ACCT6005 Solution to Practice Exercise

Page 1 of 9
ACCT6005 Solution to Practice Exercise for Assessment 2
This is the solution to Practice Exercise based on Tutorial Question 11.7. Solutions for Chapter
11 Practice Questions 11.9, 11.10 and 11.11 are on Blackboard, in Module 2.
Practice Exercise based on Tutorial Question 11.7
On 1 July 2018, Fluffy Ltd acquired all the issued shares of Glider Ltd. Fluffy Ltd paid $30 000 in
cash and 20 000 shares in Fluffy Ltd valued at $3 per share. At this date, the equity of Glider Ltd
consisted of $66 000 share capital and $6000 retained earnings.
At 1 July 2018, all the identifiable assets and liabilities of Glider Ltd were recorded at amounts
equal to their fair values except for:
The plant was considered to have a further 5-year life. The patents were sold for $120 000 to an
external entity on 18 August 2018. The inventory was all sold by 30 June 2019.
Additional information
(a) Fluffy Ltd sells certain raw materials to Glider Ltd to be used in its manufacturing process.
At 1 July 2019, Glider Ltd held inventory sold to it by Fluffy Ltd in the previous year at a
profit of $600. During the 2019–20 year, Fluffy Ltd sold inventory to Glider Ltd for $21 000.
None of this was on hand at 30 June 2020.
(b) Glider Ltd also sells items of inventory to Fluffy Ltd. During the 2019–20 year, Glider Ltd
sold goods to Fluffy Ltd for $4500. At 30 June 2020, inventory which had been sold to Fluffy
Ltd at a profit of $300 was still on hand in Fluffy Ltd’s inventory.
(c) On 1 July 2019, Glider Ltd sold an item of plant to Fluffy Ltd for $15 000. This plant had a
carrying amount in the records of Glider Ltd of $14 000 at time of sale. This type of plant is
depreciated at 10% p.a. on cost.
(d) On 1 January 2019, Fluffy Ltd sold an item of inventory to Glider Ltd for $18 000. The
inventory had cost Fluffy Ltd $16 000. This item was classified by Glider Ltd as plant. Plant
of this type is depreciated by Glider Ltd at 20% p.a.
Page 2 of 9
(e) On 1 March 2020, Glider Ltd sold an item of plant to Fluffy Ltd. Whereas Glider Ltd
classified this as plant, Fluffy Ltd classified it as inventory. The sales price was $9000 which
included a profit to Glider Ltd of $1500. Fluffy Ltd sold this to another entity on 31 March
for $9900.
(f) The tax rate is 30%.
At 30 June 2020, the financial information for the two companies was provided in the
consolidation worksheet template on next page.
Required
a) Prepare a consolidation worksheet for the preparation of the consolidated financial
statements of Fluffy Ltd at 30 June 2020.
b) Prepare Consolidated Statement of Changes in Equity, Consolidated Statement of
Financial Performance and Consolidated Statement of Financial Position for Fluffy Ltd
Group at 30 June 2020.
Answer
a) Prepare a consolidation worksheet for the preparation of the consolidated financial
statements of Fluffy Ltd at 30 June 2020.
Acquisition Analysis
At 1 July 2018:
Net fair value of identifiable assets and liabilities of Glider Ltd
= $66 000 + $6 000 (equity)
+ $4 500 x (1 – 30%) (inventory)
+ $15 000 x (1 – 30%) (patents)
+ $3 000 x (1 – 30%) (plant)

=
=
=
$72 000 + $3 150 + $10 500 + $2 100 = $87 750
$30 000 + $3 x 20 000 = $90 000
$90 000 – $87 750 = $2 250
Consideration transferred
Goodwill

Page 3 of 9
Business combination valuation entries:

30/6 Accumulated depreciation Dr
2020 Plant Cr
Deferred tax liability Cr
Business combination valuation reserve Cr
Depreciation expense Dr
Retained earnings (1/7/19) Dr
Accumulated depreciation
(1/5 x $3000 p.a. for 2 years)
Deferred tax liability
Cr
Dr
Income tax expense Cr
Retained earnings (1/7/19) Cr

30 000
27 000
900
2 100
600
600
1 200
360
180
180

Goodwill
Business combination valuation reserve
Dr

2 250
Cr 2 250
Pre-acquisition entries:
At 1/7/18:

Retained earnings (1/7/18) Dr
Share capital Dr
Business combination valuation reserve * Dr
Shares in Glider Ltd
(* $3 150 + $10 500 + $2 100 + $2 250)
At 30/6/20:
Retained earnings (1/7/19)*
Cr
Dr
Share capital Dr
Business combination valuation reserve ** Dr
Shares in Glider Ltd Cr

6 000
66 000
18 000
90 000
19 650
66 000
4 350
90 000
(* = $6000 + $3 150 + $10 500; ** = $2 100 + $2 250)
Page 4 of 9
Sales and profit in closing inventory: (a) & (b)
Sales revenue Dr 21 000
Cost of sales Cr 21 000
Sales revenue Dr 4 500
Cost of sales Cr 4 200
Inventory Cr 300
Note: Under Periodic the above entry would be:
Sales revenue Dr 4 500
Purchases Cr 4500
Closing inventory Dr 300
Inventory Cr 300
Deferred tax asset (30% x $300) Dr 90
Income tax expense Cr 90
Profit in opening inventory of Glider Ltd: (a)
Retained earnings (1/7/19) Dr 420
Income tax expense (30% x 600) Dr 180
Cost of sales Cr 600
Note: Under Periodic the above entry would be:
Retained earnings (1/7/19) Dr 420
Income tax expense Dr 180
Opening inventory Cr 600
Sale of plant (current period): (c)
Proceeds on sale of plant Dr 15 000
Carrying amount of plant sold Cr 14 000
Plant Cr 1 000
Deferred tax asset (30% x $1 000) Dr 300
Income tax expense Cr 300
Page 5 of 9

Accumulated depreciation – plant Dr 100
Depreciation expense
(10% x $1 000)
Income tax expense
Cr 30
Dr
Deferred tax asset (30% x $100) Cr
Sale of inventory classified as plant (prior period): (d)
Retained earnings (1/7/19) Dr 1 400
Deferred tax asset Dr 600
Plant Cr
Accumulated depreciation Dr 600
Depreciation expense Cr
Retained earnings (1/7/19) Cr
(20% x $2 000 p.a. for 1.5 years, 1/1/2019 – 30/6/2020)
Income tax expense (30% x $400) Dr 120
Retained earnings (1/7/19) Dr 60
Deferred tax asset (30% x $600) Cr
Sale of plant classified as inventory (current period): (e)
Proceeds on sale of plant Dr 9 000
Carrying amount of plant sold * Cr
Cost of sales (closing inventory)
(* = $9 000 – $1 500)
Cr

100
30
2 000
400
200
180
7 500
1 500

Page 6 of 9
Consolidation Worksheet at 30 June 2020

Fluffy
Ltd
Glider
Ltd
Adjustments Group
Dr Cr
Sales revenue 64 500 78 000 3
3
21 000
4 500
117 000
Cost of sales 30 900 46 350 21 000
4 200
600
1 500
3 3 4 7 49 950
Gross profit 33 600 31 650 67 050
Trading expenses 4 800 9 000 13 800
Office expenses 7 950 4 050 12 000
Depreciation 1 800 3 900 1 600 100
400
5 6 5 800
Total expenses 14 550 16 950 31 600
Profit from trading 19 050 14 700 35 450
Proceeds from sale
of plant
9 000 15 000 5
7
15 000
9 000
0
Carrying amount of
plant sold
7 500 14 000 14 000
7 500
5 7 0
Gain/(loss) on sale of
machinery
1 500 1 000 0
Profit before tax 20 550 15 700 35 450
Income tax expense 11 100 7 300 4
5 6
180
30
120
180
90
300
1 3 5 18 160
Profit 9 450 8 400 17 290
Retained earnings
(1/7/19)
48 000 31 500 1
2 4 6 6
600
19 650
420
1 400
60
180
200
1 6 57 750
Retained earnings
(30/6/20)
57 450 39 900 75 040
Share capital 96 000 66 000 2 66 000 96 000
BCVR 2 4 350 2 100
2 250
1 1 0
Total equity 153 450 105 900 171 040

Page 7 of 9

Liabilities
Current liabilities 21 100 10 500 31 600
Deferred tax liability 11 000 15 000 1 360 900 1 26 540
Total liabilities 32 100 25 500 58 140
Total equity and
liabilities
185 550 131 400 229 180
Fluffy
Ltd
Glider
Ltd
Adjustments Group
Dr Cr
Plant 57 000 107 250 27 000
1 000
2 000
1 5 6 134 250
Accumulated
depreciation
(18 300) (33 450) 1
5 6
30 000
100
600
1 200 1 (22 250)
Intangibles 12 000 11 100 23 100
Shares in Glider Ltd 90 000 90 000 2 0
Deferred tax asset 8 100 9 450 3
5 6
90
300
600
30
180
5 6 18 330
Inventory 28 500 24 600 300 3 52 800
Receivables 8 250 12 450 20 700
Goodwill 0 0 1 2 250 2 250
Total assets 185 550 131 400 177 210 177 210 229 180

Remember: COGS = Opening inventory + purchases – Closing inventory
Page 8 of 9
b) Prepare Consolidated Statement of Changes in Equity, Consolidated Statement of
Financial Performance and Consolidated Statement of Financial Position for Fluffy Ltd
Group at 30 June 2020.
Consolidated Statement of Changes in Equity

Fluffy Ltd Group
Consolidated Statement of Changes in Equity
for the period ending 30 June 2020
$
Retained earnings (1/7/19) 57 750
Add: Profit 17 290
Retained earnings (30/6/20) $75 040

Consolidated Statement of Financial Performance

Fluffy Ltd Group
Consolidated Statement of Financial Performance
for the period ending 30 June 2020
$
Sales revenue 117 000
Less: Costs of sales (49 950)
Gross profit 67 050
Expenses
Trading expenses (13 800)
Office expenses (12 000)
Depreciation (5 800)
Total expenses (31 600)
Profit before tax 35 450
Income tax expense (18 160)
Profit $17 290

Page 9 of 9
Consolidated Statement of Financial Position

Fluffy Ltd Group
Consolidated Statement of Financial Position
as at 30 June 2020
$
Assets
Current Assets
Inventories 52 800
Receivables 20 700
Total current assets 73 500
Non-current Assets
Plant 134 250
Less: Accumulated depreciation (22 250) 112 000
Intangibles 23 100
Deferred tax asset 18 330
Goodwill 2 250
Total non-current assets 155 680
Total Assets $229 180
Liabilities
Current Liabilities
Current liabilities 31 600
Total current liabilities 31 600
Non-current Liabilities
Deferred tax liability 26 540
Total non-current liabilities 26 540
Total Liabilities 58 140
Equity
Share capital 96 000
Retained earnings (30/6/20) 75 040
Total Equity 171 040
Total Liabilities and Equity $229 180

The post ACCT6005 Solution to Practice Exercise appeared first on My Assignment Online.