BAO2203: Ezy Manufacturing - Range Pvt Ltd - Corporate Accounting Assessment Answer

Subject Code: BAO2203

Corporate Accounting Assessment Answer

EZY MANUFACTURING (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.

RANGE PTY LTD (Range)

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.

SWIFT WORKS LTD

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:

Required:

1. Prepare the general journal entries in the accounting records of Ezy Manufacturing Ltd to record the

   1. acquisition of investments in,

1. 1. 1. Range Pty Ltd on 1 July, 2015;

      2. Swift Works Ltd on 1 July, 2017;

   2. dividend received or receivable during the year ended 30^th 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

1. differences between fair value and book value of identifiable net assets acquired by Ezy on the dates of acquisition;

2. elimination of investments in subsidiaries;

3. recognition of ‘Goodwill’ or ‘Gain on Bargain Purchase’;

4. elimination of intercompany transactions and balances, such as,

1. 1. dividends paid or payable by subsidiaries;

   2. intercompany sales of inventory;

   3. unrealised profit in closing inventory;

   4. unrealised profit in opening inventory;

   5. intercompany sale of non-current asset;

   6. intercompany receivables and payables

   7. intercompany revenues and expenses

5. tax effect adjustments, where necessary.

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 29^th July 2017 and 28^th 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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