On 1 July 20X2 acquired 100% of the issued voting shares of for a consideration of $254 000. At the date of acquisition equity balances were as follows:
Share Capital Retained Earnings Total
50,000 250,000
All of identifiable assets and assumed liabilities were recorded at fair value except an item of plant whose fair value was $10 000 greater than its carrying value. The remaining useful life of the plant was 5 years. An extract from the respective entities¡¯ statements of financial position disclose the following non-current asset balances on 1 July 20X2:
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Property, Plant and Equipment (cost) Acc. Depreciation
Carrying amount (net)
Useful life (total)
Additional information
The company tax rate is 30%.
210,000 (105,000) 105,000 10 yrs
(19,800) 33,000 8 yrs
As part of finalising the consolidated financial statements for the ended 30 June 20X3 you have been asked to analyse the group¡¯s financial position. Your assistant accountant has prepared the consolidation worksheet, entering the consolidation adjustments to (a) eliminate the pre-acquisition equities and the investment and (b) record the plant fair value adjustment including related tax and depreciation adjustments.
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Extract from the consolidation worksheet for the Group
30 June 20X3
Comprehensive Income
Depreciation Expense Income Tax Expense
Gain on Sale
Retained Earnings Share Capital
Fair Value Adjustment
Liabilities
Deferred Tax Liability
Property, Plant, Equipment Acc. Depreciation
Deferred Tax Asset Goodwill
Investment in
Financial $
24,000 18,600
325,000 860,000
225,000 (129,000)
Statements $
5,600 5,200
50,000 200,000
42,800 (20,400)
Consolidation Adjustments 30 June 20X3
2,000 (b) (b)
50,000 200,000 7,000
10,000 19,800
19,800 2,000
3,000 (a) (a)
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Upon review of the consolidation worksheet, you notice that the consolidation debit and credit columns do not balance. You decide to check the work of your assistant accountant.
(i) Identify the error in the consolidation worksheet and describe the correct adjustment.
(ii) The financial effect of the plant fair value adjustment consolidation entries on the Group 30 June 20X3 consolidated profit is:
(a) Profit will increase by $2,000.
(b) Profit will decrease by $2,000.
(c) Profit will increase by $1,400.
(d) Profit will decrease by $1,400.
(e) None of the above.
(iii) The consolidated carrying amount of the Group property, plant and equipment at 30 June 20X3 after processing the correct consolidation journal entries
for the plant fair value adjustments is:
(a) $106,400
(b) $118,400
(c) $126,400
(d) $128,400
(e) None of the above.
Examining the worksheet you also notice that your assistant accountant did not make the consolidation adjustments for an item of plant that sold to for $15 000 on 1 July 20X2. The original cost was $10 000 and at the date of transfer the carrying amount of the plant was $5 000 with a remaining useful life of 5 years.
(iv) In the consolidation worksheet on page 16, make all necessary consolidation adjustments for the year ended 30 June 20X3 in relation to the intragroup transfer of plant on 1 July 20X2 including associated tax and depreciation adjustments.
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(v) The financial effect of the intragroup transfer of plant on the Group 30 June
20X3 consolidated profit is:
(a) Profit will decrease by $5,000.
(b) Profit will decrease by $6,600.
(c) Profit will increase by $4,400.
(d) No effect.
(e) None of the above.
(vi) Prior to recording the consolidation adjustment for the intragroup transfer of plant, the carrying amount of plant, property, equipment calculated in (iii):
(a) Is understated by $2,000.
(b) Is understated by $12,000.
(c) Is overstated by $2,000.
(d) Is overstated by $8,000.
(e) None of the above.
(vii) Using data from Part I and II the carrying amount of the Group property, plant and equipment at 30 June 20X3 is: [2 mark]
(a) $106,400
(b) $118,400
(c) $126,400
(d) $128,400
(e) None of the above.
(viii) Explain and contrast the reasons for the consolidation accounting treatment for the plant fair value adjustment in Part I with the intragroup transfer of plant in Part II.
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(iv) Evaluate whether the fair value adjustment of plant improves the decision usefulness of the consolidated financial statements.
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