200109: Acquisition Of a Subsidiary And Consolidation Entries - Accounting Assignment

Internal Code: MAS3183

Accounting Assignment:

Part A: The World Retailing Ltd acquires 80 percent of the shares of Mark Construction Ltd on 30 June 2019 for a consideration of $584 000. The share capital and reserves of Mark Construction Ltd at the date of acquisition are: Share capital                    $200 000 Retained earnings           $100 000 Revaluation surplus        $150 000 There are no transactions between World Retailing Ltd and Mark Construction Ltd at the date of acquisition. All assets of Mark Construction Ltd are fairly valued at the date of acquisition, except for a major plant that had a fair value $25 000 greater than its carrying amount. The cost of the plant was $125 000 and it had accumulated depreciation of $90 000. In addition, the World Retailing Ltd acquired 100 per cent of the shares of Adelaide Retailing Ltd on 1 July 2017-that is two years earlier. The cost of investment was $500 000. At that date the capital and reserves of Adelaide Retailing Ltd were: Share capital                 $255 000 Retained earnings       $205 000 At the date of acquisition, all assets of Adelaide Retailing Ltd were considered to be fairly valued. Adelaide Retailing Ltd declared and paid dividend $120 000 on 30 June 2019. World Retailing Ltd incurred the following transactions with Adelaide Retailing Ltd during financial year 2018-2019: a)  During the year World Retailing made total sales to Adelaide Retailing of $71 000, while Adelaide Retailing sold $56 000 in inventory to World Retailing. b)  The closing inventory in World Retailing includes inventory acquired from Adelaide Retailing at a cost of $45 000. This cost Adelaide Retailing $38 000 to purchase. c) The opening inventory in World Retailing as at 1 July 2018 included inventory acquired from Adelaide Retailing for $62 500 that cost Adelaide Retailing $53 750. d)  Adelaide Retailing paid $55 000 in management fees to World Retailing. e) On 1 July 2018 World Retailing sold an item of plant to Adelaide Retailing for $145 000 when its carrying amount in World Retailing’s accounts was $100 000 (initial cost $168 650, accumulated depreciation $68 650). This plant is assessed as having a remaining useful life of nine years. You were appointed as the financial accountant at World Retailing Ltd in May 2019. As you may have noticed, World Retailing Ltd acquires 80% shares of Mark Construction Ltd to extend its operation in Australia and it also has an existing wholly owned subsidiary (Adelaide Retailing Ltd) operating in Adelaide. You are requested to prepare consolidation/elimination journal entries for the economic entity for the year ending 30 June 2019. After meeting with your supervisor you gathered the following information which you might need to complete your work: f) World Retailing Group Ltd has the following accounting policies for the economic entity: (i) Revaluation adjustments on acquisition are to be made on consolidation only, not on the books of any subsidiary; (ii) The plant is depreciated using the straight-line method with no residual value. For part-years, depreciation is to be calculated on the number of months the asset is held in the relevant year. (iii) All calculated amounts are to be rounded to the nearest whole dollar. Companies in the group do not show cents in any journals, worksheets, or financial statements. e)The management team of World Retailing believes that goodwill acquired from a business combination is impaired by $5 000 in the current financial year. Previous impairment of goodwill amounted to $15 000. g) The company tax rate is currently 30%. h) Journal narrations are not requested by your supervisor. Part B: The financial statements for the year ending 30 June 2019 for the economic entity have been prepared on the basis of your journals from Part A. These statements have been presented to the Board of Directors. One of the Board members pointed out that the new business acquired by World Retailing is a construction company. Its financial statements should not be consolidated because it is involved in construction, whereas all of the other companies in the economic entity are involved in the retailing industry. The Board is also alarmed that the economic entity’s balance sheet shows a deferred tax balance when the accounts for World Retailing Ltd had no deferred tax asset or deferred tax liability. Questions: (a) Should the financial statements of newly acquired business, Mark Construction Ltd, be consolidated into the economic entity and why? (b) Why does the economic entity have a deferred tax balance?