Instructions
• This Case Study is to be done individually. No group assessments will be accepted.
• You are required to answer both questions given in this assignment.
• All assignments should be typed and with proper referencing. Use Microsoft Word features to assist you in referencing. Remember – high plagiarism rates detected via Turnitin software on Moodle will result in deduction of marks.
• This assignment carries 20% towards your final grade.
Moodle Drop-box named “Case Study 2 Dropbox”.
Question 1
On 1 July 2016, Cena Ltd acquired 80% of the shares of Lesnar Ltd for $40 000. The following balances appeared in the records of Lesnar Ltd at this date:
Share Capital $20 000
General Reserve 2 000
Retained Earnings 10 000
At 1 July 2016, all the identifiable assets and liabilities of Lesnar Ltd were recorded at fair value except for the following:
Carrying amount Fair value
Machinery (cost $36 000) $30 000 $40 000
Inventory 16 000 20 000
Receivables 20 000 18 000
The machinery, which had a remaining useful life of 5 years, was adjusted to fair value after the
acquisition date in the consolidation worksheet. The machinery was sold by Lesnar Ltd on
1 January 2021 for $4000, with the related valuation reserve being transferred on consolidation to retained earnings. By 30 June 2017, receivables had all been collected and inventory sold. For the year ended 30 June 2021, the following information is available:
a) Intragroup sales were:
Lesnar Ltd to Cena Ltd – $40 000. The mark-up on cost of all sales was 25%.
At 30 June 2021, inventory of Cena Ltd included $2000 of items acquired from Lesnar Ltd.
b) At 30 June 2020, inventory of Cena Ltd included goods of $1000 resulting from a sale on 1 March 2020 of non-current assets by Lesnar Ltd at a before-tax profit of $200. These items were sold by Cena Ltd on 1 September 2020. This class of non-current assets is depreciated using a 10% depreciation rate on a straight-line basis.
c) On 1 January 2021, Lesnar Ltd sold an item of plant to Cena Ltd for $2000 at a before-tax profit of $800. For plant assets, Lesnar Ltd applies a 10% p.a. straight line depreciation rate, and Cena Ltd uses a 5% p.a. straight-line method.
d) The current tax rate is 20%.
Financial information for the year ended 30 June 2021 includes the following:
Cena Ltd Lesnar Ltd
$ $
Sales revenue 88 000 52 000
Other revenue 12 000 8 000
100 000 60 000
58 000 26 000
4 000
2 000
2 000 1 000
6 000 5 000
70 000 34 000
30 000 26 000
3 000 0
33 000 26 000
13 200 10 400
19 800 15 600
40 000 20 000
59 800 35 600
3 800 1 000
4 000 8 000
4 000 4 000
11 800 13 000
$48 000 $22 600
3 000 2 000
1 000 5 00
$4 000 $2 500
Total revenue Cost of sales Other expenses:
Selling and administrative (including depreciation)
Financial
Carrying amount of non-current assets sold
Gross profit
Dividend revenue
Profit before tax
Income tax expense
Profit
Retained earnings at 1 July 2020
Transfer to general reserve
Interim dividend paid
Final dividend declared
Retained earnings at 30 June 2021
Asset revaluation reserve (1/7/20)
Gains on property revaluation
Asset revaluation reserve (30/6/21)
Required:
Prepare the acquisition analysis and consolidation worksheet journal entries for the preparation of the consolidated financial statements of Cena Ltd at 30 June 2021 using the partial goodwill method. (30 Marks) Question 2
The accountant for HHH Ltd, Ms Stephanie, has sought your advice on an accounting issue that has been puzzling her. When preparing the acquisition analysis relating to HHH Ltd’s acquisition of Orton Ltd, she calculated that there was an excess on acquisition of $10,000. Being unsure of how to account for this, she was informed by accounting acquaintances that this should be recognized as income. However, she reasoned that this would have an effect on the consolidated profit in the first year after acquisition date. For example, if Orton Ltd reported a profit of $50,000, then consolidated profits would be $60,000. She is unsure of whether this profit is all postacquisition profit or a mixture of pre-acquisition profit and post-acquisition profit.
Required:
How should the excess be accounted for? What is the effect of its recognition on subsequent consolidated financial statements? (10 Marks)
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