Financial Reporting

RMIT Review Session 3

Courtney Clowes CPA

 Session 3 – Question 1
Question 1:
On 1 January 20X4, Bully Ltd (parent company) sold a delivery machine to Timid Ltd (subsidiary company) for
$60,000. The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20% per
annum while Timid Ltd depreciates its fixed assets at a rate of 10% p.a. Both have a 31 Dec financial year end.
1a) At what rate will the machine be depreciated in 20X4? Justify your answer.
The machine will be depreciated at a rate of 10% per annum.
The rule is that the asset must be depreciated in a manner that reflects the way it would be used up.
It is irrelevant that the Parent company has a different depreciation rate or that the parent was depreciating
the asset at a rate of 20%. The subsidiary company is now in control of the asset and the depreciation rate that
it uses will apply.
 Session 3 – Question 1
Question 1:
On 1 January 20X4, Bully Ltd (parent company) sold a delivery machine to Timid Ltd (subsidiary company) for
$60,000. The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20% per annum
while Timid Ltd depreciates its fixed assets at a rate of 10% p.a. Both have a 31 December financial year end.
1b) What is the unrealised profit or loss on 1 January 20X4? (Ignore tax effects)
All profit or loss made on the sale of a depreciable asset would remain ‘unrealised’ until the asset is sold to a
party external to the group and through annual depreciation of the asset.
On 1 January 20X4, all the profit or loss would be unrealised.
Sale price 60,000
Carrying amount 50,000
Unrealised profit 10,000
 Session 3 – Question 1
Question 1:
On 1 January 20X4, Bully Ltd (parent company) sold a delivery machine to Timid Ltd (subsidiary company) for
$60,000. The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20% per
annum while Timid Ltd depreciates its fixed assets at a rate of 10% p.a. Both have a 31 Dec financial year end.
1c) What is the unrealised profit or loss on 31 December 20X4 (Ignore tax effects)
On 31 December 20X4, one year of depreciation would be recognised. Hence this would be ‘realised’.
Unrealised profit 1 Jan 20X4 10,000
Less: depreciation in 20X4 (1,000) [10,000 X 10%]
Unrealised profit 31 Dec 20X4 9,000
 Session 3 – Question 1
Question 1:
On 1 January 20X4, Bully Ltd (parent company) sold a delivery machine to Timid Ltd (subsidiary company) for
$60,000. The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20% per
annum while Timid Ltd depreciates its fixed assets at a rate of 10% p.a. Both have a 31 Dec financial year end.
1d) What will be the carrying amount of the machine in the books of Timid Ltd on 31 December 20X4?
Cost 60,000
Less: Depreciation in 20X4 (6,000) [60,000 x 10%]
Carrying amount 31 Dec 20X4 54,000
 Session 3 – Question 1
Question 1:
On 1 January 20X4, Bully Ltd (parent company) sold a delivery machine to Timid Ltd (subsidiary company) for
$60,000. The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20% per
annum while Timid Ltd depreciates its fixed assets at a rate of 10% p.a. Both have a 31 Dec financial year end.
1e) What will be the carrying amount of the machine for the group on 31 December 20X4?
Carrying amount for group 50,000
Less: Depreciation in 20X4 (5,000) [50,000 x 10%]
Carrying amount 31 Dec 20X4 45,000
 Session 3 – Question 1
Question 1:
On 1 January 20X4, Bully Ltd (parent company) sold a delivery machine to Timid Ltd (subsidiary company) for
$60,000. The machine had a carrying amount of $50,000. Bully Ltd depreciates fixed assets at a rate 20% per
annum while Timid Ltd depreciates its fixed assets at a rate of 10% p.a. Both have a 31 Dec financial year end.
1f) What will the net effect on profits be on 31 December 20X4 when this intra-group transaction is eliminated?
(Include tax effects)
Elimination of profit on sale (10,000)
Realisation of profit through dep 1,000
Decrease of profit (9,000)
Tax (9,000 x 30%) 2,700
Net effect on profit (6,300)
 Session 3 – Question 2
Question 2:
On 1 January 20X4, Lion Ltd (parent company) sold a delivery truck to Zebra Ltd (subsidiary company) for $40,000.
The truck had a carrying amount of $30,000. Lion Ltd depreciates fixed assets at a rate 20% per annum while Zebra
Ltd depreciates its fixed assets at a rate of 10% per annum. Both have a 31 December financial year end.
2a) What are the consolidation elimination journals on 31 December 20X4?
Account Debit Credit Notes Notes
DR Profit on sale of truck (I/s) $10,000 #1 Eliminate the transaction
CR Vehicles (B/s) $10,000 #2a Account for the unrealised and realised portions
2a: it is recorded at 40,000 when it should be 30,000 i.e. the cost for the group
DR Accumulated dep (B/s) $1,000 #2b
CR Depreciation (I/s) $1,000 #2b 2b: 10,000 unrealised profit x 10% depreciation that now gets realised in 20X4

DR Deferred tax asset (B/s) $2,700 #3a The net effect on profits is a debit of 9 000 (10,000 debit – 1,000 credit).
Thus income tax would be a credit to reduce tax expense.
3a: net effect on Assets is CR of 9,000 (10,000 credit – 1,000 debit). CA < TB = DTA
CR Tax expense (I/s) $2,700 #3b The debit to DTA (9,000 x 30%)
3b: The credit to ITE (9,000 x 30%)
 Session 3 – Question 2
Question 2:
On 1 January 20X4, Lion Ltd (parent company) sold a delivery truck to Zebra Ltd (subsidiary company) for $40,000.
The truck had a carrying amount of $30,000. Lion Ltd depreciates fixed assets at a rate 20% per annum while Zebra
Ltd depreciates its fixed assets at a rate of 10% per annum. Both have a 31 December financial year end.
2b) What is the consolidation elimination journals on 31 December 20X5?
Account Debit Credit Notes Notes
DR Retained earnings $6,300 #1
CR Vehicles (B/s) $10,000 #2 Note 1: To carry forward the effects on profits from 20X4 to 20X5,
DR Accumulated dep (B/s) $2,000 #3a we need to make an adjustment to Retained earning o/b
CR Depreciation (I/s) $1,000 #3b
Total effect is 6,300 (10,000 dr – 1,000 cr – 2,700 cr)
DR Tax expense (I/s) $300 #4a
DR Deferred tax asset (B/s) $2,400 #4b
 Session 3 – Question 2
Question 2:
On 1 January 20X4, Lion Ltd (parent company) sold a delivery truck to Zebra Ltd (subsidiary company) for $40,000.
The truck had a carrying amount of $30,000. Lion Ltd depreciates fixed assets at a rate 20% per annum while Zebra
Ltd depreciates its fixed assets at a rate of 10% per annum. Both have a 31 December financial year end.
2b) What is the consolidation elimination journals on 31 December 20X5?
Account Debit Credit Notes Notes
DR Retained earnings $6,300 #1 Note 2 Assets are carried at cost. In 20X5, the cost of the delivery
CR Vehicles (B/s) $10,000 #2 truck will still be carried at its cost of 40,000. However, the cost of
the truck for the group is 30,000. Thus we will need to adjust this
DR Accumulated dep (B/s) $2,000 #3a by reducing the cost of the truck by 10,000.
CR Depreciation (I/s) $1,000 #3b
So the journal is:
DR Tax expense (I/s) $300 #4a
CR Vehicles 10,000
DR Deferred tax asset (B/s) $2,400 #4b
 Session 3 – Question 2
Question 2:
On 1 January 20X4, Lion Ltd (parent company) sold a delivery truck to Zebra Ltd (subsidiary company) for $40,000.
The truck had a carrying amount of $30,000. Lion Ltd depreciates fixed assets at a rate 20% per annum while Zebra
Ltd depreciates its fixed assets at a rate of 10% per annum. Both have a 31 December financial year end.
2b) What is the consolidation elimination journals on 31 December 20X5?
Account Debit Credit Notes Notes
DR Retained earnings $6,300 #1 Note 3 We need to realise profits through depreciation in 20X5
CR Vehicles (B/s) $10,000 #2 which is calculated in the same way as Required 2b (N2).

DR Accumulated dep (B/s) $2,000 #3 CR Depreciation 1,000

CR Depreciation (I/s) $1,000 #3 DR Accumulated dep 2,000
(remember accumulated dep has to carry forward the
DR Tax expense (I/s) $300 #4a
depreciation from 20X4 + the depreciation from 20X5.
DR Deferred tax asset (B/s) $2,400 #4b (1,000 + 1,000))
 Session 3 – Question 2
Question 2:
On 1 January 20X4, Lion Ltd (parent company) sold a delivery truck to Zebra Ltd (subsidiary company) for $40,000.
The truck had a carrying amount of $30,000. Lion Ltd depreciates fixed assets at a rate 20% per annum while Zebra
Ltd depreciates its fixed assets at a rate of 10% per annum. Both have a 31 December financial year end.
2b) What is the consolidation elimination journals on 31 December 20X5?
Account Debit Credit Notes Notes
DR Retained earnings $6,300 #1 Note 4 The effect on profit is a credit of 1,000 (depreciation). So
CR Vehicles (B/s) $10,000 #2 the journal is to increase tax because the profits increased

DR Accumulated dep (B/s) $2,000 #3 DR Tax expense 300 (1,000 x 30%)

CR Depreciation (I/s) $1,000 #3
The net effect on assets is a credit of 8,000 (10,000 cr – 2,000 dr).
DR Tax expense (I/s) $300 #4
The causes CA < TB = DTA

DR Deferred tax asset (B/s) $2,400 #4 Dr Deferred tax asset 2,400 (8,000 x 30%)
 Session 3 – Question 3
Question 3:
The financial period for the City Group is from 1 July to 30 June. On 1 July 20X6, Town Ltd (subsidiary company) sold a plant
with a carrying amount of $350,000 to City Ltd (parent company) for $600,000. On the date of sale, the plant had a
remaining useful life of 7 years. However, City Ltd intends to depreciate the plant over a useful life of 10 years.
3a) What are the consolidation elimination journals on 30 June 20X7?

DR Profit on sale of plant (I/s) 250,000 (600,000 selling price – 350,000 carrying amount)
CR Plant (B/s) 250,000
DR Accumulated dep (B/s) 25,000
CR Depreciation (I/s) 25,000 (60,000 dep by Town Ltd – 35,000 dep by the group)
DR Deferred tax asset (B/s) 67,500
CR Tax expense (I/s) 67,500 ([250,000 – 25,000] x 30%)
 Session 3 – Question 3
Question 3:
The financial period for the City Group is from 1 July to 30 June. On 1 July 20X6, Town Ltd (subsidiary company) sold a plant
with a carrying amount of $350,000 to City Ltd (parent company) for $600,000. On the date of sale, the plant had a
remaining useful life of 7 years. However, City Ltd intends to depreciate the plant over a useful life of 10 years.
3b) What are the consolidation elimination journals on 30 June 20X8?

DR Retained earnings 157,500 (250,000 dr – 25,000 cr – 67,500 cr)

CR Plant (B/s) 250,000
DR Accumulated dep (B/s) 50,000 (25,000 depreciation for 2 years)
CR Depreciation (I/s) 25,000
DR Tax expense (I/s) 7,500 (25,000 x 30%)
DR Deferred tax asset (B/s) 60,000 ([250,000 cr – 50,000 dr] x 30%)
 Session 3 – Question 4
Question 4:
On 1 October 20X8, Angel Ltd (parent) sold inventory costing $6,000 to Demon Ltd (subsidiary) for $8,000. Both
companies have a 31 December year end.
4a) Assuming all the inventory was on hand on 31 December 20X8, what are the consolidation elimination journals?

Eliminations
Parent Subsidiary DR CR Consolidated
Account
Sales $8,000 $8,000 -
Less: Cost of goods sold ($6,000) $6,000 -
Gross Profit $2,000 -

Profit before tax $2,000 -

Income tax expense ($600) $600 -
Profit for the year $1,400 -

Statement of financial position

Inventory $8,000 $2,000 $6,000
Deferred Tax Asset $600 $600
 Session 3 – Question 4
Question 4:
On 1 October 20X8, Angel Ltd (parent) sold inventory costing $6,000 to Demon Ltd (subsidiary) for $8,000. Both
companies have a 31 December year end.
4a) Assuming all the inventory was on hand on 31 December 20X8, what are the consolidation elimination journals?
When inventory is sold within the group, all the profit or loss would be unrealised until it is sold to parties external to the group.
DR Sales 8,000
CR COGS 6,000
CR Inventory 2,000#
DR Deferred tax asset 600 (CA < TB = DTA)
CR Tax expense 600 [(8,000 dr – 6,000 cr] x 30%)

# all the profit on intra-group sale of inventory would be unrealised so needs to be eliminated from the cost of the inventory
 Session 3 – Question 4
Question 4:
On 1 October 20X8, Angel Ltd (parent) sold inventory costing $6,000 to Demon Ltd (subsidiary) for $8,000. Both
companies have a 31 December year end.
4b) Assuming half the inventory was on hand on 31 December 20X8, what are the consolidation elimination journals?
When inventory is sold within the group, all the P&L loss would be unrealised until it is sold to parties external to the group
DR Sales 8,000
CR COGS 6,000
CR Inventory 1,000 (2,000 x 50% which was sold and thus realised)
CR COGS 1,000 (realising profit from intra-group sale of inventory)
DR Deferred tax asset 300 (CA < TB = DTA)
CR Tax expense 300 (1,000 x 30%)
 Session 3 – Question 4
Question 4:
On 1 October 20X8, Angel Ltd (parent) sold inventory costing $6,000 to Demon Ltd (subsidiary) for $8,000. Both
companies have a 31 December year end.
4b) Assuming half the inventory was on hand on 31 December 20X8, what are the consolidation elimination journals?
NOTE: The journals for COGS can be combined to reflect the net effect.
So the combined journals would be as follows:
DR Sales 8,000
CR COGS 7,000 (6,000 + 1,000)
CR Inventory 1,000
DR Deferred tax asset 300
CR Tax expense 300
 Session 3 – Question 4
Question 4:
On 1 October 20X8, Angel Ltd (parent) sold inventory costing $6,000 to Demon Ltd (subsidiary) for $8,000. Both
companies have a 31 December year end.
4c) Following from (b), what are the elimination journals on 31 December 20X9 if the remaining inventory was
sold in the 20X9 financial year?
DR Retained earnings 700 (carry forward effects of 20X4 profit. (8,000 dr – 7,000 cr – 300 cr)
CR COGS 1,000 (realising profit from intra-group sale of inventory)
DR Tax expense 300 (1,000 x 30%)
 Session 3 – Question 5
Question 5:
On 1 August 20X7, Son Ltd (subsidiary) sold inventory costing $15,000 to Father Ltd (parent) for $20,000. Both
companies have a 31 December year end.
5a) Assuming all the inventory was on hand on 31 December 20X7, what are the consolidation elimination journals?
DR Sales 20,000
CR COGS 15,000
CR Inventory 5,000#
DR Deferred tax asset 1,500
CR Tax expense 1,500 [(20,000 DR – 15,000 CR] x 30%)

# all the profit on intra-group sale of inventory would be unrealised so needs to be eliminated from
the cost of the inventory
 Session 3 – Question 5
Question 5:
On 1 August 20X7, Son Ltd (subsidiary) sold inventory costing $15,000 to Father Ltd (parent) for $20,000. Both
companies have a 31 December year end.
5b) Assuming 25% of inventory was on hand on 31 December 20X7, what are the consolidation elimination journals?
When inventory is sold within the group, all the P&L would be unrealised until it is sold to parties external to the group.
DR Sales 20,000
CR COGS 15,000
CR Inventory 1,250# (5,000 x 25% - see note below)
CR COGS 3,750 (realising profit from intra-group sale of inventory. 5,000 x 75%)
DR Deferred tax asset 375 (1,250 reduction in inventory x 30%)
CR Tax expense 375 (20,000 -15,000 – 3,750) x 30%)

# unrealised profit that is included in the cost of the inventory is 5,000. If 75% is sold, it means that the
cost of inventory still includes 25% of the 5,000 unrealised profit and thus this needs to be eliminated. 5,000 x 25%
 Session 3 – Question 5
Question 5:
On 1 August 20X7, Son Ltd (subsidiary) sold inventory costing $15,000 to Father Ltd (parent) for $20,000. Both
companies have a 31 December year end.
5b) Assuming 25% of inventory was on hand on 31 December 20X7, what are the consolidation elimination journals?
NOTE: The journals for COGS can be combined to reflect the net effect.
So the combined journals would be as follows:
DR Sales 20,000
CR COGS 18,750 (15,000 + 3,750)
CR Inventory 1,250
DR Deferred tax asset 375
CR Tax expense 375
 Session 3 – Question 5
Question 5:
On 1 August 20X7, Son Ltd (subsidiary) sold inventory costing $15,000 to Father Ltd (parent) for $20,000. Both
companies have a 31 December year end.
5c) Following from (b), what would be the elimination journals on 31 December 20X8 if the remaining inventory was sold in
the 20X8 financial year?
DR Retained earnings 875 (carry forward effects of 20X7 profit (20,000 dr – 18,750 cr – 375 cr))
CR COGS 1,250 (realising profit from intra-group sale of inventory. 5,000 x 25%)
DR Tax expense 375 (1,250 x 30%)
 Session 3 – Question 6
Question 6:
On 20 December 20X1, Low Ltd (subsidiary) declared and paid dividends of $15,000. 90% of the dividends paid
was made to High Ltd (parent) while the remaining 10% was made to individual non-controlling shareholders.
What is the journal entry to eliminate the intra-group dividend? (Ignore the effects of tax)
DR Dividend income 13,500 (15,000 x 90%)
CR Dividend – Retained earnings 13,500

Note: The other 10% of dividends were paid to non-controlling interest shareholders and thus are not
required be eliminated.
 Session 3 – Question 7
Question 7:
Sad Ltd is a wholly owned subsidiary of Happy Ltd and both companies have a 31 December year end. On 20
December 20X1, Sad Ltd declared dividends of $30,000. On 16 January, Sad Ltd paid the dividend. Happy Ltd
recognised the dividend declared on the accrual basis.
What are the journals to eliminate the intra-group dividend? (Ignore the effects of tax)
DR Dividend income 30,000
CR Dividend – Retained earnings 30,000
DR Dividend payable 30,000
CR Dividend receivable 30,000
 Session 3 – Question 8
Question 8:
On 1 January 20X3 Entity A (parent) loaned $40,000 to Entity B (subsidiary).
The terms of the loan indicated that no interest would be charged provided that Entity B repays half the loaned by 31
December 20X3. This condition was satisfied since Entity B repaid $20,000 of the loan to Entity A on 21 December 20X3.
What are the consolidation elimination journals in respect of the intra-group loan?

There are NO journal entries relating to the payment and repayment of the loan.
When Entity A paid the loan to Entity B, there would be a debit and credit to bank within the same group and
for the same amount and thus, no journals are required as the net effect would be zero.
For the loan asset and liability:
DR Loan payable 20,000
CR Loan receivable 20,000
 Session 3 – Question 9
Question 9:
Alpha Ltd (parent) agreed to perform all the human resources functions for Omega Ltd (subsidiary) in return for a
management fee of $25,000. On 31 Dec 20X3 (year end date), Omega Ltd was still owing $6,000 of the agreed fee.
a) What are the journals to eliminate the intra-group transaction?
DR Management fee income 25,000
CR Management fee expense 25,000
DR Management fee payable 6,000
CR Management fee receivable 6,000
 Session 3 – Question 9
Question 9:
Alpha Ltd (parent) agreed to perform all the human resources functions for Omega Ltd (subsidiary) in return for a
management fee of $25,000. On 31 December 20X3 (yearend date), Omega Ltd was still owing $6,000 of the agreed fee.
9b) What are the tax effect relating to the elimination of this intra-group transaction?
There are NO tax effects for the elimination journal entry relating to this transaction.
When consolidating, the management fee income of 25,000 and management fee expense of 25,000 is
eliminated. Thus, the net effect on profits is zero. Accordingly, there are no tax effects.
 Session 3 – Question 10
Question 10:
P Ltd (parent) provided a loan of $100,000 to S Ltd (subsidiary) on 1 January 20X3. The interest on the loan is
10% per annum. On 30 June 20X3 (year end date) the interest on the loan was not yet paid.
What are the journals to eliminate the intra-group transaction?
Interest for the period 1 Jan 20X3 to 30 June 20X3 is 5,000 (100,000 x 10%) x 6 months/12 months
Journal to eliminate the interest income and expense is as follows:
DR Interest income 5,000
CR Interest expense 5,000
The question also indicates that the interest was not yet paid and so we need to eliminate the receivable and
payable relating to the interest as well as the original loan amount.
DR Loan payable 105,000 (100,000 + 5,000)
CR Loan receivable 105,000
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Intra-group transactions
All inventory still
on hand

Only a portion of
Sale of inventory inventory still on
hand
All the inventory
is sold in
subsequent year

Profit or loss on
Affects profits
Sale of sale
depreciable
asset Different
depreciation to
the group
Intra-group
transactions Payment of Eliminate
dividends transaction

Intra-group
interest
Does not affect Eliminate
profit Intra-group transaction
management
fees
 Steps

Adjust as normal to
Current year
profit or loss
Just eliminate the
Step 1:
thing!
Carry forward profit
Subsequent years adjustment to
retained earnings

Adjust as normal to
Current year
profits
Steps – intra-group
Consider realised /
transactions that Step 2:
unrealised portion
affect profit Carry forward profit
Subsequent years adjustment to
retained earnings

Remember to
Step 3:
account for tax
 Session 3 – Question 11
Shark Ltd acquired 80% of Dolphin Ltd on 1 January 20X1.
For the year ended 30 June 20X1, Dolphin sold inventory to Shark Ltd for $20,000. The
cost of the inventory was $5,000.
a. All the inventory was on hand at year end on 30 June 20X1.
b. 30% of the inventory was on hand at 30 June 20X1.
c. 70% of inventory was sold by 30 June 20X1. During the year that ended 30 June
20X2 all the inventory was sold to external parties.

What are the journal entries for each scenario?

The tax rate applicable is 30%

 Session 3 – Question 11a

Scenario (a) Shark Dolphin Eliminations

Parent Subsidiary DR CR Consolidated
Account
Sales $20,000 $20,000 -
Less: Cost of goods sold ($5,000) $5,000 -
Gross Profit $15,000 -

Profit before tax $15,000 -

Income tax expense ($4,500) $4,500 -
Profit for the year $10,500 -

Statement of financial position

Inventory $20,000 $15,000 $5,000
Deferred Tax Asset $4,500 $4,500
 Session 3 – Question 11a
For the year ended 30 June 20X1, Dolphin sold inventory to Shark Ltd for $20,000. The cost of the inventory was $5,000.
a. All the inventory was on hand at year end on 30 June 20X1.

Step 1: (reverses the sale)

This eliminates
Dr Sales 20,000
unrealised Profit of
Cr COGS 5,000 $15,000

Step 2: (reduces inventory value) Inventory balance of

$20K is reduced to its
Cr Inventory 15,000
original cost of $5K

Step 3: (accounts for tax effects)

Dr DTA 4,500 Even though $15,000 If you pay tax now –
profit is unrealised, you get a benefit later
Cr Tax expense 4,500 you still pay tax on it. so you have a DTA
 Session 3 – Question 11
For the year ended 30 June 20X1, Dolphin sold inventory to Shark Ltd for $20,000. The cost of the inventory was $5,000.
b. 30% of the inventory was on hand at 30 June 20X1.

Step 1: (reverse the sale)

Dr Sales 20,000 This eliminates unrealised Profit of
Cr COGS 5,000 $15,000

Step 2:
70% of inventory was sold. So we can
Cr COGS 10,500 $15,000 x 70% = $10,500
recognise 70% of unrealised profit.
Cr Inventory 4,500 30% of unrealised $15,000 on hand

Step 3: (account for tax effects)

Dr DTA 1,350 Profit of $15,000 but $15,000 x 30% = $4,500
only 70% realised. $4,500 x Tax rate 30% = $1,350
Cr Tax expense 1,350
 Session 3 – Question 11c
For the year ended 30 June 20X1, Dolphin sold inventory to Shark Ltd for $20,000. The cost of the inventory was $5,000.
c. 70% of inventory was sold by 30 June 20X1. During year ended 30 Jun X2 all inventory was sold to external parties.

Step 1: (reverse the sale)

Dr Sales 20,000 This eliminates unrealised Profit of
First 3 steps – Same as (b)
Cr COGS 5,000 $15,000

Step 2:
70% of inventory was sold. So we can
Cr COGS 10,500 $15,000 x 70% = $10,500
recognise 70% of unrealised profit.
Cr Inventory 4,500 30% of unrealised $15,000 on hand

Step 3: (account for tax effects)

Dr DTA 1,350 Profit of $15,000 but $15,000 x 30% = $4,500
only 70% realised. $4,500 x Tax rate 30% = $1,350
Cr Tax expense 1,350
 Steps

Adjust as normal to
Current year
profit or loss
Just eliminate the
Step 1:
thing!
Carry forward profit
Subsequent years adjustment to
retained earnings

Adjust as normal to
Current year
profits
Steps – intra-group
Consider realised /
transactions that Step 2:
unrealised portion
affect profit Carry forward profit
Subsequent years adjustment to
retained earnings

Remember to
Step 3:
account for tax
 Session 3 – Question 11c
For the year ended 30 June 20X1, Dolphin sold inventory to Shark Ltd for $20,000. The cost of the inventory was $5,000.
c. 70% of inventory was sold by 30 June 20X1. During year ended 30-Jun-X2 all inventory was sold to external parties.

Step 1: (reverse the sale) Step 4: 30 June 20X2 (the next year)
Dr Sales 20,000 $20,000 - $10,500 - $5,000 - $1,350 = $3,150
Cr COGS 5,000 Dr Retained earnings 3,150
Cr COGS 4,500
Step 2: Dr Tax expense 1,350
Cr COGS 10,500
Cr Inventory 4,500 $4,500 x Tax rate 30% = $1,350

Step 3: (account for tax effects)

Dr DTA 1,350
Cr Tax expense 1,350
 NCI Calculation
Start with Subsidiary’s
profits

Step 1:

Adjust for TAX if

applicable

Adjust for un/realised

P&L for transactions
FROM Subsidiary TO
Parent
NCI Calculation Step 2:

Remember TAX

Multiply by the NCI

Step 3:
percentage
 Session 3 – Question 11
Shark Ltd acquired 80% of Dolphin Ltd on 1 January 20X1. For the year ended 30 June 20X1, Dolphin sold
inventory to Shark Ltd for $20,000. The cost of the inventory was $5,000.
30% of the inventory was on hand at 30 June 20X1.
What is the NCI portion of profits on 30 June 20X1 under scenario (b) if Dolphin’s profits BEFORE tax was $150,000?
Step 1: (start with profits of S and adjust for tax)
Subsidiary’s profit $150,000
Les Tax @ 30%: ($45,000)
Profit after tax $105,000

Step 2: Adjust for un/realised P&L for S to P transactions (remember tax)

Adjustment for unrealised P&L ($4,500) [($20,000) + $5,000 + $10,500]
FROM Sub TO Parent
Adjustment for TAX @ 30%: $1,350
$101,850

Step 3: Multiply by NCI percentage x 20%

= NCI Portion of profits $20,370
 Session 3 – Question 12 – Snakes & Ladders
Snakes Ltd acquired 80% of the shares in Ladders Ltd on 1 Jan 20X1. This gave it control over Ladders Ltd.
On 1 January 20X2, Ladders Ltd sold an truck with a carrying amount of 30,000 to Snakes Ltd for 50,000.
According to Ladders Ltd, the truck had a remaining useful life of 8 years but Snakes is going to depreciate
the truck over a useful life of 10 years.

a. What are the consolidation elimination journals on 31 December 20X2?

b. What are the consolidation elimination journals on 31 December 20X3?

 Steps

Adjust as normal to
Current year
profit or loss
Just eliminate the
Step 1:
thing!
Carry forward profit
Subsequent years adjustment to
retained earnings

Adjust as normal to
Current year
profits
Steps – intra-group
Consider realised /
transactions that Step 2:
unrealised portion
affect profit Carry forward profit
Subsequent years adjustment to
retained earnings

Remember to
Step 3:
account for tax
 Session 3 – Question 12
Snakes Ltd acquired 80% of the shares in Ladders Ltd on 1 Jan 20X1. This gave it control over Ladders Ltd.
On 1 January 20X2, Ladders Ltd sold an truck with a carrying amount of 30,000 to Snakes Ltd for 50,000.
According to Ladders Ltd, the truck had a remaining useful life of 8 years but Snakes is going to depreciate
the truck over a useful life of 10 years.
a. What are the consolidation elimination journals on 31 December 20X2?

Step 1: Sale Price of $50,000 - $30,000 Carrying Amount Step 3:

Dr Gain on sale 20,000 Dr DTA 5,400
Cr Tax expense 5,400
Step 2: Reduce Truck Carrying Amount back to $30,000 Tax is paid on unrealised profit on sale of $20,000
Cr Asset: Truck 20,000 adjusted for the $2,000 over depreciation
($20,000 - $2,000) x 30% = $5,400
Dr Accum Dep 2,000 This leads to a DTA of $5,400
Cr Dep expense (P&L) 2,000
Group Depreciation is $30,000 / 10 yrs = $3,000
Snakes Depreciation is $50,000 / 10 years = $5,000
Need to reduce the $2,000 over-depreciation.
 Steps – Theashen’s approach

Adjust as normal to
Current year
profit or loss
Just eliminate the
Step 1:
thing!
Carry forward profit
Subsequent years adjustment to
retained earnings

Adjust as normal to
Current year
profits
Steps – intra-group
Consider realised /
transactions that Step 2:
unrealised portion
affect profit Carry forward profit
Subsequent years adjustment to
retained earnings

Remember to
Step 3:
account for tax
 Session 3 – Question 12
Snakes Ltd acquired 80% of the shares in Ladders Ltd on 1 Jan 20X1. This gave it control over Ladders Ltd.
On 1 January 20X2, Ladders Ltd sold an truck with a carrying amount of 30,000 to Snakes Ltd for 50,000.
According to Ladders Ltd, the truck had a remaining useful life of 8 years but Snakes is going to depreciate
the truck over a useful life of 10 years.
b) What are the consolidation elimination journals on 31 December 20X3?

Unchanged from (a) Step 4: $20,000 - $2,000 - $5,400 = $12,600

Dr Gain on sale 20,000 Dr Retained Earnings 12,600
Cr Asset: Truck 20,000 CR Asset: Truck 20,000
Dr Accum Dep 2,000 Cr Accum Dep 4,000
Cr Dep expense (P&L) 2,000 CR Dep Expense (P&L) 2,000
Dr DTA 5,400 The $2,000 Depreciation expense is the same calculation as
20X2, and Accum Dep goes from $2,000 to $4,000.
Cr Tax expense 5,400
20,000 unrealised profit – $4,000 Accum Dep = $16,000 x 30% DR DTA 4,800
Tax Expense is CR $2,000 Dep Expense x 30% = $600.
CR Tax Expense 600
 Session 3 - Question 13
On 1 Jan 20X5, Pluto Ltd acquired 100% of the share capital of Saturn Ltd for $120,000. Extracts of the financial statements
for both companies prior to the acquisition was as follows:

Pluto Saturn
Issued capital 85,000 10,000
Retained earnings 150,000 85,000
Liabilities 54,000 26,000
289,000 121,000
Current assets 149,000 26,000
Non-current assets 140,000 95,000
289,000 121,000

On 1 Jan 20X5, the Fair value of the current assets and non-current assets were $36,000 and $115,000 respectively. Current
assets were adjusted to it fair value in Saturn’s records but the non-current assets were revalued in the consolidated
worksheet. The applicable tax rate is 30%
Question 13a. What is the goodwill/bargain purchase relating to this business combination?
Question 13b. Prepare the consolidated worksheet.
 Session 3 - Question 13a
On 1 Jan 20X5, Pluto Ltd acquired 100% of the share capital of Saturn Ltd for $120,000. Extracts of the financial statements
for both companies prior to the acquisition was as follows:
Consideration transferred 120,000
Pluto Saturn
Add: FV of previously held interest 0
Issued capital 85,000 10,000 Add: Non-controlling interest 0
Less: FV of net identifiable assets # (116,000)
Retained earnings 150,000 85,000
Goodwill calculation 4,000
Liabilities 54,000 26,000
289,000 121,000 # FV of net identifiable assets 116,000
Current assets 149,000 26,000 Current assets 36,000
Less: DTL on revaluation ($10,000 x 30%) (3,000)
Non-current assets 140,000 95,000 Non-current assets $115,000
289,000 121,000 Less: DTL on revaluation ($20,000 x 30%) (6,000)
Less: liabilities (26,000)

On 1 Jan 20X5, the Fair value of the current assets and non-current assets were $36,000 and $115,000 respectively.
Current assets were adjusted to it fair value in Saturn’s records but the non-current assets were revalued
in the consolidated worksheet. The applicable tax rate is 30%
Question 13a. What is the goodwill/bargain purchase relating to this business combination?
 Session 3 - Question 13a
Why the DTL for the revaluations of CA and NCA?
measuring an asset or liability in a business combination at fair value with no equivalent
adjustment to its tax base leads to an additional temporary difference and the recognition
of an increase in a deferred tax asset or liability. This tax effect should be recognised no
matter whether fair value adjustments were posted in the subsidiary’s accounts or in the
consolidation worksheet. (page 408).

The revaluation has increased the Current assets and NCA by a total of $30,000. So, the CA > TB…
Table 4.6 on page 278 shows: CA > TB for an Asset leads to a DTL.
 Question 13b – Pluto Ltd
Pluto Saturn Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued capital 85,000 10,000 Issued share capital 85 10

Retained Retained earnings 150 85
150,000 85,000
earnings
Liabilities 54 26
Liabilities 54,000 26,000
Reval surplus
289,000 121,000
DTL
Current assets 149,000 26,000 Business com reserve
Non-current
140,000 95,000 289 121
assets
289,000 121,000
Current assets 149 26
Non-current assets 140 95
Investment in Sub
Goodwill
289 121
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Pluto Saturn Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued capital 85,000 10,000 Issued share capital 85 10

Retained Retained earnings 150 85
150,000 85,000
earnings
Liabilities 54 26
Liabilities 54,000 26,000
Reval surplus 7
289,000 121,000
DTL 3
Current assets 149,000 26,000 Business com reserve
Non-current
140,000 95,000 289 121
assets
289,000 121,000
Current assets 149 26 36

DR Current assets 10 Non-current assets 140 95

CR Reval Surplus (OCI) 7 Investment in Sub 120
CR DTL (OCI) 3 Goodwill
On 1 Jan 20X5, the Fair value of the current assets and non-current assets were
$36,000 and $115,000 respectively.
289 121
Current assets were adjusted to it fair value in Saturn’s records
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Pluto Saturn Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued capital 85,000 10,000 Issued share capital 85 10

Retained Retained earnings 150 85
150,000 85,000
earnings
Liabilities 54 26
Liabilities 54,000 26,000
Reval surplus 7
289,000 121,000
DTL 3 6
Current assets 149,000 26,000
Business com reserve 14
Non-current
140,000 95,000 289 121
assets
289,000 121,000
Current assets 149 26 36
Non-current assets 140 95 20
On 1 Jan 20X5,
Investment the Fair value of the current assets and non-current assets were
in Sub
$36,000 and $115,000 respectively.
Goodwill
Current assets were adjusted to it fair value in Saturn’s records but the non-current
assets were revalued in the289 121 worksheet.
consolidated
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Pluto Saturn Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued capital 85,000 10,000 Issued share capital 85 10

Retained Retained earnings 150 85
150,000 85,000
earnings
Liabilities 54 26
Liabilities 54,000 26,000
Reval surplus 7
289,000 121,000
DTL 3 6
Current assets 149,000 26,000
Business com reserve 14
Non-current
140,000 95,000 289 121
assets
289,000 121,000
Current assets 149 26 36
Non-current assets 140 20 95 20
Investment in Sub 120 120
Goodwill
289 121
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued share capital 85 10 10

Retained earnings 150 85 85
Liabilities 54 26
Reval surplus 7
DTL 3 6
Business com reserve 14
289 121

Current assets 149 26 36

Non-current assets 140 20 95 20
Investment in Sub 120 120
Goodwill
289 121
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued share capital 85 10 10

Retained earnings 150 85 85
Liabilities 54 26
Reval surplus 7
DTL 3 6
Business com reserve 14 14
289 121

Current assets 149 26 36

Non-current assets 140 20 95 20
Investment in Sub 120 120
Goodwill
289 121 140 140
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued share capital 85 10 10

Retained earnings 150 85 85
Liabilities 54 26
Reval surplus 7 7
DTL 3 6
Business com reserve 14 14
289 121

Current assets 149 26 36

Non-current assets 140 20 95 20
Investment in Sub 120 120
Goodwill
289 121 140 140
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued share capital 85 10 10

Retained earnings 150 85 85
Liabilities 54 26
Reval surplus 7 7
DTL 3 6
Business com reserve 14 14
289 121

Current assets 149 26 36

Non-current assets 140 20 95 20
Investment in Sub 120 120
Goodwill 4
289 121 140 140
 Consolidation worksheet steps
Add 100% of all Parent
Step 1
and Sub accounts

To Reval surplus if
adjust made in Sub’s
books
Recognise investment
Step 2 in Sub AND FV
adjustments for Sub
To Business
combination reserve if
adjust in consol w/s

Parent’s investment in
Sub
Consolidation
worksheet steps
Parent’s interest in
Sub’s pre-acquisition
equity

Pre-acquisition Business combination

Step 3
elimination entries reserve

Eliminate intra-group At acquisition reval

Step 4
transactions surplus

Step 5 Account for NCI Recognise Goodwill

 Question 13b – Pluto Ltd
Accounts Pluto Saturn Adjust - DR Adjust – CR Consolidated

Issued share capital 85 10 10 85

Retained earnings 150 85 85 150
Liabilities 54 26 80
Reval surplus 7 7
DTL 3 6 9
Business com reserve 14 14
289 131 324

Current assets 149 26 36 185

Non-current assets 140 20 95 20 135
Investment in Sub 120 120
Goodwill 4 4
289 131 140 140 324
 Equity method rules
Included at cost

Investment in Increase every year for

associate share of profits

Decrease by investors
Balance sheet effect No goodwill disclosed share of dividends
received or receivable

Bargain purchase
recognised
immediately in share
of associate’s profits
Equity method rules

Adjusted for inter-

entity transactions
Share of associates
profits
NOT affected by
P&L and OCI dividends declared or
paid by associate
Share of associates
OCI
 Session 3 - Question 14a
On 1 January 20X5, Investor purchased 54,000 shares of Associate Ltd for $85,000.
Associate Ltd has 120,000 shares at a par value of $1 each.
The following ‘SELECTED’ information is provided:
Investor Associate 54,000 out of 120,000 shares = 45%
Issued Share capital 150,000 120,000
Purchase price $85,000
Retained earnings (1/01/20X5) 102,000 45,000 Net assets (120 + 45) x 45% ($74,250)
Dividends paid during 20X5 (55,000) (30,000) Goodwill acquired $10,750
Profit after tax (31/12/20X5) 186,000 95,000
Retained earnings (31/12/20X5) 251,000 110,000

a) What is the goodwill acquired or bargain purchase related to this transaction?

 Equity method rules
Included at cost

Investment in Increase every year for

associate share of profits

Decrease by investors
Balance sheet effect No goodwill disclosed share of dividends
received or receivable

Bargain purchase
recognised
immediately in share
of associate’s profits
Equity method rules

Adjusted for inter-

entity transactions
Share of associates
profits
NOT affected by
P&L and OCI dividends declared or
paid by associate
Share of associates
OCI
 Session 3 - Question 14b
On 1 January 20X5, Investor purchased 54,000 shares of Associate Ltd for $85,000.
Associate Ltd has 120,000 shares at a par value of $1 each.
The following ‘SELECTED’ information is provided:
Investor Associate b) In the consolidated financial
statements of the investor, what would be
Issued Share capital 150,000 120,000
amount of the share of associate’s profits
and the investment in associate balance?
Retained earnings (1/01/20X5) 102,000 45,000
Dividends paid during 20X5 (55,000) (30,000)
Profit after tax (31/12/20X5) 186,000 95,000
Retained earnings (31/12/20X5) 251,000 110,000

Share of profit of associate (95,000 x 45%) $42,750

Investment in associate $114,250

Cost $85,000
Add: share of profit ($95,000 x 45%) $42,750
Less: share of dividends (30,000 x 45%) ($13,500)
 Session 3 - Question 15
On 1 January 20X5, Investor purchased 54,000 shares of Associate Ltd for $85,000.
Associate Ltd has 120,000 shares at a par value of $1 each. The applicable tax rate is 30%.
During the year the following transactions took place:
- Investor sold inventory that cost $6,000 to Associate for $8,000.
- At the end of the year, only 20% of this inventory was on hand.
- Associate revalued land upwards by 15,000 which was not reflected in the cost of acquisition.
Investor Associate Share of profit of associate 42,624
Issued Share capital 150,000 120,000 Share of prima facie profit (95,000 x 45%) 42,750
Inventory sale (280) x 45% (126)

Retained earnings 102,000 45,000 Step 1:

(1/01/20X5) Sales (8,000) (8,000)
Dividends paid during 20X5 (55,000) (30,000) Add: COGS (6,000) 6,000
Profit after tax (31/12/20X5) 186,000 95,000 Step 2:
Add realised portion
Retained earnings 251,000 110,000 2,000 unrealised x 80% 1,600
(31/12/20X5)
Step 3:
Credit Tax 120
(8,000 – 6,000 – 1,600) x 30%
 Session 3 - Question 15
On 1 January 20X5, Investor purchased 54,000 shares of Associate Ltd for $85,000.
Associate Ltd has 120,000 shares at a par value of $1 each. The applicable tax rate is 30%.
During the year the following transactions took place:
- Investor sold inventory that cost $6,000 to Associate for $8,000.
- At the end of the year, only 20% of this inventory was on hand.
- Associate revalued land upwards by 15,000 which was not reflected in the cost of acquisition.
Investor Associate Investment in associate 114,124
Issued Share capital 150,000 120,000 Cost 85,000
Add: Share of profits 42,624
Less: Share of dividends (30,000 x 45%) (13,500)
Retained earnings 102,000 45,000
(1/01/20X5)
Dividends paid during 20X5 (55,000) (30,000) NOTE: Revaluation would have occurred during the year
Profit after tax (31/12/20X5) 186,000 95,000 and hence would be included in the 95,000 of profits
from the associate.
Retained earnings 251,000 110,000
(31/12/20X5)

b) In the consolidated financial statements of the investor, what would be amount of the share
of associate’s profits and the investment in associate balance?
 Session 3 - Question 16
On 1 January 20X1, Investor acquired 40% shares in Associate Ltd for $30,000. The applicable tax rate is 30%.
What is the equity-accounted share of the profit/loss in each year?
31/12/20X1 31/12/20X2 31/12/20X3
Profit/(loss) before tax 20,000 (150,000) 35,000
(30% = 6,000) (30% = 45,000) (30% = 10,500)
After tax P&L 14,000 (105,000) 24,500
Investor share of P&L (40%) 5,600 (42,000) 9,800

Investment in associate 20X1 20X2 20X3

1 Jan 30,000 35,600 0
Share of P&L 5,600 (35,600) 3,400
[42,000 limited to balance 35,600] [9,800 – 6,400]
Closing balance 35,600 0 3,400
Unrecognised loss (6,400)
 Session 3 – Question 17
David is a soybean farmer and is worried about the drastic fluctuations in
the price of soybeans.
On 1 Jan, David took out a forward derivative contract to sell 50,000 tons
of soybeans on 31 Dec.
The table below summarises the FV changes in the hedged item and
hedging instrument. Assume the hedge is fully effective.

Fair value of soy Fair value of forward

beans derivative contract
1 Jan 4,700,000 0
30 June 4,900,000 (150,000)
31 Dec 4,800,000 200,000

What are the journal entries on the different dates?

Fair value hedge - Soybeans

1 Jan

Journal entry
 Fair value hedge - Soybeans
30 June
Dr Soybean inventory 200 000
Cr Gain – P+L 200 000

The FV has increased $200,000

between 1 Jan and 30 Jun

Fair value of soy Fair value of forward

beans derivative contract
1 Jan 4,700,000 0
30 June 4,900,000 (150,000)
31 Dec 4,800,000 200,000
 Fair value hedge - Soybeans
30 June
Dr Soybean inventory 200 000
Cr Gain – P+L 200 000

Dr Loss – P+L 150 000 The FV of the Forward has

declined $150,000
Cr Forward derivative contract 150 000

Fair value of soy Fair value of forward

beans derivative contract
1 Jan 4,700,000 0
30 June 4,900,000 (150,000)
31 Dec 4,800,000 200,000
 Fair value hedge - Soybeans

31 Dec
Dr Loss – P+L 100 000
Cr Soybean inventory 100 000

The FV has dropped $100,000

between 30 June & 31 Dec

Fair value of soy Fair value of forward

beans derivative contract
1 Jan 4,700,000 0
30 June 4,900,000 (150,000)
31 Dec 4,800,000 200,000
 Fair value hedge - Soybeans

31 Dec
Dr Loss – P+L 100 000
Cr Soybean inventory 100 000

Dr Forward derivative contract 350 000

Cr Gain – P+L 350 000

Fair value of soy Fair value of forward

beans derivative contract
1 Jan 4,700,000 0
30 June 4,900,000 (150,000) The FV of the forward has
31 Dec 4,800,000 200,000 improved by $350,000.
 Fair value hedge - Soybeans
Two hundred thousand dollars is the fair value
of the forward derivative contract on 31 31 Dec
December which is the maturity date.
Recognise receipt from the forward derivative
Because this is a positive balance, it indicates contract debtor.
that Cornwell Ltd will be receiving this balance.
Dr Bank 200 000
Cr Forward derivative contract 200 000

Fair value of soy Fair value of forward

beans derivative contract
1 Jan 4,700,000 0
30 June 4,900,000 (150,000)
31 Dec 4,800,000 200,000
 Flowchart – hedge accounting
Gains and losses on
hedged item and hedge Recognise in P&L
instrument
Fair value hedge
Recognise either in P&L
Gains or losses of or OCI depending on
equity instrument entity’s measurement
choice

EFFECTIVE portion Recognise in OCI

Prior to recognition of Gains or losses on FV
non-financial asset or changes to hedging
liability instrument
INEFFECTIVE portion Recognise in P&L

Types of hedges Cash flow hedge

Transfer out of equity
Previous gains and and recognise against
losses recognised in the Non-financial asset
OCI or liability
After a non-financial
asset or liability is
recognised
Gains or losses in the
FV of hedged item and Recognise in P&L
hedging instrument

EFFECTIVE portion Recognise in OCI

Gains or loss on FV
Prior to disposal of
changes to hedging
foreign operation
instrument

Hedge of net INEFFECTIVE portion Recognise in P&L

investment in foreign
entity

After disposal of Amounts cumulated in Reclassify to P&L

foreign operation equity
 Flowchart – hedge accounting

EFFECTIVE portion Recognise in OCI

Prior to recognition of Gains or losses on FV
non-financial asset or changes to hedging
liability instrument
INEFFECTIVE portion Recognise in P&L

Types of hedges Cash flow hedge

Transfer out of equity
Previous gains and and recognise against
losses recognised in the Non-financial
OCI asset or liability
After a non-financial
asset or liability is
recognised
Gains or losses in the
FV of hedged item and Recognise in P&L
hedging instrument
 Session 3 – Question 18
On 1 April, Zoo Ltd signed a binding agreement to purchase 1 Panda from Small Island for FC1 million.
The purchase price is to be settled on 30 June.
On 30 April, the Panda arrived at Zoo Ltd’s premises.
On 1 April, Zoo Ltd took out a Foreign Exchange Contract (FEC) with a broker to receive FC1 million on
30 June and to pay $610 000 to settler the FEC.
Assume all the requirements for hedge effectiveness is fully satisfied.
What would the journal entries be on each of the dates?
1 April
Forward rate for
Spot rate
delivery on 30 June
1 April FC1 = $0.60 FC1 = $0.61

30 April FC1 = $0.61 FC1 = $0.62

31 May FC1 = $0.62 FC1 = $0.63

Journal entry
30 June FC1 = $0.64 FC1 = $0.64
 Session 3 – Question 18
On 1 April, Zoo Ltd signed a binding agreement to purchase 1 Panda from Small Island for FC1 million.
The purchase price is to be settled on 30 June.
On 30 April, the Panda arrived at Zoo Ltd’s premises.
On 1 April, Zoo Ltd took out a Foreign Exchange Contract (FEC) with a broker to receive FC1 million on
30 June and to pay $610 000 to settler the FEC.
Assume all the requirements for hedge effectiveness is fully satisfied.
What would the journal entries be on each of the dates?
30 April
Forward rate for
Spot rate
delivery on 30 June
1 April FC1 = $0.60 FC1 = $0.61
Dr FEC Contract 10 000
Cr Cash flow hedge (OCI) 10 000
30 April FC1 = $0.61 FC1 = $0.62
Dr Asset: Panda 610 000
31 May FC1 = $0.62 FC1 = $0.63 Cr Accounts Payable 610 000
30 June FC1 = $0.64 FC1 = $0.64 Dr Cash flow hedge (OCI) 10 000
Cr Asset: Panda 10 000
 Session 3 – Question 18
On 1 April, Zoo Ltd signed a binding agreement to purchase 1 Panda from Small Island for FC1 million.
The purchase price is to be settled on 30 June.
On 30 April, the Panda arrived at Zoo Ltd’s premises.
On 1 April, Zoo Ltd took out a Foreign Exchange Contract (FEC) with a broker to receive FC1 million on
30 June and to pay $610 000 to settler the FEC.
Assume all the requirements for hedge effectiveness is fully satisfied.
What would the journal entries be on each of the dates?
31 May
Forward rate for
Spot rate
delivery on 30 June
1 April FC1 = $0.60 FC1 = $0.61 Dr FEC Contract 10 000
30 April FC1 = $0.61 FC1 = $0.62 Cr Gain on FEC (P&L) 10 000

31 May FC1 = $0.62 FC1 = $0.63 Dr Loss on Forex transaction 10 000

30 June FC1 = $0.64 FC1 = $0.64
Cr Accounts Payable 10 000
 Session 3 – Question 18
On 1 April, Zoo Ltd signed a binding agreement to purchase 1 Panda from Small Island for FC1 million.
The purchase price is to be settled on 30 June.
On 30 April, the Panda arrived at Zoo Ltd’s premises.
On 1 April, Zoo Ltd took out a Foreign Exchange Contract (FEC) with a broker to receive FC1 million on
30 June and to pay $610 000 to settler the FEC.
Assume all the requirements for hedge effectiveness is fully satisfied.
What would the journal entries be on each of the dates?
30 June
Forward rate for
Spot rate
delivery on 30 June
Dr FEC Contract 10 000
1 April FC1 = $0.60 FC1 = $0.61
Cr Gain on FEC (P&L) 10 000
30 April FC1 = $0.61 FC1 = $0.62
Dr Loss on Forex transaction 20 000
31 May FC1 = $0.62 FC1 = $0.63 Cr Accounts Payable 20 000
30 June FC1 = $0.64 FC1 = $0.64 Dr Bank 30 000
Cr FEC Contract 30 000
 Session 3 – Question 19
On 1 July 20x0, Entity A purchased a note receivable
that has a maturity value on 30 June 20x3 of $133,103
The effective interest rate is 10%
No interest is paid on the note.
On 30 June 20x1, the expected credit loss for 12 months is $3,000
On 30 June 20x2, Entity A is notified by the issuer of the note that
it would only be able to pay $110,000 at maturity.

What would be the impairment loss relating to the Note Receivable

on:
30 June 20x1
30 June 20x2
Present value table for single cash flow
 Discounting - example

1 July 20x0
133,103 x 0.7513 = 100,000 1 July 20x0

30 June 20x1 30 June 20x1

133,103 x 0.8264 = 109,996

30 June 20x2 30 June 20x2

133,103 x 0.9091 = 121,003

30 June 20x3 30 June 20x3

133,103
 Impairment of financial assets – 30 June 20x1
Credit risk has NOT
increased
significantly
Stage 1
Recognise 12
Discount GROSS
months of
amount
expected credit loss

Credit risk has

increased
significantly
Impairment of
Stage 2
financial asset
Recognise lifetime Discount GROSS
expected credit loss amount

Financial asset is
credit impaired
Stage 3
Recognise lifetime Discount NET
expected credit loss amount
 Discounting – example

On 1 July 20x0, Entity A purchased a note receivable that has a maturity value on 30
June 20x3 of 133,103
The effective interest rate is 10%
No interest is paid on the note.
On 30 June 20x1, the expected credit loss for 12 months is 3,000
On 30 June 20x2, Entity A is notified by the issuer of the note that it would only be able
to pay 110,000 at maturity.

What would be the impairment loss relating to the Note Receivable on:
30 June 20x1 – 3,000
30 June 20x2
 Impairment of financial assets – 30 June 20x2
Credit risk has NOT
increased
significantly
Stage 1
Recognise 12
Discount GROSS
months of
amount
expected credit loss

Credit risk has

increased
significantly
Impairment of
Stage 2
financial asset
Recognise lifetime Discount GROSS
expected credit loss amount

Financial asset is
credit impaired
Stage 3
Recognise lifetime Discount NET
expected credit loss amount
 Discounting - example

1 July 20x0 Impairment loss

21,003
133,103 x 0.7513 = 100,000 1 July 20x0 (121,003 – 100,000)

30 June 20x1 30 June 20x1

133,103 x 0.8264 = 109,996

30 June 20x2 30 June 20x2

30 June 20x2
133,103 x 0.9091 = 121,003 110,000 x 0.9091 = 100,000

30 June 20x3 30 June 20x3 30 June 20x3

133,103 110,000
 Impairment overview
Cost less acc dep and
Cost model
impairment

Carrying amount

FV less acc dep and

Revaluation model
impairment

FV = price received to
sell asset or paid to
Impairment transfer liability
FV – costs to sell
Cost to sell = costs Excludes finance costs
directly attributable to and income tax
disposal expense

Recoverable amount Higher of… Includes three

elements

Cash flows

Excludes specific items

Value in use

WACC, incremental
Recoverable amount < carrying amount = impairment loss Discount rate
borrowing rates,
market borrowing
Recoverable amount > carrying amount = no further action required rates
 Value in use
Cash Inflows from
Directly attributable
using asset

Cash OUTflows Allocated on

Includes required to generate reasonable and
inflows consistent basis

Net cash flow from Future cash flows to

disposal at end of maintain asset in its
useful life CURRENT condition

Cash inflows from

Cash flow assets independent of
asset under review

Cash outflows that

have been recognised
as liabilities

Future restructuring
Value in use not yet committed

Excludes
Future capital
expenditure to
improve or enhance
WACC performance

Cash flows from

financing activities
Incremental
Discount rate
borrowing rate

Cash flows from

income tax
Market borrowing
rate
 Session 3 – Question 20
Entity A owns a crane which is used to load and off-load ships. It
expects the following cash flows to be incurred:
$200,000 cash inflow from customers
$10,000 cash outflow from maintenance
$30,000 future outflow (recognised as a provision) to dismantle the crane
$25,000 from the sale of the crane at the end of its life
15,000 for income taxes
20,000 capital expenditure to increase speed of the crane.

For the purposes of value in use calculation, what is the cash flow?
Cash flow from customers 200,000
Cash flow for maintenance (10,000)
Cash flow from sale 25,000
Total 215,000
 Impairment journal entry

Dr Impairment loss
(P&L)
Cost model
Cr Asset / Acc Dep
and impairment

Impairment loss
journals Dr Impairment loss
(P&L)
No
Cr Asset / Acc Dep
and impairment

Has this asset

Revaluation model previously been
revalued upwards

If remainder after
Dr Revaluation debiting revaluation
surplus (OCI) surplus, debit the
Yes
Cr Asset / Acc Dep remainder to
and impairment Impairment loss in
P&L
 Session 3 – Question 21
On 31 December 20X1 Air France had a Concorde with a carrying amount of $500,000. This craft was previously
revalued by $70,000.
Because of fears about safety and other costs, there was a downturn in the use of Concorde.
This resulted in the recoverable amount being reduced to $330,000 on 31 Dec 20X1.
What is the journal to record this impairment?

Dr Revaluation surplus (OCI) 70,000

Dr Impairment loss (P&L) 100,000
Cr Concorde Asset 170,000
 Reversal of impairment

The asset can only be written up to the LOWER of:

• its recoverable amount, as estimated at the time the reversal
indicators were identified; and
• the carrying amount that the asset would be if the original
impairment loss were not recognised.

Reversal limited
to the LOWER
of old CA and
new RA
 Calculating CA for CGU

CA of assets…

Directly attributable to
Includes
CGU

Allocated on a
reasonable and
consistent basis to
CA of CGU CGU

General rule for

Recognised liabilities
exclusion

Excludes Assumed liability by

buyer when CGU is
sold
Exception to general
rule for exclusion
When it is only
practical to determine
CA by considering
liabilities
 Allocating impairment loss for CGU

NOTE: Once
goodwill is
impaired, there will
1. CA of goodwill never be a reversal

Allocation of
impairment loss FV – costs to sell
for CGU

2. Pro rata to CA Exception – pro

of other assets in rata limited to Value in use
CGU the highest of

Zero
 Session 3 – Question 22
Component Ltd has a CGU that is comprised of 4 different assets.
On 31 December 20X5, the entity identified an impairment loss of $35,000
attributable to the CGU.
The following information pertains to the CGU:

Asset Carrying amount Value in use FV less costs to sell

Asset A 22,000 11,000 4,500
Asset B 28,000 27,000 21,000
Asset C 23,000 10,000 7,000
Goodwill 21,000 n/a n/a

What is the correct allocation of impairment loss for each asset within the CGU?
 Component Ltd

Step 1: Impair goodwill

$35,000 – $21,000
= $14,000 still needs to be allocated.

Step 2: Calculate the total CA base

$22,000 + $28,000 + $23,000
= $73,000
 Component Ltd

Step 3: Allocate on pro rata based on CA

Carrying Impairment Proposed carrying amounts
Asset A: ($22,000 / $73,000) x 14,000 Asset
amount loss allocation after impairment loss
= 4 219
Asset A 22,000 (4,219) 17,781

Asset B: ($28,000 / $73,000) x $14,000 Asset B 28,000 (5,370) 22,630

= $5,370
Asset C 23,000 (4,411) 18,589

Asset C: ($23,000 / $73,000) x $14,000 Goodwill 21,000 (21,000) 0

= $4,411
 Component Ltd
Step 4: Consider assets for which value in use and FV – costs to sell could be determined.

Ensure impairment allocation does not reduce the CA below the HIGHER of value in use
and FV – costs to sell Impairment = 1,000
(28,000 – 27,000)

Carrying Impairment Proposed carrying amounts FV less

Asset Value in use
amount loss allocation after impairment loss costs to sell

Asset A 22,000 (4,219) 17,781 11,000 4 500

Asset B 28,000 (5,370) 22,630 27,000 21,000

Asset C 23,000 (4,411) 18,589 10,000 7,000

Goodwill 21,000 (21,000) 0 n/a n/a

 Component Ltd

Step 5: allocate the maximum impairment loss that can be shared with Asset B.
Then repeat steps 2 and 3.

Impairment loss New CA after

Asset Original Carrying amount
allocation impairment loss

Asset A 22,000

Asset B 28,000 (1,000) 27,000

Asset C 23,000

Goodwill 21,000 (21,000) 0

 Component Ltd

Step 5: allocate the maximum impairment loss

that can be shared with Asset B. Asset Original Impairment New CA
Then repeat steps 2 and 3. Carrying loss allocation after
amount impairment
loss
Step 2: Calculate the total CA base
22,000 + 23,000
= 45,000 Asset A 22,000

Asset B 28,000 (1,000) 27,000

Asset C 23,000

Goodwill 21,000 (21,000)

 Component Ltd

Step 5: allocate the maximum impairment loss

that can be shared with Asset B. Asset Original Impairment New CA
Then repeat steps 2 and 3. Carrying loss allocation after
amount impairment
loss
Step 2: Calculate the total CA base
22,000 + 23,000
= 45,000 Asset A 22,000 (6 356) 15 644

Asset B 28,000 (1,000) 27,000

Step 3: Allocate on pro rata based on CA
Asset A: (22,000 / 45,000) x 13,000 Asset C 23,000
= 6 356
35K (total)21,000
Goodwill (21,000) 0
– 21K (goodwill)
– 1K (Asset B)
= 13K
 Component Ltd

Step 5: allocate the maximum impairment loss

that can be shared with Asset B. Asset Original Impairment New CA
Then repeat steps 2 and 3. Carrying loss allocation after
amount impairment
loss
Step 2: Calculate the total CA base
22,000 + 23,000
= 45,000 Asset A 22,000 (6 356) 15 644

Asset B 28,000 (1,000) 27,000

Step 3: Allocate on pro rata based on CA
Asset A: (22,000 / 45,000) x 13,000 Asset C 23,000 (6 644) 16 356
= 6,356
Goodwill 21,000 (21,000) 0
Asset C: (23,000 / 45,000) x 13,000
= 6,644
 Component Ltd

Step 5: allocate the maximum impairment loss

that can be shared with Asset B. Asset Original Impairment New CA
Then repeat steps 2 and 3. Carrying loss allocation after
amount impairment
loss
Step 2: Calculate the total CA base
22,000 + 23,000
= 45,000 Asset A 22,000 (6 356) 15 644

Asset B 28,000 (1,000) 27,000

Step 3: Allocate on pro rata based on CA
Asset A: (22,000 / 45,000) x 13,000 Asset C 23,000 (6 644) 16 356
= 6,356
Goodwill 21,000 (21,000) 0
Asset C: (23,000 / 45,000) x 13,000 (35,000)
= 6,644
 Session 3 – Question 23
Oceanic Airlines purchased a new airbus A380 on 1 Jan 20X1.
In accordance with IAS 16, it depreciates the seats of the
plane separately as a component part.
The cost of the plane seats was $500,000 on the date of
purchase and it is expected to have useful life of 10 years.

On 31 December 20X3, the FV less costs to sell of the plane

seats was $320,000 and the value in use was $343,000.

On 31 December 20X5, the FV less costs to sell of the plane

seats was $290,000 and the value in use was $300,000.

What is the impairment loss on 31 December 20X3?

Oceanic Airlines

Carrying Recoverable (Impairment)

amount amount / reversal
1 Jan 20X1 500,000
Acc Dep (150,000)
31 Dec
350,000 343,000 (7,000)
20X3
 Oceanic Airlines
Oceanic Airlines purchased a new airbus A380 on 1 Jan 20X1.
In accordance with IAS 16, it depreciates the seats of the
plane separately as a component part.
The cost of the plane seats was $500,000 on the date of
purchase and it is expected to have useful life of 10 years.

On 31 December 20X3, the FV less costs to sell of the plane

seats was $320,000 and the value in use was $343,000.

On 31 December 20X5, the FV less costs to sell of the plane

seats was $290,000 and the value in use was $300,000.

What is the reversal of impairment loss on 31 December

20X5?
 Oceanic Airlines

Carrying New Recoverable (Impairment)

amount Carrying amount / reversal
amount
1 Jan 20X1 500,000
Acc Dep (150,000)
31 Dec 350,000 343,000 (7,000)
20X3

1 Jan 20X4 350,000 343,000

Acc Dep (100,000) (98,000)
31 Dec 250,000 245,000 300,000
20X5
 Carrying New Recoverable (Impairment)
amount Carrying amount / reversal
amount
1 Jan 20X1 500,000
Acc Dep (150,000)
31 Dec 350,000 343,000 (7,000)
20X3

1 Jan 20X4 350,000 343,000

Acc Dep (100,000) (98,000)
31 Dec 250,000 245,000 300,000 5,000
20X5
Reversal limited to
the LOWER of old
CA and new RA