Financial Accounting and Reporting \' Practical Exercise on 1 July 2013 Taylor L

Question

Financial Accounting and Reporting ' Practical Exercise on 1 July 2013 Taylor Ltd acquired 80% of the issued shares of Durand Ltd for $222,720. At the date of acquisition, the shareholders' equity of Durand Ltd consisted of: share capital $200,000, general reserve $40,000 and retained earnings $20,000. All identifiable assets and liabilities of Durand are recorded at fair value at this date except for inventory for which the fair value was $4,000 greater than carrying amount, and the plant which has a carrying amount of $60,000 (with $16,000 accumulated depreciation) and a fair value of $68,000. The inventory was all sold by 30 June 2014 and the plant had a further 5-year useful life with depreciation based on the straight-line method. The tax rate is 30%.4 Additional information Goodwill had been impaired by 10% in the first year following the acquisition. During the year to 30 June 2017 it was considered that the goodwill had been further impaired by an amount of $800.* i. Durand Ltd holds debentures in Taylor Ltd amounting to $3,200. Taylor Ltd paid the 10% annual interest on debentures on 30 June 2017. ii. During the 2016-2017 period, Durand sold inventory to Taylor Ltd for $9,200, recording a profit before tax of $1,200. Taylor Ltd has sold half of these items to Sam Ltd. During the 2016-2017 period, Taylor Ltd sold inventory to Durand Ltd for $7,200, recording a profit before tax of $800. Durand Ltd has not sold any of the inventory to other entities.* The opening inventory of Taylor Ltd includes unrealised profit of $1,600 on inventory sold from Durand Ltd during the prior financial year. The inventory was all sold to an external entity by Taylor Ltd during the year ended 30 June 2017.* iv. v.

Explanation / Answer

Taylor Limited (Holding) Durand Limited (Subsidiary) Percentege of holding 80% Durand Limited (Subsidiary) Amount Share capital 200000 General reserve 40000 Retained earning 20000 Increase in value of inventory 4000 Change in FMV of Asset 8000 Total Net worth 272000 Holding 80%(288000*80%) 217600 Amount Paid 222720 Goodwill 5120 Depreciation on Plant (60000-16000)/5 8800 Entry in the books of Taylor limited Journal Entries: Debit Credit on the date of acquisition Investment in Durand limited 217600 Goodwill 5120 Bank 222720 (Being shares acquired of Durand limited) Profit and Loss account A/c 800 Goodwill 800 (During the year goodwill impared by Amount of $800) Interest on Debenture A/c 320 Bank 320 (Being interest paid on debentures @10% p.A.) Consolidated P & L account 480 Inventory A/c 480 (Being unrealised profit on inventory reversed 1200*50%*80%, 80% of the profit earned by durand limited to be reversed) Consolidated P & L account 640 Inventory A/c 640 (Being unrealised profit on inventory reversed since none of the inventory is sold full profit is to be reversed) since the entire stock is sold to the external vendor no entry of unrealised profit is to be passed. Depreciation 2200 Plant 2200 (Being depreciation charged 10%) Consolidated P & L account 800 Depreciation 800 (Being depreciation reversed to the entent of unrealised profit) Consolidated P & L account 5000 Depreciation 5000 (excess depreciation charged due to increased value to be reversed 60000/12 Bank 8000 Dividend income 8000 (Being dividend received 80% Bank 4000 Durand limited 4000 (Being amount received from Durand limited for services rendered)

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