Reference no: EM131196760

Consolidation: Principles and accounting requirements; intra-group transactions and non-controlling interests

On 1 July 2014, Bosco Ltd purchased 80% of the issued shares of Circus Ltd for $890,000. At the date of acquisition, the equity of Circus Ltd consisted of share capital and retained earnings of $500,000 and $425,000 respectively. At the date of acquisition, all assets of Circus Ltd were recorded at fair value, except for inventory, that had a fair value which was $10,000 higher than its carrying amount. All of this inventory was on-sold to external parties by 30 June 2015.

As at 30 June 2016, the following financial statements have been extracted from the financial records of Bosco Ltd and Circus Ltd:

	Bosco Ltd		Circus Ltd
	$		$
Sales revenue	2,035,000		1,250,000
Cost of goods sold	(1,280,000)		(595,000)
Gross profit	755,000		655,000
Dividend revenue - from Circus Ltd	186,000		-
Interest revenue	9,000		-
Profit on sale of plant	87,500		-
Expenses
Administrative expenses	(86,000)		(39,000)
Depreciation	(61,250)		(30,000)
Interest expense	-		(9,000)
Other expenses	(262,750)		(132,500)
Profit before tax	627,500		444,500
Tax expense	(182,250)		(133,350)
Profit after tax	445,250		311,150
Retained earnings 1 July 2015	798,750		598,350
	1,244,000		909,500
Dividends paid	(350,000)		(232,500)
Retained earnings 30 June 2016	894,000		677,000
Equity
Retained earnings	894,000		677,000
Share capital	1,025,000		500,000
Current liabilities
Accounts payable	142,000		110,000
Tax payable	153,000		113,000
Non-current liabilities
Loan from Bosco Ltd	-		300,000
	2,214,000		1,700,000
Current assets
Cash	110,000		228,000
Accounts receivable	94,000		275,000
Inventory	120,000		300,000
Non-current assets
Land and buildings	370,000		621,000
Plant - at cost	558,000		620,000
Less: accumulated depreciation	(228,000)		(344,000)
Loan to Circus Ltd	300,000		-
Investment in Circus Ltd	890,000		-
	2,214,000		1,700,000

The following additional information is provided for the year ended 30 June 2016:

(a) Bosco Ltd uses the partial goodwill method when accounting for non-controlling interests.

(b) During the year ended 30 June 2016, Bosco Ltd made inventory sales to Circus Ltd of $143,000, while Circus Ltd made inventory sales to Bosco Ltd of $120,000.

(c) By 30 June 2016, all of the inventory sold by Bosco Ltd to Circus Ltd during the year had been on-sold to external parties.

(d) The closing inventory of Bosco Ltd at 30 June 2016 includes inventory acquired from Circus Ltd at a cost of $84,000. This had cost Circus Ltd $70,000 to produce.

(e) The directors believe that the goodwill acquired was impaired by $5,000 in the current financial year.

(f) On 1 July 2015, Bosco Ltd sold an item of plant to Circus Ltd for $190,000, when its carrying amount in Bosco Ltd's financial statements was $102,500 (cost $237,500 less accumulated depreciation of $135,000). This plant was assessed as having a remaining useful life of six years, with no residual value.

(g) On 1 January 2016, Bosco Ltd loaned Circus Ltd $300,000. Interest on the loan for the year ended 30 June 2016 amounted to $9,000, and was paid by Circus Ltd on 30 June 2016.

(h) The tax rate is 30%.

Required:
A. With reference to the relevant accounting standards, explain why the relationship between Bosco Ltd and Circus Ltd is a parent-subsidiary relationship and not an associate relationship, even though Bosco Ltd does not own 100% of the shares in Circus Ltd.

B. Prepare the acquisition analysis and consolidation journal entries (including NCI entries) necessary for the preparation of consolidated financial statements for Bosco Ltd and its subsidiary, Circus Ltd, for the financial year ended 30 June 2016.

C. Prepare the acquisition analysis assuming that Bosco Ltd uses the full goodwill method when accounting for non-controlling interests. Assume that the fair value of the non-controlling interest at 1 July 2014 was $200,000.