Acquisition of subsidiaries and consolidation analysis
- Acquisition analysis and adjustment/elimination journal entries for consolidation at acquisition, 1 July 2011
Acquisition analysis
Step 1. P.P.E Revaluation:
Property, plant and equipment-cost $110000
Accumulated depreciation $90000
Carrying amount $200,000
Fair value $260,000
Revaluation surplus -increment $60,000 (net of tax: $42,000)
Step2 Recognise new legal liability on acquisition: there was no revaluation decrement
Balance of revaluation surplus at the date of acquisition:
$60,000
Step3: determine goodwill or bargain purchase
Fair value of identifiable net asset (FVINA) = $600000 Share capital
$250,000 Retained earnings
$60,000 Revaluation surplus
$910,000
Cost of acquisition $1100, 000
Since cost of acquisition is greater than FVINA, Goodwill is recognised.
Goodwill $190,000 (positive difference)
Consolidation elimination/adjustments at 1 July 2019
Entry 1a
Dr Accumulated depreciation-PPE 90,000
Cr Property, plant and equipment 90,000
(Write back accumulated depreciation of revalued P.P.E. on acquisition)
Entry 1b
Dr Property, plant and equipment 60,000
Cr Revaluation surplus 42,000
Cr Deferred tax liability 18,000
(Increase value of “undervalued” P.P.E. on acquisition)
Entry 2
Dr Revaluation surplus 0.00
Dr Deferred Tax Asset 0.00
Cr Provision for legal claim 0.0
(To revaluate contingent liability)
Entry 3
Dr Share capital 600,000
Dr Revaluation surplus 60,000
Dr Retained earnings –opening 250,000
Dr Goodwill 190,000
Cr Investment in Sunnybank Hills Ltd 1100,000
(Elimination of adjusted pre-acquisition equity accounts)
- Adjustment/elimination journal entries for consolidations as at 30 June 2012
Consolidation journals at the date of acquisition as at 30 June 2020 Year 1
Entry 1a
Dr Accumulated depreciation-PPE 90,000
Cr Property, plant and equipment 90,000
(Write back accumulated depreciation of revalued P.P.E. on acquisition)
Entry 1b
Dr Property, plant and equipment 60,000
Cr Revaluation surplus 42,000
Cr Deferred tax liability 18,000
(Increase value of “undervalued” P.P.E. on acquisition)
Entry 2a
Dr Provision for legal claim 0.0
Cr Income tax expense 0.00
Cr Legal claim expense 0.00
(To record the legal claim was settled and paid off)
Entry 3
Dr Share capital 600,000
Dr Revaluation surplus 60,000
Dr Retained earnings –opening 250,000
Dr Goodwill 190,000
Cr Investment in Sunnybank Hills Ltd 1100,000
(Elimination of adjusted pre-acquisition equity accounts)
Entry 4a
Dr Depreciation expense -PPE 12,500
Cr Accumulated depreciation 12,500
(To recognise additional depreciation expenses)
Entry 4b
Dr Differed Tax Liability 3,750
Cr Income tax expense 3,750
(To recognise tax affect for additional depreciation)
- Adjustment/elimination journal entries for consolidation as at 30 June 2025
Entry 1a
Dr Accumulated depreciation-PPE 90,000
Cr Property, plant and equipment 90,000
(Write back accumulated depreciation of revalued P.P.E. on acquisition)
Entry 1b
Dr Property, plant and equipment 60,000
Cr Revaluation surplus 42,000
Cr Deferred tax liability 18,000
(Increase value of “undervalued” P.P.E. on acquisition)
Entry 2
Dr Share capital 600,000
Dr Revaluation surplus 60,000
Dr Retained earnings –opening 250,000
Dr Goodwill 190,000
Cr Investment in Sunnybank Hills Ltd 1100,000
(Elimination of adjusted pre-acquisition equity accounts)
To adjust revalued assets
Entry 3a
Dr Depreciation – Plant 12,500
Dr Retained earnings (opening) 62,500
Cr Accumulated Depreciation – Plant 75,000
(Additional depreciation on revalued asset)
Entry 3b
Dr Deferred Tax Liability 22,500
Cr Retained earnings 18,750
Cr Income tax expense 3,750
(Tax effect on additional depreciation on revalued asset)
Intragroup sales of plant in 2022
Entry 4a
Dr Retained earnings 7,200
Dr Equipment 16,800
Cr Accumulated depreciation-Equipment 24,000
(To eliminate of over depreciation charge)
Entry 4b
Dr Deferred tax asset 2,160
Cr Retained earnings 2,160
(To reverse tax effect of the excess depreciation charge)
Entry 4c
Dr Accumulated depreciation – Equipment 2,800
Cr Retained earnings 1,600
Cr Depreciation expense 1,200
(Depreciation adjustment for the equipment)
Entry 4d
Dr Income tax expense 480
Dr Retained earnings 360
Cr Deferred tax asset 840
(Tax effect on the depreciation adjustment for the equipment)
Intragroup sales of plant in 2023
Entry 5a
Dr Plant 5,760
Cr Retained earnings 5,760
(To reverse intragroup sales of the plant)
Entry 5b
Dr Income tax expense 1,728
Cr Deferred tax liability 1,728
(Tax effect on intragroup sales of the plant in 2023)
Entry 5c
Dr Retained earnings 120
Dr Depreciation expense 1,440
Cr Accumulated depreciation – Plant 1,560
(To eliminate depreciation of the plant)
Entry 5d
Dr Deferred Tax Liability 468
Cr Retained earnings 36
Cr Income tax expense 432
(Tax effect on depreciation on the plant)
Intragroup sales of inventory in 2024
Entry 6a
Dr Sales 28,600
Cr Cost of goods sold 28,600
(To eliminate of intragroup sales of inventory)
Entry 6b
Dr Cost of goods sold 650
Cr Inventory 650
(To eliminate unrealised profit closing inventory)
Entry 6c
Dr Deferred tax asset 195
Cr Income tax expense 195
(Tax effect on elimination of unrealised profit in closing inventory)
- Adjustment/elimination journal entries for consolidation as at 30 June 2028
Entry 1a
Dr Accumulated depreciation-PPE 90,000
Cr Property, plant and equipment 90,000
(Write back accumulated depreciation of revalued P.P.E. on acquisition)
Entry 1b
Dr Property, plant and equipment 60,000
Cr Revaluation surplus 42,000
Cr Deferred tax liability 18,000
(Increase value of “undervalued” P.P.E. on acquisition)
Entry 2
Dr Share capital 600,000
Dr Revaluation surplus 95,000
Dr Retained earnings –opening 120,000
Dr Goodwill 190,000
Cr Investment in Sunnybank Hills Ltd 1100,000
(Elimination of adjusted pre-acquisition equity accounts)
Entry 2a
Dr Sales 28,000
Cr Cost of goods sold 28,000
(To eliminate intra-group sales)
Entry 3a
Adjustment of the depreciation
Dr Depreciation – PPE 12,500
Dr Retained earnings 75,000
Cr Accumulated depreciation – PPE 87,500
(Additional depreciation on revalued asset)
Entry 3b
Dr Deferred Tax Liability 26,250
Cr Retained earnings 22,500
Cr Income tax expense 3,750
(Tax effect on depreciation on PPE)
Intragroup sale of the equipment in 2025
Entry 4a
Dr Retained earnings 7,200
Dr Equipment 16,800
Cr Accumulated depreciation –Equipment 24,000
(To eliminate the excess depreciation on the equipment)
Entry 4b
Dr Deferred tax asset 2,160
Cr Retained earnings 2,160
(Tax reverse of the excess depreciation on the equipment)
Entry 4c
Dr Accumulated depreciation –Equipment 4,000
Cr Retained earnings 2,800
Cr Depreciation expense -Equipment 1,200
(Depreciation adjustment)
Entry 4d
Dr Income tax expense 360
Dr Retained earnings 840
Cr Deferred tax asset 1,200
(Tax effect on the depreciation adjustment for the equipment)
Intragroup sales of Plant in 2026
Entry 5a
Dr Plant 5,760
Cr Retained earnings 5,760
(To reverse intragroup sale of the plant)
Entry 5b
Dr Retained earnings 1,728
Cr Deferred tax liability 1,728
(Tax effect on reversal intragroup sale of the plant)
Entry 5c
Dr Retained earrings 1,560
Dr Depreciation expense 1,440
Cr Accumulated depreciation –Plant 3,000
(To eliminate depreciation on the plant)
Entry 5d
Dr Deferred Tax Liability 26,250
Cr Retained earnings 22,500
Cr Income tax expense 3,750
(Tax effect on depreciation of the plant)
Intragroup sale of the inventory in 2027
Entry 6a
Dr Sales 28,600
Cr Cost of goods sold 28,600
(To eliminate intragroup sale of inventory)
Entry 6b
Dr Retained earnings 650
Cr Cost of goods sold 650
(Eliminate unrealised profit in opening inventory)
Entry 6c
Dr Income tax expense 195
Cr Retained earnings 195
(Tax effect on unrealised profit of inventory)
Intragroup sale of the inventory in 2028
Entry 7
Dr Sales 30,800
Cr Cost of goods sold 30,800
(To eliminate intragroup sales)
Entry 8a
Dr Management fee revenue 5,000
Cr Management fee expenses 5,000
(To eliminate management fee expenses)
Entry 8b
Dr Management fee payable 6,000
Cr Management fee receivable 6,000
(To eliminate intragroup management fee payable and receivable)
Entry 9a
Dr Dividend payable 10,000
Cr Dividend declared 10,000
(To eliminate dividend payable)
Entry 9b
Dr Dividend revenue 10,000
Cr Dividend receivable 10,000
(To eliminate dividend receivable)
Entry 10
Dr Impairment loss – Goodwill 2,000
Cr Accumulated impairment – Goodwill 2,000
(To record goodwill impairment)
Part B
According to AASB 13 Fair Value Measurement is one of the obstacle expected, fair It is well-defined as the value that would be gained to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (AASB 13 2015). Fair value provides a reasonable and unbiased estimate of the potential market price of a goods and services. Also fair value provides rational estimate figure of assets. A fair value is used in range of objectives in accounting such as asset acquisition, replacement costs and cost of close substitutes.
The fair value measurement is applicable for specific asset or liability accounts. Therefore, when we apply fair value in any accounting measurement, we must consider the characteristics of the asset or liability.
Fair value must be used in a consolidation. When a parent company and a subsidiary company amalgamate, some accounting transactions have to be eliminated in order to avoid accounting entry duplication. This accounting treatment is not a common as original cost that initially recorded in each company is used value assets in many cases. The parent company purchases an interest in a subsidiary company, and assets and liabilities in the subsidiary company are presented at fair value for each account. When the accounting records of both parent and subsidiary companies are successfully consolidated, the fair market values of the subsidiary company are utilised to generate the combined financial statements.
According to AASB 1053 Application of Tires of Australian Accounting Standards, a parent company and a subsidiary company are required to disclose information that is onerous to prepare and is often of no benefit to users. In addition, AASB 10 Consolidated Financial Statement paragraph 19 states that a parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances (AASB 10). In order to strictly comply with uniform accounting policies in a consolidation, fair value method is required to use for the uniformity of the financial statement reporting.
Reference
Australian Accounting Standards Board [AASB] 2010, AASB 10, Consolidated Financial Statement, Canberra, viewed 14 May 2018, <http://www.aasb.com.au>.
com.au.
Australian Accounting Standards Board [AASB] 2010, AASB 13 Fair Value Measurement, Canberra, viewed 14 May 2018, <http://www.aasb.com.au>.
com.au.
Australian Accounting Standards Board [AASB] 2010, AASB 1053, Application of tires, Canberra, viewed 14 May 2018, <http://www.aasb.com.au.
com.au.
Deegan, C 2016, Australian financial accounting, 8th edn, Wiley, NSW.