-In making consolidation worksheet adjustments, sometimes tax-effect entries are made. Why? Make reference to applicable accounting standards

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Financial information at 30 June 2020 of Great Ltd and its subsidiary company, Wall Ltd, is shown below.

At 1 July 2017, the date Great Ltd acquired its 80% shareholding in Wall Ltd, all the identifiable assets and liabilities of Wall Ltd were at fair value except for the following assets:

 

 

Carrying amount

 

Fair value

Plant (cost $75,000)

 

$49,000

 

$55,000

Land

 

29,000

 

37,000

The plant has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2017 was sold on 1 February 2018 for $40,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings.

Great Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2017 was $31,500.

 

 

Great Ltd

 

Wall Ltd

Sales revenue

 

$

316,000

 

 

$

220,000

 

Other revenue:

 

 

 

 

 

 

 

 

Debenture interest

 

 

5,000

 

 

 

 

Management and consulting fees

 

 

5,000

 

 

 

 

Dividend from Wall Ltd

 

 

12,000

 

 

 

 

Total revenues

 

 

338,000

 

 

 

220,000

 

Cost of sales

 

 

130,000

 

 

 

85,000

 

Manufacturing expenses

 

 

90,000

 

 

 

60,000

 

Depreciation on plant

 

 

15,000

 

 

 

15,000

 

Administrative

 

 

15,000

 

 

 

8,000

 

Financial

 

 

11,000

 

 

 

5,000

 

Other expenses

 

 

14,000

 

 

 

12,000

 

Total expenses

 

 

275,000

 

 

 

185,000

 

Profit before tax

 

 

63,000

 

 

 

35,000

 

Income tax expense

 

 

(25,000

)

 

 

(17,000

)

Profit

 

 

38,000

 

 

 

18,000

 

Retained earnings (1/7/19)

 

 

50,000

 

 

 

45,000

 

 

 

 

88,000

 

 

 

63,000

 

Transfer to general reserve

 

 

3,000

 

 

 

 

Interim dividend paid

 

 

10,000

 

 

 

10,000

 

Final dividend declared

 

 

10,000

 

 

 

5,000

 

 

 

 

23,000

 

 

 

15,000

 

Retained earnings (30/6/20)

 

 

65,000

 

 

 

48,000

 

General reserve

 

 

50,000

 

 

 

10,000

 

Other components of equity

 

 

13,000

 

 

 

10,000

 

Share capital

 

 

300,000

 

 

 

100,000

 

Debentures

 

 

200,000

 

 

 

100,000

 

Current tax liability

 

 

25,000

 

 

 

17,000

 

Dividend payable

 

 

10,000

 

 

 

5,000

 

Deferred tax liability

 

 

 

 

 

7,000

 

Other liabilities

 

 

90,000

 

 

 

12,000

 

 

 

$

753,000

 

 

$

309,000

 

Financial assets

 

$

50,000

 

 

$

60,000

 

Debentures in Wall Ltd

 

 

100,000

 

 

 

 

Shares in Wall Ltd

 

 

131,600

 

 

 

 

Plant (cost)

 

 

120,000

 

 

 

102,000

 

Accumulated depreciation – plant

 

 

(65,000

)

 

 

(55,000

)

Other depreciable assets

 

 

76,000

 

 

 

55,000

 

Accumulated depreciation

 

 

(40,000

)

 

 

(25,000

)

Inventory

 

 

90,000

 

 

 

85,000

 

Deferred tax asset

 

 

85,400

 

 

 

30,000

 

Land

 

 

201,000

 

 

 

57,000

 

Dividend receivable

 

 

4,000

 

 

 

 

 

 

$

753,000

 

 

$

309,000

 

Additional information

  1. At the acquisition date of 80% of its issued shares by Great Ltd, the equity of Wall Ltd was:

Share capital (100,000 shares)

 

$100,000

General reserve

 

3,000

Retained earnings

 

37,000

  1. Inventory on hand of Wall Ltd at 1 July 2019 included a quantity priced at $10,000 that had been sold to Wall Ltd by its parent. This inventory had cost Great Ltd $7,500. It was all sold by Wall Ltd during the year.
  2. In Great Ltd’s inventory at 30 June 2020 were various items sold to it by Wall Ltd at $5,000 above cost.
  3. During the year, intragroup sales by Wall Ltd to Great Ltd were $60,000. It was also learned that Wall Ltd had sold to Great Ltd an item from its inventory for $20,000 on 1 January 2019. Great Ltd had treated this item as an addition to its plant and machinery. The item was put into service as soon as received by Great Ltd and depreciation charged at 20% p.a. The item had been fully imported by Wall Ltd at a landed cost of $15,000.
  4. Management and consulting fees derived by Great Ltd were all from Wall Ltd and represented charges made for administration $2,200 and technical services $2,800. The latter were charged by Wall Ltd to manufacturing expenses.
  5. All debentures issued by Wall Ltd are held by Great Ltd.
  6. Other components of equity relate to movements in the fair values of the financial assets. The balance of this account at 1 July 2019 was $10,000 (Great Ltd) and $8,000 (Wall Ltd).
  7. The tax rate is 30%.

 

Q -In making consolidation worksheet adjustments, sometimes tax-effect entries are made. Why? Make reference to applicable accounting standards and the amounts used in your consolidation workings (at least two examples for each argument are to be provided). 

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