College of , Hospitality and Tourism StudiesSchool of Accounting and Department of AccountingACC803: Advanced Financial ReportingSemester 1 | 2021__________________________________________________________________CASE…

College of , Hospitality and Tourism Studies

School of Accounting and

Department of Accounting

ACC803: Advanced Financial Reporting

Semester 1 | 2021

__________________________________________________________________

CASE STUDY 2 (20%)

__________________________________________________________________

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.

• Due Date: Thursday, 24th June, 2021 at 11.59pm – to be submitted via the

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)

ALL THE BEST!