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BAO2203: Corporate Accounting - Victoria University - Swift Works Ltd - Range Pty Ltd - Ezy Manufacturing Ltd - Accounting And Finance Assessment Answer
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Subject Code: BAO2203
RANGE PTY LTD (Range)
The range is a producer of uncoated paper, industrial and consumer packaging, and pulp. It has been one of the key suppliers of raw pulp in Australia for the last twenty (20) years. Ezy, Range’s major customer, purchased all ordinary shares of Range on 1 July 2015. Ezy issued 240,000 shares as part of the consideration and paid the balance $2,800 000 in cash. The shares in Ezy were trading on 1 July 2015 for $40 per share but subsequent to the acquisition of Range, fell to $34 per share as the market reacted badly to the purchase price paid by Ezy for its interest in Range.
Ezy holds all preference shares in Range. Preference shares are non-participating, cumulative and redeemable. All assets of Range were stated at fair value in its accounts on 1 July 2015, except the following:
• An item of inventory recorded at $600,000 is obsolete and has an estimated value of only $100,000.
• Land recorded at $1,000,000 has been independently valued at $2,000,000.
• ‘Property, Plant and Equipment’ included a piece of equipment, which cost Range $750,000 on 1 July 2014 and had a useful life of 10 years.
Due to a change in technology, the equipment is now worthless. At the date of acquisition, Range had internally generated patents that were not recognised in its accounting records, having a fair value of $15 000 and a remaining useful life of five years. The range had no intention of recognising these in its accounting records. Since 1 July 2018, Range has traded extensively with Ezy. All sales made by Range to Ezy have been at cost plus 40%.
SWIFT WORKS LTD (SWL)
SWL provides Ezy with highly automated milling and other machinery, which are required in the manufacture of its paper and packaging products. There are substantial trading activities carried on between SWL and Ezy. All transactions are on normal commercial terms and conditions, which are calculated on the basis of cost plus 30%. Ezy acquired 100% of the ordinary issued capital of SWL on 1 July 2017 for $3,600,000. The additional incidental costs of acquisition amounted to $100,000. The identifiable net assets at the date of acquisition were represented by:
All identifiable net assets were considered to be stated at fair value. A director of Ezy acted as the representative of Ezy on the board of SWL. He suggested that in order to improve its efficiency, SWL should modernize its facilities. It should replace its old plant and equipment with new automated machinery. He also put forward Ezy’s proposal to finance the automation. The proposal was accepted by the other two directors of SWL. SWL borrowed $1 000 000 from Ezy on 31 December 2017, at an interest of 10% p.a., paid annually on 31 December. The loan is to be repaid as a lump sum at the end of five years.
Additional Information
• Ezy values all classes of assets on a cost basis.
• The inventory turnover period in all group companies is less than one year.
• Ezy Group impairs goodwill at 10% every year.
• Ezy Ltd. supplies paper and packaging product to other group companies for their internal use at cost plus 20%.
• During the year, group companies traded extensively with each other. As at 30 June 2019, the following stocks were, being held by group companies from purchases made from other group companies.
• Information on dividends paid and declared is as follows:
Required:
(1) Prepare the general journal entries in the accounting records of Ezy Manufacturing Ltd to record the
a) acquisition of investments in,
i) Range Pty Ltd on 1 July 2015;
ii) Swift Works Ltd on 1 July 2017; b) dividend received or receivable during the year ended 30th June 2019.
(2) Prepare acquisition analyses for Ezy Manufacturing Ltd’s investments in subsidiaries on the respective dates of acquisition. (3) Prepare the consolidation journal entries* required to prepare the consolidated worksheet of the Ezy Group as at 30 June 2019. Show all workings providing explanations and justifications with reference to appropriate accounting standards, where necessary. *The consolidation journal entries must address
a) differences between fair value and the book value of identifiable net assets acquired by Ezy on the dates of acquisition;
b) elimination of investments in subsidiaries;
c) recognition of ‘Goodwill’ or ‘Gain on Bargain Purchase’;
d) elimination of intercompany transactions and balances, such as,
i) dividends paid or payable by subsidiaries;
ii) intercompany sales of inventory;
iii) unrealised profit in closing inventory;
iv) unrealised profit in opening inventory;
v) intercompany sale of a non-current asset;
vi) intercompany receivables and payables
vii)intercompany revenues and expenses
e) tax effect adjustments, where necessary.
(4) Complete the consolidated worksheet of the Ezy Group for the year ended 30 June 2019. An incomplete proforma consolidation worksheet of the Ezy Group is available on VU Collaborate in Excel format.
PART II Topic: Impairment of Assets
From the 2018 Annual Report of Myer Ltd, refer to the NOTES to the Consolidated Financial Statements of Myer Holdings Intangible Assets (C2). Answer the following questions:
1. Why is an impairment test considered necessary?
2. What effect does impairment have on a company’s Balance Sheet and Profit and Loss Statement?
3. What are the value of Goodwill for Myer Holdings on 29th July 2017 and 28th July 2018? Provide some possible reasons for this change.
4. Which other Intangible assets have been impaired between 2017 and 2018?
5. Explain what impact does change (increasing or decreasing) the discount rate have on the calculation of impairment losses? 6. Can we reverse impairment losses for all assets? Explain.
Accounting And Finance Assessment Answer
Assignment Task: BAO2203 PART I EZY MANUFACTURING LTD (Ezy) You are the accountant of Ezy Manufacturing Ltd (Ezy), a listed public company incorporated in Australia. Ezy is a paper and packaging company that is complemented by an extensive merchant distribution system, with primary markets and manufacturing operations in the Asia Pacific region. In order to take complete control of its production facilities, Ezy implemented a policy of vertical integration and invested in two of its key suppliers. The investments of Ezy as at 30 June 2019 are illustrated below:
RANGE PTY LTD (Range)
The range is a producer of uncoated paper, industrial and consumer packaging, and pulp. It has been one of the key suppliers of raw pulp in Australia for the last twenty (20) years. Ezy, Range’s major customer, purchased all ordinary shares of Range on 1 July 2015. Ezy issued 240,000 shares as part of the consideration and paid the balance $2,800 000 in cash. The shares in Ezy were trading on 1 July 2015 for $40 per share but subsequent to the acquisition of Range, fell to $34 per share as the market reacted badly to the purchase price paid by Ezy for its interest in Range.
Ezy holds all preference shares in Range. Preference shares are non-participating, cumulative and redeemable. All assets of Range were stated at fair value in its accounts on 1 July 2015, except the following:
• An item of inventory recorded at $600,000 is obsolete and has an estimated value of only $100,000.
• Land recorded at $1,000,000 has been independently valued at $2,000,000.
• ‘Property, Plant and Equipment’ included a piece of equipment, which cost Range $750,000 on 1 July 2014 and had a useful life of 10 years.
Due to a change in technology, the equipment is now worthless. At the date of acquisition, Range had internally generated patents that were not recognised in its accounting records, having a fair value of $15 000 and a remaining useful life of five years. The range had no intention of recognising these in its accounting records. Since 1 July 2018, Range has traded extensively with Ezy. All sales made by Range to Ezy have been at cost plus 40%.
SWIFT WORKS LTD (SWL)
SWL provides Ezy with highly automated milling and other machinery, which are required in the manufacture of its paper and packaging products. There are substantial trading activities carried on between SWL and Ezy. All transactions are on normal commercial terms and conditions, which are calculated on the basis of cost plus 30%. Ezy acquired 100% of the ordinary issued capital of SWL on 1 July 2017 for $3,600,000. The additional incidental costs of acquisition amounted to $100,000. The identifiable net assets at the date of acquisition were represented by:
All identifiable net assets were considered to be stated at fair value. A director of Ezy acted as the representative of Ezy on the board of SWL. He suggested that in order to improve its efficiency, SWL should modernize its facilities. It should replace its old plant and equipment with new automated machinery. He also put forward Ezy’s proposal to finance the automation. The proposal was accepted by the other two directors of SWL. SWL borrowed $1 000 000 from Ezy on 31 December 2017, at an interest of 10% p.a., paid annually on 31 December. The loan is to be repaid as a lump sum at the end of five years.
Additional Information
• Ezy values all classes of assets on a cost basis.
• The inventory turnover period in all group companies is less than one year.
• Ezy Group impairs goodwill at 10% every year.
• Ezy Ltd. supplies paper and packaging product to other group companies for their internal use at cost plus 20%.
• During the year, group companies traded extensively with each other. As at 30 June 2019, the following stocks were, being held by group companies from purchases made from other group companies.
• Information on dividends paid and declared is as follows:
- In June 2019, the directors of Range proposed a dividend out of current year’s profits for $100,000. This dividend was duly authorised in August 2019.
- SWL paid an interim dividend of $25,000 and declared a further dividend of $75,000 out of Retained Earnings as at 1 July 2018.
Required:
(1) Prepare the general journal entries in the accounting records of Ezy Manufacturing Ltd to record the
a) acquisition of investments in,
i) Range Pty Ltd on 1 July 2015;
ii) Swift Works Ltd on 1 July 2017; b) dividend received or receivable during the year ended 30th June 2019.
(2) Prepare acquisition analyses for Ezy Manufacturing Ltd’s investments in subsidiaries on the respective dates of acquisition. (3) Prepare the consolidation journal entries* required to prepare the consolidated worksheet of the Ezy Group as at 30 June 2019. Show all workings providing explanations and justifications with reference to appropriate accounting standards, where necessary. *The consolidation journal entries must address
a) differences between fair value and the book value of identifiable net assets acquired by Ezy on the dates of acquisition;
b) elimination of investments in subsidiaries;
c) recognition of ‘Goodwill’ or ‘Gain on Bargain Purchase’;
d) elimination of intercompany transactions and balances, such as,
i) dividends paid or payable by subsidiaries;
ii) intercompany sales of inventory;
iii) unrealised profit in closing inventory;
iv) unrealised profit in opening inventory;
v) intercompany sale of a non-current asset;
vi) intercompany receivables and payables
vii)intercompany revenues and expenses
e) tax effect adjustments, where necessary.
(4) Complete the consolidated worksheet of the Ezy Group for the year ended 30 June 2019. An incomplete proforma consolidation worksheet of the Ezy Group is available on VU Collaborate in Excel format.
PART II Topic: Impairment of Assets
From the 2018 Annual Report of Myer Ltd, refer to the NOTES to the Consolidated Financial Statements of Myer Holdings Intangible Assets (C2). Answer the following questions:
1. Why is an impairment test considered necessary?
2. What effect does impairment have on a company’s Balance Sheet and Profit and Loss Statement?
3. What are the value of Goodwill for Myer Holdings on 29th July 2017 and 28th July 2018? Provide some possible reasons for this change.
4. Which other Intangible assets have been impaired between 2017 and 2018?
5. Explain what impact does change (increasing or decreasing) the discount rate have on the calculation of impairment losses? 6. Can we reverse impairment losses for all assets? Explain.
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