Project 1

Question 2

On acquision date (1 Jan 20x3)

Fair value differential of Equipment 80000

Less: Deferred tax liability -16000
Total fair value differential 64000

Share capital of Xeru as as 1 Jan 20x3 1,300,000

Retained earnings of Xeru as at 1 Jan 20x3 120,000
Total book value of Xeru 1,420,000

Total fair value of identifiable net asset-

100% 1,484,000
FVINA-90% 1335600
FVINA-10% 133560

Investment paid by Pary 2,900,000

Fair value of NCI 290,000
Total consideration paid 3,190,000

Goodwill on consolidation (P&NCI) 1,706,000

Investment paid by Pary 2,900,000

Less: FVINA-90% -1335600
Goodwill on consolidation (P) 1,564,400

Fair value of NCI 290,000

Less: FVINA-10% -133560
Goodwill on consolidation (NCI) 156,440

a) Consolidation entries

Date Entries Dr Cr Note

CJE1: Elimination of investment
31/12/20x6 in Xeru
 Dr. Share capital 1,300,000

Dr. Retained earnings 120,000

Dr. Equipment 80,000

Dr. Goodwill 1,706,000

Cr. Investment in Xeru 2,900,000

Cr. Deferred Tax Liability (DTL) 16,000

Cr. Non-controlling interest
(NCI)- B/S 290,000

CJE2: Prior depreciation of

31/12/20x6 Equipment Note 1
Dr. Opening retained earnings
(ORE) 21,600

Dr. NCI(B/S) 2,400

Cr. Accumulated depreciation-
Equipment 24,000

31/12/20x6 CJE3: Tax efefct of CJE2

Dr. DTL 4,800

Cr. NCI(B/S) 480

Cr. Openings retained earnings 4,320

CJE4: Current year depreciation

31/12/20x6 of equipment

Dr. Depreciation expense 11,200

Cr. Accumulated depreciation-
Equipment 11,200

31/12/20x6 CJE5: Tax effect of CJE4

Dr. DTL 2,240

Cr. Income tax expense 2,240

 CJE6: Elimination intra-group
31/12/20x6 loan

Dr. Payable to Xeru 200,000

Cr. Receivable from Pary 200,000

CJE7: Elimination of dividend

31/12/20x6 declared

Dr. Dividend income ([P/L) 162,000

Dr. NCI (B/S) 18,000

Cr. Dividend declared (SCE) 180,000

CJE8: NCI allocation change in

31/12/20x6 retained earnings Note 2

Dr. Openings retained earnings 34,000

Cr. NCI(B/S) 34,000

CJE9: Elimination of transfer of

31/12/20x6 fixed asset Note 3

Dr. Gain on sale 467,200

Cr. Accumulated depreciation-
Fixed asset 307,200

Cr. Fixed asset 160,000

31/12/20x6 CJE10: Tax effect of CJE9

20%x
467,200(gain on
Dr. Deferred Tax Asset(DTA) 93,440 sale)

Cr. Income Tax expense (P/L) 93,440

CJE11: Adjustment for excess

31/12/20x6 depreciation Note 3
Dr. Accumulated depreciation-
Equipment 155,733
 Cr. Depreciation Expense (P/L) 155,733

31/12/20x6 CJE12: Tax effect of CJE11

Dr. Tax expense 31,147

Cr. DTA 31,147

CJE13: Elimination of
31/12/20x6 downstream sale Note 4

Dr. Sale 200,000

Dr. Inventory 3,600

Cr. COGS 203,600

31/12/20x6 CJE14: Tax effect of CJE13 Note 4

Dr. Tax expense 720

Cr. DTL

31/12/20x6 CJE15: NCI share of profit of Xeru Note 5

Dr. NCI(P/L) 118,187

Cr. NCI (B/S) 118,187

Note 1
FV-BV of equipment depreciation=80,000/10) 8000 per year
Prior year depre 3 years
As at 1/1/20x6
Carrying amt of FV-BV 56000
Remaining useful life- 5 years
^New depreciation rate 11200

Note 2
Retained earnings, 1 Jan 20x6 460,000
Less: Retained earnings on acquisition date -120,000
Increase in retained earnings 340,000
NCI allocation-10% 34000

Note 3
Sales 800,000
Less: Asset carrying amount(Cost-Acc depre) -332800
Gain 467,200

Original depreciation = CA/Remaining useful

life =332,800/3
332,800/3 110933

Entity's depreciation(800,000/3) 266667

Excess depreciation 155733

Note 4
P Xeru Dr Cr Group

Sales 200,000 xxx 200,000 xxx

COGS -206,000 -80000 -203,600 -82400
Profit/Loss -6,000

Inventory 0 120000 3600 123600

Unrealized loss (URP) 3600

In 20x4 -> Loss, paying lesser tax, but, the not all loss was
fully realized, so the tax expense must be higher
As such, recognize additional tax expense & DTL
(205*3,600)

Note 5
Net profit of Xeru-100% as reported 1,440,000 Given

Less: Depreciation of FV-BV of equipment (11,200) CJE4

Add: Income tax expense 2,240 CJE5

Less: Gain on sale (467,200)

Add: Income tax expense 93,440 CJE10

Add: Depreciation expense 155,733 CJE11

Less: Tax expense (31,147) CJE12

Adjusted net profit-100% of S 1,181,867
NCI- 10% 118186.667

b) Analytical check
- NCI (B/S)
NCI as per listing
method:
290,000 CJE1
-2,400 CJE2
480 CJE3
-18,000 CJE7
34,000 CJE8
118,187 CJE15
422,267 NCI as per listing method

(b) Analytical check of NCI

Note

Share capital of Xeru as at 31 Dec 20x6 1,300,000

Retained earnings of Xeru as at 31 Dec 20x6 1,720,000

Book value-100% 3,020,000

1
Add: Unamortized fair value differential of
equipment (after tax) 35,840

Less: Unrealized profit of gain on sale (311,467) 2

Add: Tax effect of gain on sale 62,293

Total unamortized fair value differential (213,333)

Total FVINA-100% 2,806,667

 FVINA-10% 280,667

Add: Unimpaired goodwill 141,600

NCI as at 31/12/20x6 422,267

Note 1:
Equipment (80,000-3*8000-11200) 44800
80,000-24,000-11,200
Carrying amount as at 31/12/20x6(80000-24000-11200) 44800
Unamortized (after tax) 0.8 35840

Note 2
Unrealized profit from upstream sale of fixed asset
Gain*Remaining useful life of fixed asset transferred/Total useful life of fixed asset
transferred
Since gain will realize subsequently from excess depreciation

- Retained earnings
Group retained earnings- Analytical check Note
Pary's retained earnings as at 31 Dec 20x6-
100% as reported $ 8,180,000.00
Add: Unrealized downstream loss (after tax) $ 2,880.00
Total Pary's RE $ 8,182,880.00

Retained earnings of S at 31-12-20x6- 100%

as reported $ 1,720,000.00
Less: Retained earnings of S at acquisition
date $ (120,000.00)
Gain on sale-Acc
depre (467,200-
Less: Unrealized gain on sale(after tax) $ (249,173.60) 155733)(1-0.2)
Less: Cumulative after tax past depreciation
of fair value differential of equipment $ (28,160.00) 0.8*(24000+11200)
Adjusted change in retained earnings $ 1,322,666.40
90% attributable to Pary $ 1,190,399.76
Total group retained earnings as at 31 Dec
20x6 $ 9,373,279.76