A Primer on Calculating Goodwill Impairment - Assignment Example

Accounting Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 30 April, 2016. Assignment 2 A. Question 1: (40 marks) Ace Ltd is a listed parent company with interests in television stations, cinemas and newspapers. On 1 January 2014, Ace Ltd acquired 40% of the voting shares of Deuce Pty Ltd, a publisher of women magazines, for $1 620 000 cash. The acquisition gave Ace Ltd. significant influence over Deuce Ltd. The recorded net assets and contingent liabilities of Deuce Ltd as at the date of acquisition were represented by the following equity items: $000 Share capital 1 000 Retained earnings 600 General reserve 200   1 800 Additional information: (a) At the date of acquisition, Deuce Ltd has created several magazine mastheads. The terms and conditions of the mastheads indicate they can be transferred to another party. The costs relating to the development of these mastheads had been written off by Deuce Ltd as expenses when incurred. Ace Ltd can reliably measure the fair value of the unrecognised mastheads at the date of acquisition at $300 000. (b) Ace Ltd has adopted an accounting policy for the Ace Ltd extended group whereby all intangible assets with a finite life are to be amortised on a straight-line basis over their useful lives. Ace Ltd expects the mastheads will provide future economic benefits for a period of 20 years. (c) During the year ended 31 December 2014 Deuce Ltd earned profit before tax of $900 000, incurred an income tax expense of $300 000 and paid a dividend of $100 000 on 30 September 2014. (d) On 1 July 2014 Deuce Ltd sold Ace Ltd a printing machine at an agreed value of $420 000. This equipment had a carrying amount of $120 000 to Deuce Ltd at the date of its transfer. The remaining useful life of the machine at the date of transfer is estimated to be 3 years. (e) Ace Ltd uses the cost method to account for its investment in Deuce Ltd in its separate financial statements as there is no quoted market price for Deuce Ltd. shares. (f) Ace Ltd has not recognised any impairment losses in relation to its investment in Deuce Ltd in its separate financial statements or its consolidated financial statements for the year ended 31 December 2014. (g) The company tax rate is 30%. Required: (i) Calculate the amount of goodwill on acquisition of Act Ltd’s interest in Deuce Ltd and related journal entry under cost method. a) Good will = consolidation transferred + amount of non-controlling assets + fair value of equity interest – net assets recognized. Goodwill = $1,620,000 (40% acquired) + $300,000 - $1,800,000 (net assets) Goodwill = $120,000 b) Journal entries; Dr. Cr. $ $ Goodwill account 120,000 Deuce Ltd. 120,000 (Creation of goodwill account) Dr. Cr. $ $ Cash account 1,620,000 Ace Ltd capital account 1,620,000 (Record of cash brought in by Ace Ltd towards Its capital contribution) (ii) Prepare the equity accounting consolidation adjusting entries required in Ace Ltd’s consolidated financial statements for the year ended 31 December 2014. Equity accounting consolidation adjusting entries $ Non-current assets: Shares (40% shares in Deuce Pty Ltd) $ 1,620,000 Income (40% 0f $100,000) $ 40,000 (iii) Estimate the carrying value of Ace Ltd’s investment in Deuce Ltd the year ended 31 December 2014. Carrying value = Cost of an asset – Accumulated amount of amortization – amount of asset impairment. Accumulated amount of amortization = $ 300,000/20 = $ 15,000 per year Amount of asset impairment = $ 0. Carrying value = $ 1,620,000 – $ 15,000 * 40% - $120 000 * 40% – 0 Carrying value = $ 1,566,000 Question 2: (35 marks) On 1 July 2013, Merlot Ltd and Malbec Ltd entered into a joint venture by investing in a jointly controlled incorporated entity – Vineyards Pty Ltd. The purpose of the joint venture was to lease a 40-hectare vineyard for a five-year period at an annual lease rental of $200 000. Neither investor was a parent entity. Merlot Ltd and Malbec Ltd contributed the following assets to the joint venture in exchange for a 50% voting equity interest in Vineyards Pty Ltd. Carrying value $                            Fair value $ Merlot Ltd – Plant ------------------                         80 000                                       100 000                                      Merlot Ltd – Cash ------------------                         100 000                                      100 000                                      The remaining useful life of the plant contributed by Merlot Ltd is five years. The joint venture agreement stated that a manager will be appointed with the responsibility for growing, harvesting and marketing the grapes. The manager is also responsible for ensuring all plant of the joint venture is maintained to a satisfactory service level. Additional information: a) During the year ended 30 June 2014 each of the investors made an additional cash contribution of $50 000 in exchange for an additional equal voting equity interest in Vineyards Pty Ltd. b) The harvest amounted to 300 tonnes of grapes, which the manager sold for $1 200 per tonne. c) Vineyards Pty Ltd. has adopted an accounting policy whereby plant is depreciated on a straight-line basis over its useful life. Accordingly the plant will be depreciated over five years. The following financial statements were prepared for Vineyards Pty Ltd. For the year ended 30 June 2014. Balance sheet as at 30 June 2014 $ Assets: Cash and cash equivalents Property, plant and equipment Sundry assets/account receivable Total assets Liabilities: Trade and other payables Current tax payable Total liabilities Net assets Equity: Share capital Retained earnings Total equity    80 000 200 000 100 000 380 000   5 000 25 000 30 000 350 000   300 000 50 000 350 000   Income statement for the year ended 30 June 2014 $ Sales revenue Less Expense Profit from continuing activities before tax Less Income tax expense Profit for the year 360 000 285 000 75 000 25 000 50 000   Required: i) Prepare the journal entries on 1 July 2013 in the books of Merlot Ltd and Malbec Ltd to record their investment in the jointly controlled entity – Vineyards Pty Ltd. Journal entries; Dr. Cr. $ $ I) Plant account 100,000 Merlot Ltd. Capital account 100,000 (Being plant brought in by Merlot Ltd towards Its capital contribution) II) Cash account 100,000 Malbec Ltd. Capital account 100,000 (Record of cash brought in by Malbec Ltd towards Its capital contribution) ii) Prepare the adjusting journal entries required under equity method of accounting for the year ended 30 June 2014 in the financial statements of Merlot Ltd and Malbec Ltd in relation to their investment in the jointly controlled entity – Vineyards Pty Ltd. Adjusting Journal entries; Dr. Cr. $ $ I) Cash account 50,000 Merlot Ltd. Capital account 50,000 (Record of cash brought in by Merlot Ltd towards Its capital contribution) II) Cash account 50,000 Malbec Ltd. Capital account 50,000 (Record of cash brought in by Malbec Ltd towards Its capital contribution) III) Profit & Loss account 25,000 Merlot Ltd. Capital account 25,000 (Record of interest of capital payable to Merlot Ltd) IV) Profit & Loss account 25,000 Malbec Ltd. Capital account 25,000 (Record of interest of capital payable to Malbec Ltd) iii) Explain how the journal entries required under (i) & (ii) could change if the joint venture agreement stated that due to the technical nature of the plant contributed by Merlot Ltd, it will be responsible for ensuring the plant is maintained to a satisfactory service level. There would be revaluation of assets and liabilities and the treatment of gains and losses arising from the respective revaluations (Feldman, 2004). This will ascertain new partners contribution towards capital to be shown in books and new profit and loss sharing ratios.   Reference Feldman, Stanley. (2004). A Primer on Calculating Goodwill Impairment: Valuation issues raised by Financial Accounting Statement 412. Axiom Publishers. New York. Read More