Advanced Financial Accounting Past Exam Paper

AFA final exam paper 2011 2nd semester (answers included)

Q1. Theory questions (total 5 marks)

1. “A Ltd owns 50% of the shares in B Ltd. Therefore B Ltd is a subsidiary of A Ltd”

Explain why you agree or disagree with the above statement (3 marks)

New IFR10 concept: control – when investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Three essential elements:

1, investor has power over investee- right to direct activities that significantly affect investee’s returns (referred to ‘relevant activities’)

2, investor has exposure, or rights, to variable returns from involvement with investee

3, ability of investor to use its power over the investee to affect amount investor’s return

Whether B Ltd is a subsidiary of A depends on if it is controlled by A Ltd. In many cases, control of voting rights will still provide control, but other circumstances must undertake analysis and a judgement. Can still have control where A has less than half voting power- would look at factors as number of directors on board and ability to cast more than 50% of votes at an annual meeting.

1. Journal entries (2 marks)

Rent

Dr      rent revenue         500

       Cr      rent expense               500

Dr      rent payable           500

       Cr      rent receivable              500

Q2   Consolidation worksheet adjusting journal entries (total 10 marks)

Parent Ltd owns all of the share capital of Subsidiary Ltd. During the year ended 10 June 2006, Parent Ltd sold $60,000 of inventory to Subsidiary Ltd and recorded a profit before tax of $30,000 on the transaction. At 30 June 2006, Subsidiary Ltd still has 2/3 of the inventory on hand. The tax rate is 30%.

Required:

1. Prepare the consolidation worksheet adjusting entries for the consolidation worksheet at 30 June 2006. Show all the calculations (3 marks)
2. Briefly explain the rationale for your entries in 1) above. (5 marks)
3. Assume that all of the inventory was sold during the financial year ending 30 June 2007. Prepare the consolidation worksheet adjusting entries for the consolidation worksheet at 30 June 2007. (2 marks)

Answer:

1. Worksheet entries as at 30 June 2006

Dr      Sales                60,000

       Cr      COGS                        40,000

       Cr      Inventory                 20,000

Dr      DTA               6,000

       Cr      ITE                           6,000

1. Rationale of entries

1, Eliminate sales – not sales to external parties

2, cost of goods sold does not reflect cost to external parties. Eliminate original cast of goods sold for sale from Parent Ltd to subsidiary Ltd ($30,000) + overstatement of cost of goods sold to external parties ($10,000)

3, 2/3 of inventory on hand to Subsidiary Ltd is 40,000. From the group perspective the value should be $20,000. Reduce inventory by $20,000

4, the inventory on hand is carried by the group at $20,000 but has a tax base of $40,000. Hence the group has a deductible temporary difference of $ 20,000 which leads to a DTA of $6,000 (30% of $20,000)

5, entries adjusting sales and cost of goods sold reduced consolidated profit before tax by $20,000. Therefore the consolidated tax expense has to be reduced by $6,000.

1. Worksheet entries as at 30 June 2007

Dr      retained earnings (1/7/06)                14,000

Dr      ITE                                                             6,000

       Cr      COGS                                                                    20,000

Q3.  NCI (total 16 marks)

On 1 July 20×5, Big Ltd acquired 80% of the share capital of Small Ltd for 800,000 when the equity of Small Ltd consisted of:

Share capital                        400,000

Retained earnings              486,000

At the date of acquisition:

•all of the identifiable assets and liabilities of Small Ltd except for land were recorded at fair value

•the carrying amount for land in the financial records of Small Ltd was $ 800,000. The fair value of land was $ 100,000.

The following information about preparing the consolidation financial statement for the year ended 30 June 20×6:

•on 1 July 20×5, Small Ltd sold Big Ltd equipment at a profit before tax of $16,000. Big Ltd depreciated the equipment at a straight-line over 4 years (residual value is 0).

•on 1 January 20×6, Big Ltd provided Small Ltd with 10,000 of accounting services. The service had been paid for by 30 June 20×6.

•tax rate is 30%

At the year ended 30 June 20×6:

                                                                                 Small Ltd

Profit after tax                                                       100,000

Add: opening retained earnings                         486,000

                                                                                 586,000

Less: dividend paid                                                10,000

Closing retained earnings                                    576,000

At the year ended 30 June 20×7:

                                                                                 Small Ltd

Profit after tax                                                       120,000

Add: opening retained earnings                         576,000

                                                                                 696,000

Less: dividend paid                                                10,000

Closing retained earnings                                    686,000

Required:

1. determine the amount of goodwill involved in the business combination, show all calculations (2 marks)
2. prepare the adjusting journal entries required for the preparation of the consolidation worksheet  as at 30 June 2006 show all calculations (8 marks)
3. Measure the NCI in both the net profit after tax and closing retained earnings for the year ended at 30 June 20×6. (3 marks)
4. Measure the NCI in both the net profit after tax and closing retained earnings for the year ended at 30 June 20×7. (3 marks).

Answer: