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Consolidation Sforzando Ltd Acquired Issued Fortepiano
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Assignment Task
Part
A - Consolidation Question
| On 01/07/2020, Forte Ltd acquired 100% of the issued shares of Piano Ltd for: | $2,252,000 |
| Share capital | $1,013,400 |
| General Reserve | $253,400 |
| Retained earnings | $189,960 |
| $1,456,760 |
The accounts of the two companies appear as at 30/06/2023 are as follows:
|
Sales |
3,603,500 |
1,815,600 |
|
less Cost of Goods Sold |
2,162,100 |
1,180,100 |
|
Depreciation expense |
180,100 |
90,700 |
|
Interest expense |
144,100 |
21,905 |
|
Other expenses |
317,500 |
90,695 |
|
Other Income |
|
|
|
plus Interest revenue |
32,800 |
0 |
|
Dividend revenue |
197,000 |
0 |
|
less Income tax expense |
308,800 |
129,600 |
|
Net Profit after Tax |
720,700 |
302,600 |
|
Retained earnings (01/07/2022) |
1,080,900 |
316,600 |
|
Available for appropriation |
1,801,600 |
619,200 |
|
Interim dividend paid |
168,900 |
84,400 |
|
Final dividend declared |
281,500 |
112,600 |
|
Retained earnings (30/06/2023) |
1,351,200 |
422,200 |
|
Loan payable (due 30/06/2025) |
0 |
337,000 |
|
Dividend payable |
281,500 |
112,600 |
|
Deferred Tax Liability |
337,800 |
28,100 |
|
Other liabilities |
506,700 |
85,300 |
|
Total Liabilities |
1,126,000 |
563,000 |
|
Total Liabilities & Owner's Equity |
5,630,000 |
2,252,000 |
Additional information:
- At date of acquisition, all identifiable net assets of Piano Ltd were recorded at fair value, with the exception of a item of Equipment in the books of Piano Ltd. The item of Equipment had cost of $495,440, and an accumulated depreciation of $99,110. The management of Forte Ltd believed the item of Equipment had a fair value of $515,229 and a remaining useful life of 5 years.
- The directors apply the impairment test for goodwill annually. As at 30/06/2023, the cumulative goodwill impairment write-downs for prior years totalled $625,000. During the current year, the goodwill has further been impaired by another $9,375.
- An item of Equipment owned by Piano Ltd was sold to Forte Ltd on 01/01/2021 for $296,167. The cost of the Equipment was $270,240 and its accumulated depreciation was $54,060 at the time of trasnfer. Forte Ltd estimated this item had an annual depreciation rate of 20% with no residual value.
- The opening inventory of Forte Ltd includes unrealised profit of $236,000 on inventory transferred from Piano Ltd during the prior financial year. All of this inventory was sold by Forte Ltd to parties external to the Group by 30/06/2023.
- During the financial year ending on 30/06/2023, Forte Ltd purchased inventory from Piano Ltd for $1,024,000. This inventory had previously cost Piano Ltd $409,000. By 30/06/2023, 65% of this inventory was sold to outsiders by Forte Ltd.
- Piano Ltd borrowed a loan from Forte Ltd amounting to $337,000 at the start of the current period. On 30/06/2023, Piano Ltd paid the annual interest for the intra group loan at a rate of 6.50%.
- During the current year, Forte Ltd paid Arina Ltd, an external party for management fees expense amouning to $2,000
B - Discussion Question on Control
Burwood Ltd owns 48% of the ordinary share capital of Elgar Ltd, providing it with the right to receive variable dividends. The other investors in Elgar Ltd comprise a number of small shareholders, none of whom holds more than 2% of votes and who have not entered collective arrangements. Burwood Ltd.’s management always attend general meetings of Elgar Ltd but representation of other members is historically less than 20% of shareholders.
Required:
IFRS 10 / AASB 10 Consolidated Financial Statements focuses on control as the key concept underlying the parent/subsidiary relationship and explains the circumstances in which an investor controls an investee according to IFRS 10 / AASB 10. Now, consider the case of Elgar Ltd, explain whether Burwood Ltd should consolidate Elgar Ltd and justify your answers in accordance with IFRS 10 / AASB 10.
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