CONSOLIDATION

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• CONSOLIDATION
• PART 2
• ICAP MODULE B FINANCIAL ACCOUNTING MODULE D
  COST ACCOUNTING.NEW CLASSES.
• JOIN KHALID AZIZ

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JOIN KHALID AZIZ

• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP
  MODULE B, B.COM, BBA, MBA PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D,
  BBA, MBA PIPFA.
• CONTACT
• 0322-3385752
• 0312-2302870
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.

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Illustration

• Consider a family of 3
• Father (employed as a manager)
• Weekly take-home pay of 500
• Mother (sells food parcels from home)
• Collects an average of 100/week
• Receives 150/week from husband for housekeeping
• 1 child, Mere (full-time student)
• Receives 25/week as pocket-money from her
  parents
• Receives 15/week as allowance from her sponsor

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Illustration

• Calculate how much each family member receives in
  a week

Family Member Amount
Father 500
Mother 100 150 250
Mere 25 15 40
Total 790
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Illustration

• Calculate how much the family receives in a week

Family Member Amount
Father 500
Mother 100 150 150 100
Mere 25 15 25 15
Total 615
We must exclude or eliminate transactions within
the family
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5. Elimination Entries
Learning Objective 5

• The purpose of an elimination entry is
• To exclude or eliminate
• transactions between members of the entity
• Known as
• Intra-group or Inter-company transactions

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Learning Objectives

• You will be able to
• 1. Define an Economic Entity
• Explain the concept of Control
• 3. Identify factors that indicate Control
• 4. Differentiate between pre post acquisition
  equity
• Explain the purpose of Elimination Entries
• Record Elimination Entries for
• Pre-acquisition Equity
• Dividends from pre-acquisition profits
• Goodwill on acquisition
• Revaluation of assets at acquisition date

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6. Record Elimination Entries
Learning Objective 6

• How is an elimination entry constructed?

• Its just like
• selecting the Undo option
• or reversing an arithmetic process
• or reversing balance-day adjustments

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Example 1
From Lecture May 1st

• On 1 April 2006,
• Tonga Ltd acquired all the shares of Nuku Ltd
• for a cash payment of 225,000
• On that date, the equity of Nuku Ltd consisted of
• Share Capital 150,000
• Reserves 30,000
• Retained Profits 20,000

Tonga Limited
100
Nuku Limited
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6.a Pre-acquisition Equity
Books of Nuku Ltd
Books of Tonga Ltd
Capital 150,000 Reserves
30,000 Retained Profits 20,000
200,000
Shares in Nuku Ltd 225,000
Eliminate intra-group assets

• Eliminate intra-group equity

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6.a Pre-acquisition Equity

• Elimination entry at date of acquisition
• Dr Share Capital 150,000
• Dr Reserves 30,000
• Dr Retained Profits 20,000
• Dr Goodwill 25,000
• Cr Shares in Nuku Ltd 225,000

This is known as the pre-acquisition entry Must
be made in the Worksheet every year
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6.b Dividends from Pre-acquisition Profits

• Such dividends
• Are treated as a return of capital
• Reduce value of investment (shares) in subsidiary

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Example 2
Same Companies in Example 1

• Immediately after the acquisition, Nuku Ltd
  declared a dividend of 12,000
• out of pre-acquisition profits

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6.b Dividends from Pre-acquisition Profits

• When the dividend is declared, what entries will
  be passed by
• Nuku Ltd (Subsidiary)
• Tonga Ltd (Parent)

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6.b Dividends from pre-acquisition profits

• Books of Nuku Ld (Subsidiary)

Dr Dividend Provided 12,000 Cr Dividend
Payable 12,000
Liability
Reduction to Retained Profits
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6.b Dividends from pre-acquisition profits

• Entries in books of Tonga Ld (Parent)

Dr Dividend Receivable 12,000 Cr Shares in
Nuku Ltd 12,000
These are both Assets

• Investment in Nuku Ltd now 213,000
• Originally 225,000
• Less Return of Capital 12,000

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JOIN KHALID AZIZ

• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP
  MODULE B, B.COM, BBA, MBA PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D,
  BBA, MBA PIPFA.
• CONTACT
• 0322-3385752
• 0312-2302870
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.

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6.b Dividends from Pre-acquisition Profits

• What elimination entries are required?

1. Intra-group Payable/Receivable
2. Pre-acquisition entry

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6.b Dividends from Pre-acquisition Profits
Intra-group Payable/Receivable Dr Dividend
Payable 12,000 Cr Dividend
Receivable 12,000

• All intra-group payables receivables are
  eliminated in this manner
• Accounts Payable/Receivable
• Loans Payable/Receivable
• Debentures Payable/Receivable

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6.b Dividends from Pre-acquisition Profits
Pre-acquisition entry Dr Share Capital
150,000 Dr Reserves 30,000 Dr
Retained Profits (Opening) 20,000 Dr
Goodwill 25,000 Cr Dividend
Provided 12,000 Cr Shares in Nuku Ltd
213,000
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6.b Dividends from Pre-acquisition Profits
Pre-acquisition entry Dr Retained Profits
(Opening) 20,000 Cr Dividend Provided
12,000

• In future periods
• Close Dividend Provided to Retained Profits
• Net Effect 20,000 12,000 8,000
• All PNL items are adjusted against R/Profits

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6.b Dividends from Pre-acquisition Profits

• How do we treat a dividend already declared (but
  not paid) by the subsidiary at acquisition date?

• If cum div,
• subtract from cost of acquisition
• If ex div,
• excluded from analysis
• payable to previous shareholders

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6.c Goodwill on Acquisition

• Any goodwill is recognised as a consolidation
  adjustment

• If subsidiary already has goodwill in its books
• Deduct recorded goodwill from FV of INA
• Journalise difference in pre-acquisition entry
• See Comprehensive Example 14.6 page 566

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6.d Revaluation of Assets

• If assets of the subsidiary are revalued upon
  consolidation, an adjustment is necessary

• Dr Asset
• Cr Business Combination Valuation Reserve
• Cr DTL

• BCVR is a component of Equity
• Added when calculating FV of INA
• Eliminated through pre-acquisition entry

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6.d Revaluation of Assets

• Also need to provide additional Depreciation
• Increase in Value divided by remaining useful life

Dr Depreciation Expense Cr Acc. Depreciation
This extra Expense effectively reduces Profit
Tax
Dr DTL Cr I/Tax Expense
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Example 3
Same Companies in Example 1

• In addition to the information in Example 1
• Nuku Ltd has only 1 asset (Equipment)
• Cost 45,000
• Book value 27,000
• Fair value 36,000
• Remaining Useful life 3 years
• Tax Rate 30

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6.d Revaluation of Assets

• What revaluation entries are required in the
  consolidated statements?

Dr Acc.Depn- Equipment 18,000 Cr
Equipment 9,000 Cr BCVR
6,300 Cr DTL 2,700
45,000 - 36,000
30 of 9,000

• Known as the revaluation entry
• Made every year until the asset is sold
• Then change account to Transfer to BCVR

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6.d Revaluation of Assets

• On 31 March 2007
• Dr Depreciation 3,000
• Cr Acc. Depn- Equipment 3,000
• (9,000/3 years)
• Dr DTL 900
• Cr I/Tax Expense 900
  
• (2,700/3 years)

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Calculate Fair Valueof Identifiable Net Assets
Step 1
Equity Item Amount
Share Capital 150,000 Reserves
30,000 BCVR 6,300 Retained Profits
20,000
Total 206,300
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Calculate Cost of Acquisition
Step 2

• Immediate cash payment of 225,000

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Calculate Goodwill
Step 3
Cost of Acquisition 225,000
Less Fair Value of INA 206,300
Goodwill 18,700
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6.d Revaluation of Assets

• Pre-acquisition entry on 31 March 2007

Assuming Dividend was paid during the year
Dr Share Capital 150,000 Dr
Reserves 30,000 Dr Retained Profits
20,000 Dr BCVR 6,300 Dr Goodwill
18,700 Cr Dividend Provided
12,000 Cr Shares in Nuku Ltd
213,000
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JOIN KHALID AZIZ

• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP
  MODULE B, B.COM, BBA, MBA PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D,
  BBA, MBA PIPFA.
• CONTACT
• 0322-3385752
• 0312-2302870
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.