PREPARE THE ACQUISITION ANALYSIS AND JOURNAL ENTRIES TO RECORD THE BUSINESS COMBINATION IN THE RECORDS OF NORTH LTD

04 Jun PREPARE THE ACQUISITION ANALYSIS AND JOURNAL ENTRIES TO RECORD THE BUSINESS COMBINATION IN THE RECORDS OF NORTH LTD

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FACULTY OF BUSINESS

COURSE NO: ACC2115 / ACC5215

COURSE NAME: Company Accounting / Corporate Accounting

This examination carries 70% of the
total Assessment for this course

Examination:
Current Deferred/
Supplementary
x x
Internal Time Allowed:
Perusal: Ten (10) minutes
External x x Working: Two (2) hours
Examination
Date: June 2009

Special Instructions:

Communication of any
kind about any matter between students by any means whatsoever is strictly
prohibited from the time that students enter the examination room until they exit
at the completion of the examination. This includes any temporary absence from
the examination room during the examination. Any such communication will be
deemed to be cheating and treated as serious academic misconduct under
University Regulation 5.10.

This is a RESTRICTED
examination.

Students are permitted:

to use
non-programmable calculators. Students must note the make and model of the
calculator used in the space provided above. This may be checked by the
examination supervisor.

to write on the blue examination
paper during perusal.

Students are not permitted:

to write in the answer booklet
during perusal.

Please write your name and
student number on all examination papers.

This examination consists of 2
parts:

Part A–consists of
ten (10) multiple choice questions to be answered on the examination answer
sheetprovided.

Part B–consists of
four (4) practical questions to be answered in the answer booklet provided.
Question 4 should be answered on the blue examination paper in the space
provided.

Clearly number each question.

All examination
question papers must be submitted to supervisors at the end of every
examination and returned to USQ.

Any non-USQ copyright material
used herein is reproduced under the provisions of Section 200 (1) (b) of the
Copyright Amendment Act 1980.

ACC2115 / ACC5215 –
Company Accounting / Corporate Accounting Page 1

June
2009

PART A – Multiple Choice (20 marks)

Ten (10) questions worth two (2) marks
each.

Please record your answers on the
examination answer sheet provided.

Question 1

When assessing the materiality of a bad
debtor, the accountant of Gold Limited concluded that in conformity with
guidelines provided in AASB 1031 Materiality, it was not likely to be
material as it:

·
was more than 12% but less than 20% of
total equity

·
was more than 10% but did not exceed 50%
of total bad debtors for the period;

·
was less than 5% of total bad debtors
for the reporting period;

·
did not affect the cash flows for the
period

Question 2

Under
AASB 3 Business Combinations, an ‘excess’ arises when the acquirer’s interest
in the net fair value of the acquiree’s identifiable net assets and contingent
liabilities is:

1
less than the carrying amount of the net
assets acquired

2
less than the cost of the business
combination

3
greater than the cost of the business
combination

4
more than the book values of the
identifiable assets acquired.

Question 3

As
required by AASB 127 Consolidated and Separate Financial Statements,
where there are transactions between members of the group, the effects of these
transactions are:

•
adjusted partially in direct proportion
to the level of control held by the parent

•
adjusted in full on consolidation

•
adjusted in proportion to the equity
held by the minority interests in the subsidiary

•
not adjusted in the consolidation
process

Question 4

According
to AASB 127 Consolidated and Separate Financial Statements, the term ‘minority
interest’ means:

•
the total equity of the combined group

•
the equity in the parent entity other
than the portion owned by the subsidiary entity

•
the equity in the
economic entity other than that which can be attributed to the subsidiary
entity

•
that portion of the net
assets of a subsidiary attributable to equity interests that are not owned by
the parent.

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 2

June
2009

Question 5

Where
an investor sells inventory to an associate and the inventory is still on hand
at the end of the year the investors’ share of the associate’s profits is:

(1)
not affected as
unrealised profits are only considered to arise in a parent – subsidiary
relationship

(2) not
affected as the unrealised profit is in the books of the investor, not the
associate

(3) increased
by the investor’s share of the unrealised profit

(4) decreased
by the investor’s share of the unrealised profit

Question 6

For
the purposes of equity accounting for an investment in an associate, it is
presumed that the investor has significant influence over the other entity
where the investor holds:

(1) between
1% and 5% of the voting power of the investee;

(2) between
5% and 10% of the voting power of the investee.

(3) 20%
or more of the voting power of the investee;

(4) 50%
or more of the voting power of the investee;

Question 7

Bruce
Limited acquired a 30% investment in George Limited for $21 000. George Limited
declared and paid a dividend of $15 000. Bruce Limited does not prepare
consolidated financial statements. The appropriate entry for Bruce Limited to
record this dividend is:

a) DR Investment in associate $4 500
CR Dividend revenue $4 500
b) DR Cash $4 500
CR Investment in associate $4 500
c) DR Dividends received $10 500
CR Cash $10 500
d) DR Cash $10 500
CR Dividend revenue $10 500
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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 3

June
2009

Question 8

Dave
Limited acquired a 25% interest in Joe Limited for $30 000 on 1 July 2009. Dave
Limited is part of a consolidated group. For the financial year ending 30 June
2010, Joe Limited had generated a profit before tax of $45 000. Tax rate is
30%. At this date, Joe Limited took the following action:

revalued
assets up to fair value by $10 000 declared a dividend of $5 000

The
balance in the investor’s account ‘Shares in associate’, after equity
accounting has been applied, is:

–
$30 000

–
$40 875

–
$39 625

–
$41 250

Question 9

In relation to the order of priority
of payment of debts upon liquidation, which statement is correct?

–
ordinary unsecured creditors rank before
preferential unsecured creditors;

–
preferential unsecured creditors rank
before deferred creditors;

–
deferred creditors rank before ordinary
unsecured creditors;

–
deferred creditors rank before secured
creditors.

Question 10

When translating financial
statements into the presentation currency the reserve transfers are:

a
shown at the translated
amount based upon the rates that were applicable when the transferred amounts
were first recognized in equity

b
shown at the translated amount based
upon the rates at the balance date

c
shown at the translated amount based
upon the average rates for the current period

d
not required to be transferred

End of Part A

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 4
June
2009
PART B – Practical Questions (80 marks)

Four (4) practical questions – answer
all questions.

Please record your answers in the answer
booklet provided.

Question 1 (15 marks)

Orbost
Ltd, an Australian company, acquired all of the shares of Clarkesville Ltd a US
company for US$320,000 on 1 January 2009. At that date, Clarkesville Ltd’s
balance sheet was as follows:-

Clarkesville Ltd
Balance Sheet
as at 1 January 2009
Assets USD ($US)
Cash 200,000
Equipment 200,000
Liabilities
Creditors 80,000
Net
assets 320,000
Shareholders’
equity
Share
capital 200,000
Retained
earnings 120,000
Total
equity 320,000
All the assets and liabilities were recorded at fair
value.

At 31 December 2009 the financial statements of
Clarkesville Ltd were as follows:

Clarkesville Ltd

Income statement

for the year ending 31 December, 2009

USD ($US)
Sales 300,000
Expenses 160,000
Profit 140,000
Retained
earnings (1/1/2009) 120,000
Retained
earnings (31/12/09) 260,000
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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 5
June
2009
Clarkesville Ltd
Balance Sheet
as at 31 December, 2009
USD ($US)
Assets
Cash 340,000
Equipment 200,000
Accumulated
depreciation (40,000)
Liabilities
Creditors 40,000
Net
assets $460,000
Shareholders’
equity
Share
capital 200,000
Retained
earnings 260,000
Total
Equity $460,000
Additional information:
Tax is not considered in this exercise.
The
exchange rates applicable are as follows:
1 AUD ($A) is equivalent to:
1 January 2009 0.75
US
31 December 2009 0.65
US
Average for 2009 0.70
US
Sales and expenses were incurred evenly throughout
the 2009 year.

Required:

(1)
Translate the accounts
of Clarkesville Ltd into the presentation currency of Australian dollars (round
to the nearest dollar).

(2)
Verify the translation adjustment.

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 6
June
2009
Question 2 (15 marks)

North
Ltd is expanding its share of the market for security doors and has negotiated to
take over the operations of South Ltd on 1 March 2009. The balance sheets for
the two companies as at 28 February 2009 were as follows:

North
Ltd South
Ltd
Cash 17,250 9,000
Accounts receivable 18,750 26,025
Inventory 26,625 20,700
Buildings (net) 45,000 22,500
Furniture and Fittings (net) 48,750 34,500
Land 62,500 75,000
Goodwill 18,750 1,500
$237,625 $189,225
Accounts payable 42,000 32,625
Debentures 62,500 17,500
Share capital – 75 000 shares 75,000 –
– 45 000 shares – 45,000
General reserve 21,375 20,100
Retained earnings 36,750 74,000
$237,625 $189,225
The assets of South Ltd are recorded at fair value
except for:

Fair
Value
Inventory 24 000
Buildings 30 000
Furniture
& Fittings 36 000
North
Ltd is to acquire all of the assets of South Ltd except cash. North Ltd is required
to provide South Ltd with enough extra cash to allow South Ltd to repay all of
its outstanding debts plus liquidation costs of $2,500. North Ltd must also
provide two fully paid shares in North Ltd for every three shares held in South
Ltd. The fair value of shares in North Ltd is $3.50 per share.

South
Ltd’s liquidator discovered that an amount of $2,400 for Accounts Payable had
not been recorded and is outstanding at 28 February 2009.

The
debentures issued by South Ltd are to be redeemed at a 3% premium. The costs of
issuing the shares were $2,400.

Required:

Prepare
the acquisition analysis and journal entries to record the business combination
in the records of North Ltd. (Do not include narrations).

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 7

June
2009

Question 3 (30 marks)

Golden
Ltd purchased 75% of the capital of Compass Ltd for $210,000 on the 1 July
2007. The Equity of Compass Ltd at 1 July 2007 included:

Share
Capital $ 120,000
Retained
Earnings $ 65,000
General
Reserve $ 25,000
The
carrying amounts and fair values of identifiable assets and liabilities in
Compass Ltd were:

Item Carrying
Amount Fair
Value
Inventory $ 95,000 $ 103,000
Plant
and Equipment (cost $130,000) $ 105,000 $ 120,000
Land $ 125,000 $ 155,000
Differences
between carrying amounts and fair values are recognised on consolidation. Compass
Ltd had not recorded any goodwill. The plant and equipment has a remaining
useful life of 5 years.

One
quarter of the inventory on hand at 1 July 2007 was sold by 30 June 2008.

The
applicable tax rate is 30%.

Additional Information

Compass Ltd paid a dividend of $15,000 out of
2007-2008 profits.

Compass Ltd sold Golden Ltd an item of
equipment for $20,000 on the 30th
June 2008. The carrying amount of this equipment at that time was $18,000.

Compass Ltd made a profit of $60,000 for the
2007-2008 period.

Required

Prepare
the consolidation journal entries for Golden Ltd and its subsidiary Compass Ltd
at 30 June 2008. Do not prepare a consolidated worksheet. No journal narrations
required.

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 8
June
2009
Question 4 (20 marks)

The
trial balance below is of Springsure Ltd’s accounts as at 30 June 2010:

SPRINGSURE
LTD

Trial
Balance

as at
30 June 2010

Debit Credit
Cash at
Bank 37,500
Inventory 78,000
Accounts
Receivable 54,000
Buildings 225,000
Accumulated
Depreciation – Buildings 45,000
Land 150,000
Goodwill 37,500
Mortgage
Payable 165,000
Unsecured
Creditors 63,000
Calls in
Arrears (15,000 shares) 4,500
Share
Capital 375,000
Retained
Earnings 67,500
Asset Revaluation
Reserve 6,000
$ 654,000 $ 654,000
Share capital consisted of 375 000 ordinary shares
fully issued and called to $1.

It was decided on 30 June 2010 to wind up the
company. Additional information is as follows:

a)
Estimated realised amounts are:
Land $147 000
Buildings 129 000
Inventory 67 500
Accounts Receivable 37 500
Calls in Arrears 2 500
Goodwill 0
b)
Unsecured creditors include:
Accounts Payable $42 000
GST 5 250
Director’s Salary 6 750
PAYG tax instalments 9 000
$63 000
*
There is an impending
lawsuit against the company. If the company is found guilty they will be
required to pay $27 000 in damages.

*
The mortgage is secured over the
buildings.

Required

Complete
the following Summary of Affairs that is required to be presented to the
creditors of Springsure Ltd.

Note: You are required to complete the
following table on this blue examination paper.

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 9

June
2009

SPRINGSURE LTD

COMPANIES FORM 509

SUMMARY OF AFFAIRS

Assets and Liabilities as at 30 June 2010

Estimated

Valuation Realisable

Value

1.
Assets not specifically charged:

2.
Assets subject to specific charges:

Total Assets

Total Estimated Realisable Value

(3)
Less preferential
creditors entitled to priority over the holders of a floating charge

(4)
Less amounts owing and
secured by floating charge over company’s assets

(5)
Less preferential creditors

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ACC2115 / ACC5215 – Company
Accounting / Corporate Accounting Page 10

June
2009

Estimated
amount available for unsecured creditors

6.
Unsecured Creditors

(7)
Balances owing to partly secured
creditors

(8)
Contingent Assets

(9)
Contingent Liabilities

Estimated
Surplus (Deficit)

Share
Capital

Issued:

Paid-up:

End of Examination

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