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ACC304 Advanced Financial Accounting Assignment
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Assignment Task
Part A
Grace Ltd acquired a 100% interest in Kelly Ltd on 1 March 2021. Consideration consisted of $600,000 in cash and 100,000 shares with a fair value price of $2 per share. At that date, Kelly Ltd.’s equity consisted of a share capital of $100,000, a general reserve of $60,000, and retained earnings of $250,000.
On the date of the acquisition, all assets and liabilities were equal to fair value except for the following:
(a) Kelly Ltd had inventories recorded for $900,000 which had a fair value of $1,200,000. These inventories were sold to external parties by 30 June 2022 for $658,000.
(b) Kelly Ltd’s plant had a fair value of $700,000. This asset has a remaining life of 10 years.
Kelly’s balance sheet disclosed the following balances on acquisition date:
Plant (at cost) $900,000
Accumulated depreciation $300,000
Additional information:
- Kelly Ltd has an existing goodwill record of $1,000 on the acquisition date.
- The corporate tax rate is 30%.
The following intra-company transactions have occurred since the acquisition date:
a) On 1 May 2021, Grace Ltd sold inventory to Kelly Ltd for $350,000, recording a before-tax profit of $150,000. By 30 June 2021, a stock take recorded 100% of this inventory still on hand for Kelly Ltd. However, by 30 June 2022, all inventory was sold to external parties.
b) During the year ended 30 June 2022, Kelly Ltd declared a final dividend of $95,000. This was paid on 30 November 2022.
c) On 30 April 2022, Kelly Ltd purchased goods for $90,000 from Grace Ltd. This inventory had originally cost Grace Ltd $70,000. As at 30 June 2022, 25% of inventory was still on hand.
d) Kelly Ltd rents a warehouse from Grace Ltd. The rental contract commenced on 1 October 2021 with a monthly rent of $25,000. The rent is paid in arrears and the June 2022 quarter was not paid until 31 July 2022. Both companies record accruals for outstanding rent at year-end.
Required:
Excel document – separate sheet for parts a) - c):
a) Prepare consolidated worksheet entries for the year ending 30 June 2022. Include dates, narrations, and a reference number per entry.
b) Prepare a consolidation worksheet for the year ending 30 June 2022. Please enter each entry as a separate amount and not as aggregated totals from part (a) above Template worksheet is attached.
c) Using the group column from your worksheet, prepare a consolidated Income statement for the Grace Ltd group as of 30 June 2022.
Round all answers to 2 decimal places.
Word document:
d) Luke is employed as a graduate accountant in the finance area of Santos Ltd. He is struggling to understand the reason why certain accounts are used in the consolidation worksheet entries for the annual report. Luke’s question is provided below:
Please explain why we are using a Deferred Tax liability (DTL) account when assets are increased to fair value. If we are increasing the value of an asset, this should be a benefit to the group, not a liability. Reference your answer using relevant accounting standards.
| Grace Ltd ($) | Kelly Ltd ($) | Dr ($) | Cr ($) | Consolidated ($) | |
| Sales | 1,930,700 | 1,505,100 | |||
| Less Cost of Sales | 510,000 | 281,000 | |||
| Gross Profit | 1,420,700 | 1,224,100 | |||
| Other income: | |||||
| Dividend Income | 95,000 | 45,000 | |||
| Rental income | 225,000 | ||||
| Total income: | 320,000 | 45,000 | |||
| Operating expenses: | |||||
| Rent expenses | 37,000 | 225,000 | |||
| Depreciation Expenses | 62,000 | 40,000 | |||
| Other general expenses | 40,000 | 10,000 | |||
| Total expenses | 139,000 | 275,000 | |||
| Profit before tax | 1,601,700 | 994,100 | |||
| Less Income Tax Expenses | 480,510 | 298,230 | |||
| Profit after tax | 1,121,190 | 695,870 | |||
| Retained earnings (1 July 2021) | 124,000 | 250,000 | |||
| Less Dividends declared | 70,000 | 95,000 | |||
| Retained earnings (30 June 2022 | 1,175,190 | 850,870 | |||
| General reserve | 36,000 | 60,000 | |||
| Share Capital | 400,000 | 100,000 | |||
| BCVR | - | - | |||
| Transfer from BCVR | - | - | |||
| Total Shareholders’ equity | 1,611,190 | 1,010,870 | |||
| Grace Ltd ($) | Kelly Ltd ($) | Dr ($ | Cr ($) | Consolidated ($) | |
| Liabilities | |||||
| Deferred tax liabilities | - | - | |||
| Trade Payables | 80,000 | 520,850 | |||
| Dividend payable | 80,000 | 95,000 | |||
| Bank Overdraft | 677,310 | 1,192,720 | |||
| Rent Payable | 75,000 | ||||
| Total liabilities | 837,310 | 1,883,570 | |||
| Total Shareholders’ Equity and Liabilities | 2,448,500 | 2,894,440 | |||
| Assets | |||||
| Land, at cost | 387,000 | 415,000 | |||
| Plant, at cost | 370,000 | 900,000 | |||
| Less Accumulated Depreciation | (120,000) | (360,000) | |||
| Investment in Kelly Ltd | 800,000 | - | |||
| Goodwill | - | 1,000 | |||
| Dividend receivable | 95,000 | ||||
| Deferred tax assets | - | 845,440 | |||
| Rent receivable | 75,000 | - | |||
| Inventories | 726,500 | 840,000 | |||
| Trade Receivables | 95,000 | 93,000 | |||
| Cash and cash equivalent | 20,000 | 160,000 | |||
| Total Assets | 2,448,500 | 2,894,440 |
Part B
Assignment instructions:
Prepare a video presentation and a script (Word document only) to address each of the following questions, in relation to Part A Case study. You will be assessed on your technical understanding of each question and also your presentation skills. Please refer to the marking rubric which details the assessment criteria for the communication and presentation skills. Please ensure your presentation does not exceed the 8 minutes +/- 10% time limit.
Part C
Please ensure your presentation includes reference to the appropriate Australian accounting standards (AASB).
Your presentation should focus on demonstrating your technical understanding of why these entries are made rather than only discussing the numeric calculations performed. The following questions relate to Part A of this assessment:
1. Discuss the accounting treatment for any prior year intragroup transactions and why these adjustments were necessary
2. Discuss all calculations and consolidation entries required for the rental elimination entries, including any accruals and tax effects.
3. Justify and explain the reason for any consolidation entries you have made relating to intragroup sales of inventories in the current year, including tax effects. Provide a breakdown of your calculation for the adjustment to COGS expense.
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