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ACCT6005 Company Accounting Case Study Sample

Context:

• Assessment coverage: Module 1-2 Fair Value adjustment and Intra group transactions.

• You are required to demonstrate: the assumed knowledge and skills from Module 1 Introduction and Principles of Consolidation; understanding and ability to account for fair value adjustments and intra group transactions.

• You are able to prepare: acquisition analysis, adjustment entries for group using the consolidation worksheet, and consolidated financial statements.

• You are able to recommend and communicate strategic recommendations regardingfair value adjustment entries.

Instructions:

• Show all relevant workings where required.
• Combine the answers for both Part A and Part B into one assessment document.

Solution

Part A

Point 1: Goodwill

1. The accounts that would get affected from the impairment of Goodwill are Goodwill, Retained Profit, BCVR, Investments in Dublin.

2. The above accounts have not been adjusted to eliminate the intragroup impairment of Goodwill of $5000.

It is to be further noted that Goodwill treatment would not get affected from the tax rate.

The individual companies would have passed the following entries before consolidation are as follows:

3. The Elimination Entry would be for the stated situation are as follows

4. If this error is not corrected, goodwill would be shown at book value instead of showing at fair value leads to which the value of assets would be shown at overstated value by $5000. As per the IAS 36 goodwill should be impaired if the book value is less than the fair value of the market. In the currents scenario goodwill of the Dublin Ltd has been impaired by $5000 and this should be shown at the consolidated balance sheet. Since the goodwill which has been acquired during the time of acquisition has been impaired the same should be reduced by $5000 to show the net and true effect. For Assignment Help Further, any impairment or any improvements in the valuation of the goodwill would be capitalized as such treatment is not regular in nature. However, in the current scenario as the impairment of goodwill has risen after acquisition hence the same should be reduced from the Retained Earnings. Also, impairment expense is the different type of expense for the company and hence this should not mix up with any other expense. (Glaum, Landsman, Wyrwa, 2018)

Point 2: Sales of inventory

1. The accounts that would get affected from the sales of inventory in between the companies are Cost of goods sold, Sales, Inventory, Net Profit.

2. The above accounts have not been adjusted to eliminate the intragroup unrealized profit of $3000.

The individual companies would have passed the following entries before consolidation are as follows:

3. Elimination entries for the current adjustment is follows

4. If this error is not corrected, inventory and profit would be shown at inflated value. Further, the overall value of the assets would reflect at the inflated values as the value of the inventory has been inflated. On the other side liabilities would be inflated due to the profit arrived from such sale. The intra group adjustment should be made appropriately so that net effect can be shown. Therefore, such adjustments have to make to deliver true and fair balance of the financial statements so that the value of assets and liabilities should reflect at correct balance. The profit would change for the company as the profit from the sale of inventory would reduce from the total profit. (Dubolazov, Simakova, Dubolazova, Makarov, 2020)

Point 3: Sale of Equipment

1. The account that would get affected from the sale of equipment in between two companies are Galway, equipment, Profit on equipment, Dublin.

2. The above accounts have not been adjusted to eliminate the intragroup unrealized profit of $5600. The sale of equipment between both the companies should be excluded as the same is considered under intra-group transaction.

The individual companies would have passed the following entries:

3. Elimination Entry for the current adjustment is follows

4. If the above adjustment has not being made then assets and liabilities both would be shown at inflated values. The correct value of the equipment would be ignored and the unrealized profit that should be ignored has taken into consideration. Hence, net gain after tax should be excluded for the purpose of correct evaluation of the equipment. (Dutt, Nicolay, Spengel, 2021)

Point 4: Dividend

1. The account which have been affected Dividend received, Dividend Payable, Dublin, Galway.

2. The above accounts have not been adjusted to eliminate the intragroup adjustment of $18000. The date of acquisition is 1st July 2019 and dividend paid on September 2019 which is the part of post-acquisition profit and hence should be credited in the profit and loss account. Any revenue occurred after the acquisition should not be capitalized. Further, Galway Ltd has declared the dividend as on May 2020 and the same would be paid on October 2020.

The individual companies would have passed the following entries:

3. Elimination of entries for the current adjustment is follows

4. If the above adjustment has not being made then assets and liabilities both would be shown at inflated values leads to which the balance sheet of the company would not deliver true and fair statements. Further, dividend payment and received would show double effect which is not correct as per the international accounting standard. There would be no difference in the accounting of net profit as dividend is being paid after arriving at profit. The intra group transactions should be adjusted while preparation of the consolidation account so that the financial statement should deliver true value. As per the international accounting standard while preparation of the consolidation net effect should be shown.

Point 5: Charge of service Fees

1. The account which have been affected Galway, Dublin, Service Revenue, Service Expense.

2. The above accounts have not been adjusted to eliminate the intragroup adjustment of $9000 ($90000 x 10%). AS 90% of $90000 has already paid by Dublin Ltd to Galway Ltd.

The individual companies would have passed the following entries:


3. Elimination of entries for the current adjustment are as follows:

Dr Service Revenue $90000
Cr Service Expense $90000

4. If the above adjustment has not being made then assets and liabilities both would be shown at inflated values leads to which the balance sheet of the company would not deliver true and fair statements. In the current scenario, Dublin Ltd has purchased services expenses from Galway Ltd which leads to creation of creditors in Dublin Company and creation of debtors in the account of Galway Ltd. To show the net effect both the transaction should be eliminated. However, the value of the net assets and equity would not change for a group but the assets and liabilities would be inflated by $9000 in the financial statements. The Gross Profit would not change but the reporting of income would accordingly overstated by such amount. (Piuzzi, Song, Bigach, Khlopas, Mont, Vega, 2019)

Part B

From the above adjustments the consolidation report has been created in which net affect has been considered thereby eliminating all the previous stated entries that enables us to understand the true and fair view of the financial statements of the company. As per the international accounting standard all the intra group entries should be adjusted effectively to deliver correct value of the statements.

References

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