CASE STUDY

CONSOLIDATION WORKSHEET

On 1 July 2007, Mickey Ltd acquired 80% of the shares of Mouse Ltd on an ex div basis. At this date, all the identifiable assets and liabilities of Mouse Ltd were recorded at amounts equal to fair value except for:
Carrying Fair
Amount Value
Inventory $120 000 $130 000
Machinery (cost $200 000) 160 000 165 000

The inventory was all sold by 30 November 2007. The machinery had a further 5-year life but was sold on 1 April 2010. At acquisition date Mouse Ltd reported a contingent liability of $15 000 that Mickey Ltd considered to have a fair value of $7 000. This liability was settled in June 2008 for $10 000. At acquisition date, Mouse Ltd had not recorded an asset relating to equipment design as the asset was still in the research phase. Mickey Ltd placed a fair value on the asset of $12 000, reflecting expected benefits existing at acquisition date. The asset was considered to have a further 10-year life. On 1 January 2009, the asset met the requirements of IAS 38 Intangible Assets and subsequent expenditure by Mouse Ltd on the asset was capitalised.

Additional information:
(a) On 1 July 2008, Mouse Ltd sold an item of plant to Mickey Ltd at a profit before tax of $4 000. Mickey Ltd depreciates this class of plant at a rate of 10% per annum on cost while Mouse Ltd applies a rate of 20% per annum on cost.
(b) At 30 June 2009 Mickey Ltd has on hand some items of inventory purchased from Mouse Ltd in June 2008 at a profit before tax of $500. These were all sold by 30 June 2010.
(c) During the 2009-10 period Mickey Ltd sold $12 000 inventory to Mouse Ltd at a mark-up of 20% on cost. $3 000 of this inventory remains unsold by 30 June 2010.
(d) The other components of equity relate to available-for-sale financial assets. These assets are measured at fair value with movements in fair value being taken directly to equity.
(e) The parent and the subsidiary are considered to be separate cash generating units. Management have analysed the impairment indicators on an annual basis and conducted an impairment test on the subsidiary cash generating unit in the 2008-09 year which resulted in the writing down of goodwill by $4 000. There have been no other business combinations involving these entities since 1 July 2007.
(f) The tax rate is 30%.
(g) Shareholder approval is not required in relation to dividends.



(h) On 30 June 2010 the trial balances of Mickey Ltd and Mouse Ltd were as follows:

Mickey Ltd Mouse Ltd

Shares in Mouse Ltd $295 200 -
Inventory 180 000 $60 000
Available for-sale financial assets 229 000 215 000
Other current assets 10 000 2 000
Deferred tax assets 15 800 8 000
Plant and machinery 462 500 303 000
Land 144 200 42 000
Equipment design - 18 000
Goodwill 20 000 22 000
Cost of sales 120 000 70 000
Other expenses 50 000 10 000
Income tax expense 35 000 40 000
Dividend paid 14 000 6 000
Dividend declared 20 000 4 000
1 595 700 800 000

Share capital 800 000 330 000
Other components of equity 100 000 80 000
Other reserves 50 000 1 000
Retained earnings (1/7/09) 45 000 16 000
Transfer from other reserves - 2 000
Sales 200 000 160 000
Other income 50 000 10 000
Debentures 70 000 20 000
Deferred tax liability 20 000 12 000
Other current liabilities 38 700 35 000
Dividend payable 10 000 4 000
Accumulated amortisation
– equipment design - 4 000
Accumulated impairment losses – goodwill - 16 000
Accumulated depreciation – plant
and machinery 212 000 110 000
$1 595 700 $800 000







(I) Extracts from the Statement of Changes in Equity for Mouse Ltd were as follows:
2007-08 2008-09 2009-10
Retained earnings (opening balance) $20 000 $19 000 $16 000
Profit for the period 20 000 20 000 50 000
Dividends paid * (3 000) * (6 000) (6 000)
Dividends declared (15 000) (17 000) * (4 000)
Transfers to/from other reserves * (3 000) * 2 000
Retained earnings (closing balance) 19 000 16 000 58 000
Other reserves (opening balance) 30 000 33 000 33 000
Transfers to/from retained earnings * 3 000 0 * (2 000)
Bonus issue 0 0 * (30 000)
Other reserves (closing balance) 33 000 33 000 1 000
Other components of equity (op. bal.) 10 000 42 000 72 000
Movements in fair value 32 000 30 000 8 000
Other components of equity (cl. bal.) 42 000 72 000 80 000
Share capital (opening balance) 300 000 300 000 300 000
Bonus issue 0 0 * 30 000
Share capital (closing balance) 300 000 300 000 330 000

* these items were from equity earned prior to the date of acquisition

Required

1. Prepare the consolidation worksheet for Mickey Ltd for the preparation of consolidated financial statements at 30 June 2010 using the consolidation worksheet provided.

2. The consolidation worksheet journal entries used to prepare the worksheet are to be attached to the worksheet.



Can somebody tell me where to start? And what direction i should be heading? IM CLUELESS:eek::eek:

Have you heard anything about this question.. or have u managed to figure any of it out??

I could really use the help 2.

The question is ambigous and not clear. I am a bit confused about it but I am giving you to what extent I have, hopefully, been able to get.

Have all the dividends been recorded by the two parties. Mickey Ltd in 2010 has a dividend declared of $20,000 in the P&L and a dividend payable of $10,000 in the balance sheet!!

First thing the shares are acquired ex div basis this means that the Mickey Ltd would not have the right to the most immediate dividend in this case the dividend paid in period 2007-08 but will be entitled to dividend paid in 2008-09 and 2009-10. Now the dividend in 2008-09 and 2009-10 are paid and declared out of pre-acquisition profits meaning that the cost of investment will be reduced by 80% of the dividend value. But for double entry purposes have these dividend been recorded by Mickey Ltd. For the dividend in 2008-09 of $ 6,000 you should assume yes and removed the dividend from the reserves. For the dividend in 2009-10, you should check the accounts for 30 June 2010 and no where you find dividend receivable of 80% of $4,000. Is it in other current assets? I don't know. Think that should provide for it.

The fair value adjustment should be taken into account on date of acquisition. Therefore the $10,000 form inventory and $ 5,000 from machinery will be taken into account when calculating goodwill. But the corresponding adjusment to the inventory figure which is sold in Nov 2007 therefore realsied in profit should be in reserves then? Same for the machinery as it is sold and the value realised in April 2010? Now since the value of the machinery has increased then the depreciation figure will also increase for the threes years by $ 1,000 each year.

A contingent liability should not be recognised but disclosed. Therefore at acquisition date it was a contingent liability and should not be recognised as per IAS 37.

The asset is still in the research phase and as per IAS 38 it should not be recognised at acquisition date.

An item of plant is sold by Mouse Ltd to Mickey Ltd at a profit before tax of $ 4,000. This should be removed in the 'Other income' in the P&L. Now this is an unrealised profit and should be eliminated on consolidation form the reserves and the cost of the asset should be written back to cost. But has the tax effect been recorded in the accounts of Mouse Ltd? The change in depreciation rate is a change in estimate and no adjustment needed of any kind? The excess depreciation charged on this asset should be crdited back to the reserves and for two years.

The inventory purchased from Mouse Ltd and which had a value of $ 500 has no effect on the consolidation in 2010 as it has already been sold and realised.

The $12,000 should be removed from the P&L account. From the sales of Mickey Lt and the Cost of sales of Mouse Ltd. Now there is a value of $ 3,000 still at 30 June 2010 from which the unrealised profit of $500 should be removed from the inventory figure and the reserves figure.

Has the impairment loss does anything to do with the value of the investment in Mouse Ltd or the impairment is offset against the asset of Mouse Ltd as it is treated as a cash generating unit as per IAS 36.

ARE THESE CORRECT? PLEASE HELP:confused: