity incident in a note, with potential payout estimated at $4,000 according to the company's lawyers. The case has yet to be settled.

Our Accounts Clerk prepared an acquisition analysis and determined that the goodwill amount is $10,500 (calculated as $262,500 cash less the subsidiary's equity acquired of $252,000) to be reported in the accounts. Can you check that this is right and help me with the acquisition analysis? The directors are pleased with the recognition of our established reputation and customer loyalty through the goodwill. Our loyal customers quickly purchased all existing inventories of Penguin Ltd following the acquisition generating huge profits. What journal entries do I need to prepare the consolidated financial statements for the year ended 30 June 2024? Please show all workings and explain each journal entry, as I may need to respond to questions from the Board of Directors.

Unfortunately, we have now experienced challenges over the past year such as interest rate rises, supply cost increases, and sales reductions, which have impacted our margins. Customers have been cutting back on discretionary spending. There is a suggestion that we should amortise goodwill to save on taxes. How should I address and respond to these comments?

Prior to going on long service leave, The Chief Accountant identified two inter-company transactions for further consideration when preparing the consolidated accounts. Specific details of these transactions are shown below:

1. On the 20th June 2024, Penguin Ltd sold inventories costing $80,000 to Gotham Ltd for $70,000 on credit. At the end of the year, 30% of the goods were still in Gotham Ltd's inventory. Gotham Ltd paid the outstanding balance to Penguin Ltd on 1st August 2024. We have recognised a loss of $10,000 from the sale which has reduced our taxes. Is there anything else we need to do? Please provide any necessary journal entries.

2. On 1 July 2022, Gotham Ltd sold old equipment with an original cost of $123,456 to Penguin Ltd for $88,000 cash. The equipment had a carrying amount of $100,000 on Gotham Ltd's books at the time of the sale. Gotham Ltd depreciates its assets at a rate of 10% on a diminishing value basis, while Penguin Ltd uses the straight line method of depreciation. Independent experts have confirmed that the remaining useful life of the equipment is five years. The Chief Accountant was mumbling something about not recording these transactions. Won't the accounts then be incomplete? Please explain what I need to do with the transaction and show any journal entries necessary.

Please respond by letter (not email) as I would like to present this to the Board. I look forward to hearing from you shortly.

Reference no: EM133772881

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