Advanced Accounting II (2024/25 Semester 1)

Assignment One

Instructions to Students:

1) This assignment contains ONE comprehensive question (with two parts) which accounts for
10% of the final grade.

2) Deadline of submission: 10am, 14 October 2024 (Monday)for both hard copy and
soft copy.

3) For students of Section 1001, 1005 to 1006:

Please submit the hard copy to: Ms. Doris Liu (Office:T1 – 301 – R5 – H18)

For students of Section 1002 to 1004:

Please submit the hard copy to: Ms. Judy Xu (Office:T1 – 301 – R5 – H15)

4) The answers presented should be in handwritten format and you should show your
computations clearly.

5) For the soft copy uploaded to the ISpace, please use the PDF version. No photo is
allowed.

6) Use of Generative AI Tools is NOT allowed.

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Question
Part I (70 marks)
Purple Company is a manufacturer of electronic home appliances. Yellow Company is a manufacturer of
electronic ovens and is renowned for its high quality of materials used in its production. Because of its
expansion of business, Purple Company acquired 70% ownership interests of Yellow Company on 1 January
20X3.

Green Company is a retailer of electronic ovens established eight years ago. For the sake of effectively
launching the electronic oven products in the target market, Yellow Company acquired 90% ownership
interests of Green Company on 1 April 20X4. Red Company is an advertising company which specializes in
the promotion of electronic home appliances. On 1 January 20X4, Purple Company acquired 30%
ownership interests of Red Company.

The details of acquisition of Red Co., Yellow Co., and Green Co. are shown below. (All figures are in $)
Red Co. Yellow Co. Green Co.
Date of acquisition 1 January 20X4 1 January 20X3 1 April 20X4
Percentage acquisition by Purple Co. 30% 70%
Percentage acquisition by Yellow 90%
Co.

Shareholder’s equity at date of acquisition:

Share capital 780,000 3,120,000 1,950,000
Retained earnings (RE) 1,560,000 3,510,000 1,326,000
2,340,000 6,630,000 3,276,000

Fair value of non-controlling

– 3,900,000 741,000
interests (NCI) at acquisition date:

The fair value (FV) and book value (BV) of net identifiable assets of each company at the date of acquisition
are shown below:
Red Co. Yellow Co. Green Co.
Book value Fair Book value Fair value Book value Fair value
value
Inventory 858,000 1,248,000 390,000 351,000
Intangible assets
1,170,000
Other net assets 2,340,000 2,340,000 5,772,000 5,772,000 2,886,000 2,886,000
Net identifiable assets 2,340,000 3,510,000 6,630,000 7,020,000 3,276,000 3,237,000

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The financial statements of each company for the year ended 31 December 20X5 are shown below:
Income Statement
For the Year Ended 31 December 20X5
Purple Co. Red Co. Yellow Co. Green Co.
Profit before tax 16,380,000 1,950,000 7,020,000 1,170,000
Less: tax (3,276,000) (312,000) (1,404,000) (257,400)
Profit after tax 13,104,000 1,638,000 5,616,000 912,600
Less: dividend declared (1,560,000) (390,000) (1,170,000) (468,000)
Profit retained 11,544,000 1,248,000 4,446,000 444,600
Retained earnings (RE),
4,680,000 2,730,000 4,680,000 1,560,000
1 January 20X5
Retained earnings (RE),
16,224,000 3,978,000 9,126,000 2,004,600
31 December 20X5

Statement of Financial Position

As at 31 December 20X5
Purple Co. Red Co. Yellow Co. Green Co.
Fix assets, net book value 10,920,000 2,730,000 8,034,000 13,650,000
Investment in Red Co., at cost 3,120,000
Investment in Yellow Co., at cost 8,580,000
Investment in Green, at cost 3,120,000
Inventory 2,964,000 897,000 1,950,000 390,000
Accounts receivable 2,340,000 1,170,000 2,340,000 975,000
Cash 175,500 195,000 390,000 117,000
28,099,500 4,992,000 15,834,000 15,132,000

Accounts payable 7,195,500 234,000 3,588,000 11,177,400

Share capital 4,680,000 780,000 3,120,000 1,950,000
Retained earnings (RE) 16,224,000 3,978,000 9,126,000 2,004,600
28,099,500 4,992,000 15,834,000 15,132,000
Additional information:
a) Inventory of Yellow Co. at the acquisition date was disposed of in 20X4, while inventory of Green Co.
was disposed of in January 20X5.

b) The intangible asset of Red Co. at the date of acquisition had no definite useful life and was tested for
impairment on an annual basis. So far, there is no impairment loss for the intangible asset.

c) On 1 January 20X5, Red Co. transferred a fixed asset to Purple Co. at a transfer price of $600,000. The
original cost of this asset was $720,000 and its accumulated depreciation (using straight-line
depreciation method and no residual value) was $240,000 at the date of transfer. The original useful life
of the asset was six years and the remaining life as at 1 January 20X5 was four years.

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d) In May 20X4, Yellow Co. transferred inventory to Red Co. at an invoiced price of $780,000. The
original cost of the inventory was $546,000.
Percentage resold to third parties during 20X4 20%
Percentage resold to third parties during 20X5 50%
Percentage unsold as at end of 20X5 30%

e) Assume a tax rate of 20%

Required:
1) Prepare the following consolidation and equity accounting entries for Purple Co. and its subseries and
associate for the year ended 31 December 20X5. (35 marks)

 CJE1: Elimination of investment in Yellow Co.;

 CJE2: Adjustment of sale of Yellow Co.’s under-valued inventory;
 CJE3: Tax effects of CJE2;
 CJE4: Allocation of Yellow Co.’s post-acquisition RE to Yellow Co.’s NCI;
 CJE5: Adjustment for NCI’s share of unrealized profit in the beginning RE (sale from Yellow Co. to
Red Co.);
 CJE6: Elimination of dividend declared by Yellow Co.;
 CJE7: Allocation of Yellow Co.’s current year profit (after tax) to NCI of Yellow Co.;
 CJE8: Elimination of investment in Green Co.;
 CJE9: Allocation of Green Co.’s post-acquisition RE to total NCI of Green Co.;
 CJE10: Adjustment of excess cost of sales on Green Co.’s over-valued inventory;
 CJE11: Tax effects of CJE10;
 CJE12: Elimination of dividend declared by Green Co.;
 CJE13: Allocation of Green Co.’s current year profit (after tax) to total NCI of Green Co.;
 EA1: Recognition of share of post-acquisition RE of Red Co.;
 EA2: Adjustment for unrealized profit (after tax) in the beginning RE of Red Co.;
 EA3: Reclassification of dividend income as a reduction of investment in Red Co.;
 EA4: Recognition of share of current year profit (after tax) of Red Co.

2) Perform an Analytical Check of the year end balances of:

a) Non-controlling interests
b) Investment in Associate
c) Consolidated Retained Earnings (15 marks)

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3) Prepare the consolidation worksheets for Purple Co., Yellow Co. and Green Co. for the year ended 31
December 20x5. (20 marks)

Part II (30 marks)

1)
Company A purchased 35% equity interest in Company B, a publicly traded company, for $20 million on
1 January 20X4. As such, Company A accounts for its 35% equity interest in Company B by using the
equity method of accounting.

On 31 December 20x4, Company A acquired the remaining 65% equity interest in Company B for $65
million and thus, obtains control of Company B. Company A accounts for the transaction as a business
combination. Company B’s identifiable net assets were recognized at $80 million on 31 December 20x4.
The fair value of Company A’s 35% equity interest in Company B was $35 million, and the carrying amount
(book value) of that equity interest was $25 million on 31 December 20x4.

Company B declared a dividend of $5 million for the year ended 31 December 20X4. The deferred tax
accounting implications are ignored.

Required:
How should company A accounts for all the above mentioned equity interest in Company B for the year
ended 31 December 20X4? (Please show your computations in supporting your explanations.)
(10 marks)

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2)
On 31 December 2021, Pet Company paid $36 million in order to acquire 80% interest of Smile Company.
On 30 June 2024, it decided that the ownership interest should be reduced to 30%.

With regard to the disposal of 50% interest in Smile Company, Pet Company obtained $18 million from
those investors who purchased the said interest. The fair value of the 30% investment on 30 June 2024 was
$10 million. The reserves of Smile Company on different dates were as follows:

Retained Earnings Revaluation Reserves

31 December 2020: $6m 31 December 2020: $1m
31 December 2021: $7m 31 December 2021: $1.2m
30 June 2024: $9.5m 30 June 2024: $3m

Required:
Explain how the accountant of Pet Company should deal with the followings (from the Consolidation
Financial Statement perspective):
(a) Retained investment
(b) Sale of the 50% interest in Smile Company
(Please show your computations in supporting your explanations.)
(10 marks)

3)
On 1 January 2023, P Ltd acquired a 30% investment in Z Ltd for $20,000. This investment balance, based
on equity accounting principle, was recorded as $35,000 in P Ltd’s accounts on 31 December 2023.
On 1 January 2024, P made a further acquisition of 50% of Z Ltd's shares for $160,000. The previously
acquired investment had a fair value of $50,000 on 1 January 2024. P has a policy of valuing the non-
controlling interest (NCI) at fair value at the date of acquisition. The fair value of the identifiable net assets
was valued at $200,000 and the NCI at $30,000.

Required:
Explain how control was gained, referencing the facts of the case and IFRS 10. Discuss how P Ltd’s
accountant should calculate the goodwill arising from the acquisition of Z Ltd when control was achieved on
1 January 2024. (Please show your computations in supporting your explanations.)
(10 marks)