Assignment Task

Part A

Grace Ltd acquired a 100% interest in Kelly Ltd on 1 March 2021. Consideration consisted of $600,000 in cash and 100,000 shares with a fair value price of $2 per share. At that date, Kelly Ltd.’s equity consisted of a share capital of $100,000, a general reserve of $60,000, and retained earnings of $250,000.

On the date of the acquisition, all assets and liabilities were equal to fair value except for the following:

(a) Kelly Ltd had inventories recorded for $900,000 which had a fair value of $1,200,000. These inventories were sold to external parties by 30 June 2022 for $658,000.

(b) Kelly Ltd’s plant had a fair value of $700,000. This asset has a remaining life of 10 years.

Kelly’s balance sheet disclosed the following balances on acquisition date:

Plant (at cost) $900,000

Accumulated depreciation $300,000

Additional information:

• Kelly Ltd has an existing goodwill record of $1,000 on the acquisition date.
• The corporate tax rate is 30%.

The following intra-company transactions have occurred since the acquisition date:

a) On 1 May 2021, Grace Ltd sold inventory to Kelly Ltd for $350,000, recording a before-tax profit of $150,000. By 30 June 2021, a stock take recorded 100% of this inventory still on hand for Kelly Ltd. However, by 30 June 2022, all inventory was sold to external parties.

b) During the year ended 30 June 2022, Kelly Ltd declared a final dividend of $95,000. This was paid on 30 November 2022.

c) On 30 April 2022, Kelly Ltd purchased goods for $90,000 from Grace Ltd. This inventory had originally cost Grace Ltd $70,000. As at 30 June 2022, 25% of inventory was still on hand.

d) Kelly Ltd rents a warehouse from Grace Ltd. The rental contract commenced on 1 October 2021 with a monthly rent of $25,000. The rent is paid in arrears and the June 2022 quarter was not paid until 31 July 2022. Both companies record accruals for outstanding rent at year-end.

Required:

Excel document – separate sheet for parts a) – c):

a) Prepare consolidated worksheet entries for the year ending 30 June 2022. Include dates, narrations, and a reference number per entry. 

b) Prepare a consolidation worksheet for the year ending 30 June 2022. Please enter each entry as a separate amount and not as aggregated totals from part (a) above Template worksheet is attached.

c) Using the group column from your worksheet, prepare a consolidated Income statement for the Grace Ltd group as of 30 June 2022.

Round all answers to 2 decimal places. 

Word document:

d) Luke is employed as a graduate accountant in the finance area of Santos Ltd. He is struggling to understand the reason why certain accounts are used in the consolidation worksheet entries for the annual report. Luke’s question is provided below:

Please explain why we are using a Deferred Tax liability (DTL) account when assets are increased to fair value. If we are increasing the value of an asset, this should be a benefit to the group, not a liability. Reference your answer using relevant accounting standards.

	Grace Ltd ($)	Kelly Ltd ($)	Dr ($)	Cr ($)	Consolidated ($)
Sales	1,930,700	1,505,100
Less Cost of Sales	510,000	281,000
Gross Profit	1,420,700	1,224,100
Other income:
Dividend Income	95,000	45,000
Rental income	225,000
Total income:	320,000	45,000
Operating expenses:
Rent expenses	37,000	225,000
Depreciation Expenses	62,000	40,000
Other general expenses	40,000	10,000
Total expenses	139,000	275,000
Profit before tax	1,601,700	994,100
Less Income Tax Expenses	480,510	298,230
Profit after tax	1,121,190	695,870
Retained earnings (1 July 2021)	124,000	250,000
Less Dividends declared	70,000	95,000
Retained earnings (30 June 2022	1,175,190	850,870
General reserve	36,000	60,000
Share Capital	400,000	100,000
BCVR	–	–
Transfer from BCVR	–	–
Total Shareholders’ equity	1,611,190	1,010,870

	Grace Ltd ($)	Kelly Ltd ($)	Dr ($	Cr ($)	Consolidated ($)
Liabilities
Deferred tax liabilities	–	–
Trade Payables	80,000	520,850
Dividend payable	80,000	95,000
Bank Overdraft	677,310	1,192,720
Rent Payable		75,000
Total liabilities	837,310	1,883,570
Total Shareholders’ Equity and Liabilities	2,448,500	2,894,440
Assets
Land, at cost	387,000	415,000
Plant, at cost	370,000	900,000
Less Accumulated Depreciation	(120,000)	(360,000)
Investment in Kelly Ltd	800,000	–
Goodwill	–	1,000
Dividend receivable	95,000
Deferred tax assets	–	845,440
Rent receivable	75,000	–
Inventories	726,500	840,000
Trade Receivables	95,000	93,000
Cash and cash equivalent	20,000	160,000
Total Assets	2,448,500	2,894,440

Part B

Assignment instructions:

Prepare a video presentation and a script (Word document only) to address each of the following questions, in relation to Part A Case study. You will be assessed on your technical understanding of each question and also your presentation skills. Please refer to the marking rubric which details the assessment criteria for the communication and presentation skills. Please ensure your presentation does not exceed the 8 minutes +/- 10% time limit.

Part C

Please ensure your presentation includes reference to the appropriate Australian accounting standards (AASB).

Your presentation should focus on demonstrating your technical understanding of why these entries are made rather than only discussing the numeric calculations performed. The following questions relate to Part A of this assessment:

1. Discuss the accounting treatment for any prior year intragroup transactions and why these adjustments were necessary

2. Discuss all calculations and consolidation entries required for the rental elimination entries, including any accruals and tax effects.

3. Justify and explain the reason for any consolidation entries you have made relating to intragroup sales of inventories in the current year, including tax effects. Provide a breakdown of your calculation for the adjustment to COGS expense.