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Intra-Group reconciliation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Intra-Group reconciliation

  • This topic has 5 replies, 2 voices, and was last updated 3 years ago by P2-D2.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • September 14, 2021 at 10:09 pm #635752
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Hello Sir,

    regarding amount due from subsidiary and parents (payables and receivables) to each other

    I want to stand on a base and understand which amount I have to cancel out from both the parent and subsidiary

    should I say that whatever the difference between the two parties in payables and receivables then I should cancel out

    If you see the below question there was two amounts concerning this matter first $700,000 and the other 3m .In model answer only the 3m was cancelled out and the $700,000 was added to the payables

    Please clarify this sir specially this sentence as it is telling that the 3m difference between the parties is because of the goods in transit but the goods worth $700,000 only ,

    please clarify sir,

    At 31 March 20X6, Dargent Co’s records showed a receivable due from Latree Co of $3million, this
    differed to the equivalent payable in Latree Co’s records due to the goods in transit.

    Thanks,

    ————————————————————————————————————————–
    Question 305 from Bpp Kit 2020

    305 Dargent Co (Mar/Jun17) 36 mins
    On 1 January 20X6, Dargent Co acquired 75% of Latree Co’s equity shares by means of a share exchange of
    two shares in Dargent Co for every three Latree Co shares acquired. On that date, further consideration was also
    issued to the shareholders of Latree Co in the form of $100 8% loan notes for every 100 shares acquired in
    Latree Co. None of the purchase consideration, nor the outstanding interest on the loan notes at 31 March 20X6,
    has yet been recorded by Dargent Co. At the date of acquisition, the share price of Dargent Co and Latree Co is
    $3·20 and $1·80 respectively.
    The summarised statements of financial position of the two companies as at 31 March 20X6 are:
    Dargent Co Latree Co
    $’000 $’000
    Assets
    Non-current assets
    Property, plant and equipment (note (i)) 75,200 31,500
    Investment in Amery Co at 1 April 20X5 (note (iv)) 4,500 –
    79,700 31,500
    Current assets
    Inventory (note (iii)) 19,400 18,800
    Trade receivables (note (iii)) 14,700 12,500
    Bank 1,200 600
    35,300 31,900
    Total assets 115,000 63,400
    Equity and liabilities
    Equity
    Equity shares of $1 each 50,000 20,000
    Retained earnings – at 1 April 20X5 20,000 19,000
    – for year ended 31 March 20X6 16,000 8,000
    86,000 47,000
    Non-current liabilities
    8% loan notes 5,000 nil
    Current liabilities (note (iii)) 24,000 16,400
    29,000 16,400
    Total equity and liabilities 115,000 63,400
    The following information is relevant:
    (i) At the date of acquisition, the fair values of Latree Co’s assets were equal to their carrying amounts.
    However, Latree Co operates a mine which requires to be decommissioned in five years’ time. No provision
    has been made for these decommissioning costs by Latree Co. The present value (discounted at 8%) of the
    decommissioning is estimated at $4million and will be paid five years from the date of acquisition (the end
    of the mine’s life).
    (ii) Dargent Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. Latree Co’s
    share price at that date can be deemed to be representative of the fair value of the shares held by the
    non-controlling interest.
    (iii) The inventory of Latree Co includes goods bought from Dargent Co for $2·1million. Dargent Co applies a
    consistent mark-up on cost of 40% when arriving at its selling prices.
    On 28 March 20X6, Dargent Co despatched goods to Latree Co with a selling price of $700,000. These
    were not received by Latree Co until after the year end and so have not been included in the above
    inventory at 31 March 20X6.
    At 31 March 20X6, Dargent Co’s records showed a receivable due from Latree Co of $3million, this
    differed to the equivalent payable in Latree Co’s records due to the goods in transit.
    The intra-group reconciliation should be achieved by assuming that Latree Co had received the goods in
    transit before the year end.

    (iv) The investment in Amery Co represents 30% of its voting share capital and Dargent Co uses equity
    accounting to account for this investment. Amery Co’s profit for the year ended 31 March 20X6 was
    $6million and Amery Co paid total dividends during the year ended 31 March 20X6 of $2million. Dargent
    Co has recorded its share of the dividend received from Amery Co in investment income (and cash).
    (v) All profits and losses accrued evenly throughout the year.
    (vi) There were no impairment losses within the group for the year ended 31 March 20X6.
    Required:
    Prepare the consolidated statement of financial position for Dargent Co as at 31 March 20X6.
    (20 marks)

    Answer

    DARGENT CO – CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X6
    $’000 $’000
    ASSETS
    Non-current assets
    Property, plant and equipment (75,200+31,500+4,000 re mine – 200 depreciation) 110,500
    Goodwill (W1)) 11,000
    Investment in associate (4,500+1,200 (W3) 5,700
    127,200
    Current assets
    Inventories (19,400+18,800+700 GIT – 800 URP (W2) 38,100
    Trade receivables (14,700 + 12,500 – 3,000) 24,200
    Cash and cash equivalents (1,200+600) 1,800
    64,100
    Total assets 191,300
    EQUITY AND LIABILITIES
    Equity attributable to owners of the parent
    Equity shares of $1 each ( 50,000 + 10,000 (W1)) 60,000
    Other equity reserves (share premium) (W1) 22,000
    Retained earnings (W3) 37,390 59,390
    119,390
    Non-controlling interest (W4) 9,430
    Total equity 128,820
    Non-current liabilities
    8% loan notes (5,000 +15,000 consideration) 20,000
    Accrued loan interest (W3) 300
    Environmental provision (4,000 + 80 interest (W3)) 4,080 24,380
    Current liabilities (24,000+16,400-(3,000-700 GIT) intra-group W2)) 38,100
    Total equity and liabilities 191,300

    Workings (figures in brackets are in $’000)
    1 Goodwill in Latree Co
    $’000 $’000
    Controlling interest
    Share exchange (20,000 u 75% u 2/3 = 10,000 u $3.20) 32,000
    8% loan notes (20,000 u 75% u $1,000/1,000) 15,000
    Non-controlling interest (20,000 u 25% u $1.80) 9,000
    56,000
    Equity shares 20,000
    Retained earnings at 1 April 20X5 19,000
    Earnings 1 April 20X5 to acquisition (8,000 u 9/12) 6,000
    Fair value adjustments – asset re mine 4,000
    – Provision re mine (4,000) (45,000)
    Goodwill arising on acquisition 11,000

    The share exchange of $32 million would be recorded as share capital of $10 million (10,000 u $1) and
    share premium of $22 million (10,000 u ($3.20 – $1.00)).
    Applying the group policy to the environmental provision would mean adding $4 million to the carrying
    amount of the mine and the amount recorded as a provision at the date of acquisition. This has no overall
    effect on goodwill, but it does affect the consolidated statement of financial position and post-acquisition
    profit.

    2 Inventory
    The inventory of Latree Co includes unrealised profit (URP) of $600,000 (2,100 u 40/140). Similarly, the
    goods in transit sale of $700,000 includes URP of $200,000 (700 u 40/140).

    3 Consolidated retained earnings
    $’000
    Dargent Co’s retained earnings 36,000
    Latree Co’s post-acquisition profit (1,720 x 75% see below) 1,290
    Unrecorded share of Amery’s retained profit ((6,000 – 2,000) u 30%) 1,200
    Outstanding loan interest at 31 March 20X6 (15,000 u 8% u 3/12) (300)
    URP in inventory (W2) (800)
    37,390
    The adjusted post-acquisition profits of Latree Co are:
    As reported and time apportioned (8,000 u 3/12) 2,000
    Interest on environmental provision (4,000 u 8% u 3/12) (80)
    Additional depreciation re.mine (4,000/5 years u 3/12) (200)
    1,720

    4 Non-controlling interest
    $’000
    Fair value on acquisition (W1) 9,000
    Post-acquisition profit (1,720 u 25% (W4) 430
    9,430

    September 17, 2021 at 8:16 pm #635924
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    To deal with the goods in transit you need to record the goods in the group accounts first, DR Inventory CR Payables (using 700)

    Upon doing this the intra-group balances will then balance and you can cancel the receivable and payable, DR Payable CR Receivable (using 3000)

    Try it using the question above to see how you get on and let me know how you do.

    Thanks

    September 23, 2021 at 12:12 pm #636356
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Hello Sir,

    By making the entry of 700 in the group ,after that how we will know that now the AP and AR of the group became balanced to further cancel them out ,I mean how we will see that from the balances given in the question.

    Thanks,

    September 25, 2021 at 8:56 am #636446
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    They have to balance unless told otherwise that they don’t. You will only ever be told what is incorrect and needs adjusting, you won’t be told about the rest being correct.

    Thanks

    September 25, 2021 at 11:18 am #636466
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Hi Sir,

    Thanks for clarification,

    Thanks,

    September 29, 2021 at 8:44 pm #636705
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    You’re welcome!

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