ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION
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PRACTICE CONSOLIDATION QUESTION

NOTE: This is a straightforward question. It is NOT the exam question. The exam questions may cover
transactions not covered by this question or may not include transactions covered in this question.

On 1 July 2014, Pepper Ltd acquired all of the issued capital of Salt Ltd. As part of the settlement, Pepper
Ltd issued the shareholders of Salt Ltd with 100,000 shares in Pepper Ltd. The shares in Pepper Ltd were
listed on the ASX for $1.88 while the shares in Salt Ltd were listed at $2.00. Pepper Ltd also paid $44,830
cash and agreed to pay a further $50,000 on 1 July 2015. The appropriate interest rate being 6%. The
shareholders’ equity of Salt Ltd at that date was:
Issued capital $100,000
Retained earnings 25,000
$125,000

At the date of acquisition, all of the carrying amount of net assets of Salt Ltd were recorded at fair value
except the following.
i. The land, originally costing $60,000, had a fair value of $84,000.
ii. The buildings had originally cost $220,000 and had accumulated depreciation of $40,000. The fair
value of the buildings at date of acquisition was $360,000. It has a remaining useful life of 10 years.
iii. As at 30 June 2014, Salt Ltd had disclosed information relating to a legal action in the notes to their
accounts. They estimated a settlement of $10,000. The legal action was settled on the 1 June 2015
for $10,000.

The attached worksheet shows the income statements, retained profits and balance sheets of the two
companies for 30 June 2017.

Additional information:
a) The goodwill arising from the acquisition was impaired by $1,200 at the end of the current year and
was impaired by $2,000 at the end of the financial year ended 30 June 2015.
b) Inter-company sales of inventory during the year were:
a. Pepper Ltd to Salt Ltd for $3,000
b. Salt Ltd to Pepper Ltd for $4,000
c) The entire inventory purchased by Salt Ltd had been sold outside the group by the end of the current
year. However, the inventory purchased by Pepper Ltd remained unsold by the end of the year. Salt
Ltd had recorded a profit of $1,500 on this sale.
d) In September 2015, Salt Ltd has sold $2,000 inventory to Pepper Ltd. At the end of that financial year,
60% of this inventory had been sold outside the group by Pepper Ltd. The inventory had cost Salt Ltd
$1,500.
e) Interest on debentures is paid annually on 30 June.
f) Pepper Ltd recognises dividends when received. (Please refer to the financial statements to determine
the dividends).
g) On the 1 July 2015, Pepper Ltd sold a building to Salt Ltd for $180,000. The building was purchased by
Pepper Ltd on 1 July 2014 for $150,000 and was being depreciated straight-line over a useful life of 10
years. The remaining useful life is unchanged.
Required:
(a) Prepare the acquisition analysis using the template provided.
(b) Prepare the consolidation elimination and adjusting journal entries required as at 30 June 2017.
(c) Complete the consolidated worksheet as at 30 June 2017 on the template provided.


ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION
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Part A: Acquisition Analysis at 1 July 2014
Purchase consideration at fair value
100,000 shares in Pepper @ $1.88 188,000
Cash 44,830
Payable 1/7/2015 50,000 (1.06-1) = 50,000 x 0.943396 47,170 280,000
FV of INA
Issued capital 100,000
Retained earnings 25,000
FVA – land (net of tax) FV $84,000- CA $60,000 = $24,000 - tax@ 30% = $7,200 16,800
FVA – building (net of tax) FV $360,000 - CA $180,000 = $180,000 – tax at 30% =
$54,000
126,000
FVA – contingent liability (net tax) $10,000 – tax @ 30% = $3,000 (7,000) 260,800
Goodwill on acquisition 19,200

Fair value adjustment – depreciation calculation (3 years post DOA)
Depreciation – sub $180,000/10 remaining years 18,000
Depreciation – economic entity $360,000/10 remaining years 36,000
Adjustment 18,000
Tax on depreciation adjustment @ 30% 5,400

Intra-entity asset transfer and depreciation calculation (2 years post transfer)
Cost 1/7/2014 150,000
Less acc depreciation ($150,000/10 years) to 30/6/2015 15,000
Carrying amount 135,000
Selling price 180,000
Gain on sale 45,000
Tax on gain 13,500

Depreciation – Economic entity $135,000/9 remaining years 15,000
Depreciation – Parent entity $180,000/9 remaining years 20,000
Adjustment to reduce overstated depreciation recorded by parent (5,000)
Tax on depreciation adjustment @ 30% 1,500



ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION
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Part B: Consolidated Journal Entries as at 30/6/2017
DOA 1/7/2014 – 3 years post acquisition.
Ref Account Debit
$
Credit
$
1 Land 24,000
DTL 7,200
Fair value adjustment 16,800
(FVA to land on consolidation)

2 Accumulated depreciation 40,000
Building 40,000
(write-back accumulated depreciation for FVA adjustment)

Building 180,000
DTL 54,000
Fair value adjustment 126,000
(FVA to building on consolidation)

Depreciation expense (2017 expense) 18,000
Retained earnings 1/7/2016 (2016 & 2015 expense) 36,000
Accumulated depreciation 54,000
(incremental depreciation on FVA – 3 years since DOA)

DTL 16,200
Income tax expense (2017 expense) 5,400
Retained earnings 1/7/2016 (2016 & 2015 expense) 10,800
(tax on incremental depreciation on FVA on consolidation)

Contingent – liability (FVA) – Settled on 1 June 2015 – i.e. prior
Note: Contingent liability directly adjusted to Op RE in Elim Jnl

3 Issued capital 100,000
Retained earnings 1/7/2016 (25,000-7,000 Cont. Liab) 18,000
Goodwill 19,200
Fair value adjustment 142,800
Investment in Sub Ltd 280,000
(pre-acquisition elimination entry and recognise goodwill on
consolidation)


4 Retained earnings 1/7/2016 (2015 expense) 2,000
Impairment loss (2017 expense) 1,200
Accumulated impairment – goodwill 3,200
(recognised goodwill impairment)

5 Sales 7,000
COGS 7,000
(eliminate intra-group sales)

ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION
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6 COGS 1,500
Inventory 1,500
DTA 450
Income tax expense 450
(eliminate URP in closing inventory and related tax)

7 Retained earnings 1/7/2016 140
Income tax expense 60
COGS 200
(eliminate URP in opening inventory and related tax)

8 Interest revenue 500
Borrowing costs 500
(eliminate interest on intra-group debenture holdings)

9 5% Debenture (liability) 10,000
5% Debenture in Subsidiary (asset) 10,000
(eliminate intra-group debenture holdings)

10 Dividend revenue 10,000
Dividend paid 10,000
(eliminate subs dividends paid to parent)

11 Retained earnings 1/7/2016 45,000
Accumulated depreciation 15,000
Building 30,000

DTA 13,500
Retained earnings 1/7/2016 13,500

Accumulated depreciation 10,000
Depreciation expense 5,000
Retained earnings 1/7/2016 5,000

Income tax expense 1,500
Retained earnings 1/7/2016 1,500
DTA 3,000
(eliminate unrealised gain on intra-group asset transfer and
related tax and 2 years depreciation adjustment and related
tax)

Add lines as needed.

If you cannot prepare the acquisition analysis and consolidation elimination and adjusting journal
entries to this point within 90 minutes, you are not sufficiently prepared for the exam.
ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION
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Part C: Consolidated Worksheet for year ending 30 June 2017

Pepper Salt Sub Total DR REF CR Group
Sales 296,000 440,000 736,000 7,000 5 729,000
less Cost of goods sold: 147,000 167,000 314,000 1,500
6/5
7
7,000
200 308,300
Gross Profit 149,000 273,000 422,000 420,700
Borrowing costs - 1,000 1,000 8 500 500
Other expenses 30,400 95,000 125,400 18,000 1,200
2/11
4
5,000
139,600
Dividend revenue 10,000 - 10,000 10,000 10 -
Interest revenue 500 - 500 500 8 -
Profit before income tax 129,100 177,000 306,100 280,600
Income tax expense 60,000 70,000 130,000 60 1,500
7/2
11/6
5,400
450 125,710
Net Profit 69,100 107,000 176,100 154,890
Retained profits 1.7.16 96,500 25,000 121,500
36,000
18,000
2,000
140
45,000
1,500
2
3/11
4/11
7
11
11
10,800
13,500
5,000


48,160
Profit available to distribute 165,600 132,000 297,600 203,050
Less Dividend paid 30,000 10,000 40,000 10 10,000 30,000
Retained profits 30.6.17 135,600 122,000 257,600 173,050
Reserves 100,000 - 100,000 100,000
Fair value adjustment 142,800
1
3/2
16,800
126,000 -
Issued equity 300,000 100,000 400,000 100.000 3 300,000
Total Owners’ equity 535,600 222,000 757,600 573,050
Income tax payable 60,000 70,000 130,000 130,000
Other current liabilities 127,500 143,500 271,000 16,200
2/1
2
7,200
54,000 316,000
5% debentures - 20,000 20,000 10,000 9 10,000
Total Liabilities 187,500 233,500 421,000 456,000
Total Equity & Liabilities 723,100 455,500 1,178,600 1,029,050
ASSETS
Inventory 48,000 60,000 108,000 6 1,500 106,500
Other current assets 45,100 51,500 96,600 450 13,500
6/11
11
3,000
107,550
Investment in Subsidiary 280,000 - 280,000 3 280,000 -
5% Debentures in Sub 10,000 - 10,000 9 10,000 -
Land 200,000 120,000 320,000 24,000 1 344,000
Buildings 260,000 350,000 610,000 180,000
2
11
40,000
30,000 720,000
less acc. dep (120,000) (126,000) (246,000) 40,000 10,000
2
11
54,000
15,000 (265,000)
Goodwill 19,200 3 19,200
Less acc. impairment 4 3,200 (3,200)
Total Assets 723,100 455,500 1,178,600 698,550 698,550 1,029,050
NOTE: This is NOT the exam question. The purpose of this question to provide a review of the principles
covered in lectures and the text. DO NOT restrict your revision effort to only the matters covered in the
practice question.