Case study of Sun Ltd and Callis Ltd
You are the financial accountant of Sun Ltd, a food manufacturing company in Western Australia. You have been asked by the CEO to prepare the consolidated financial accounts for the year ended 30 June 2014.
The statements of comprehensive income and financial position of Sun Ltd and its subsidiary, Callis Ltd, for the year ended 30 June 2014 are as follows:
Statements of comprehensive income for the year ended 30 June 2014
|
Sun Ltd |
Callis Ltd |
|
|
$ |
$ |
|
|
Sales |
425,875 |
201,000 |
|
Cost of Sales |
-194,000 |
-83,000 |
|
Gross profit |
231,875 |
118,000 |
|
Dividend received from Callis Ltd |
15,600 |
|
|
Interest received from Sun Ltd |
1,000 |
|
|
247,475 |
119,000 |
|
|
Expenses |
-114,500 |
-62,000 |
|
Operating profit before tax |
132,975 |
57,000 |
|
Income tax expense |
-59,500 |
-22,000 |
|
Operating profit after tax |
73,475 |
35,000 |
|
Retained earnings at 1 July 2013 |
24,000 |
19,000 |
|
Interim dividend paid |
-8,000 |
-9,500 |
|
Final dividend declared |
-45,000 |
-22,500 |
|
Retained earnings at 30 June 2014 |
44,475 |
22,000 |
Statements of financial position as at 30 June 2014
|
Sun Ltd |
Callis Ltd |
|
|
$ |
$ |
|
|
Assets |
||
|
Current assets |
||
|
Inventory |
32,000 |
22,000 |
|
Other current assets |
88,575 |
50,400 |
|
Total current assets |
120,575 |
72,400 |
|
Non-current assets |
||
|
Property, plant and equipment |
306,000 |
175,000 |
|
Investment in Callis Ltd |
140,500 |
– |
|
Investment in debentures |
– |
10,000 |
|
Total non-current assets |
446,500 |
185,000 |
|
Total assets |
567,075 |
257,400 |
|
Liabilities |
||
|
Current liabilities |
||
|
Trade and other payables |
30,100 |
19,400 |
|
Current tax liability |
59,500 |
24,000 |
|
Provision for final dividend |
45,000 |
22,500 |
|
Total current liabilities |
134,600 |
65,900 |
|
Non-current liabilities |
||
|
10% debentures |
50,000 |
– |
|
Total non-current liabilities |
50,000 |
– |
|
Total liabilities |
184,600 |
65,900 |
|
Net assets |
382,475 |
191,500 |
|
Shareholders’ equity |
||
|
Share capital |
300,000 |
150,000 |
|
General reserve |
38,000 |
19,500 |
|
Retained income |
44,475 |
22,000 |
|
Total equity |
382,475 |
191,500 |
Details of the subsidiary
On 1 July 2005, Sun Ltd acquired 80% of Callis Ltd, a food manufacturer in New South Wales, for cash. At 1 July 2005, the shareholders’ equity of Callis Ltd was as follows:
|
$ |
|
|
Share Capital |
150 000 |
|
General reserve |
4 000 |
|
Retained earnings |
4 000 |
Sun Ltd regarded the assets of Callis Ltd to be fairly valued at the date of acquisition except for land which has a fair value which is $20 000 larger than that recorded in Callis Ltd’s records. This is to be accounted for as a consolidation adjustment.
Additional information
1. Sun Ltd records dividend revenue in the accounting period when the cash is received.
2. The final dividend declared by Callis Ltd for the June 2013 year was $10 000 and it was paid on 1 August 2013. The interim dividend for the June 2014 year was paid on 30 June 2014.
3. The directors have applied the impairment test for goodwill annually and determined that a write-down of $1 000 is required for consolidation purposes as at 30 June 2014. The cumulative goodwill impairment write-downs for prior years totalled $1 500.
4. Inter-company sales for the year ended 2014:
|
From Sun Ltd to Callis Ltd |
$40 000 |
|
From Callis Ltd to Sun Ltd |
$20 000 |
5. Opening inventory of Sun Ltd includes unrealised profit of $2 000 on inventory sold by Callis Ltd. Sun Ltd has sold half of this inventory during the year.
6. Both companies use the perpetual inventory method.
7. During the current year, Callis has purchased inventory from Sun Ltd at a profit of $6 000. 75% of this inventory was sold outside the group at the end of the year.
8. Callis Ltd purchased $10 000 10% debentures in Sun Ltd at 1 July 2013.
9. The tax rate is 30%.
Required:
a) For the accounting records of Sun Ltd show the general journal entries (including narrations) to record:
i) The acquisition of the shares in Callis Ltd on 1 July 2005. (2 marks)
ii) The dividends received from Callis Ltd in the year ended 30 June 2014. (3 marks)
b) Prepare the consolidated financial statements of Sun Ltd and its subsidiary as at 30 June 2014 (Statement of Comprehensive Income, Statement of Financial Position and Statement of Changes in Equity). (30 marks)
Assume the partial goodwill method.
Show all workings including the following:
i) Acquisition analysis
ii) Consolidation journal entries (including narrations)
iii) Worksheet and
iv) Calculation of the non-controlling interest (NCI).
c) You have a cousin starting the ACCT5511 course. Explain the main differences between the partial and full goodwill methods. (5 marks)
Note: Please do not forget narrations for journal entries!
