QUESTION 2 – SUGGESTED SOLUTION (30 marks) Other income
a. (8 marks) Champion Limited 80 000
CHAMPION LIMITED GROUP Beast Limited 105 000
EQUITY ACCOUNTING JOURNAL ENTRIES FOR THE YEAR ENDED Kolbe Limited (deduct ½ mark if Kolbe is included here) 0
31 DECEMBER 2018 Intragroup dividends
Debit Credit - Beast Limited [10 000 x 75%] (7 500) ^
- Kolbe Limited [5 000 x 30%] (1 500) ^
J1 Share of profit of associate (P/L) ^ 21 600 Intragroup management fee (60 000) ^
[25/75^ x 216 000^ x 30%^ (15 000/ 50 000)] Intragroup rent (deduct ½ mark if included here) –
Equipment at cost (SFP) ^ 21 600 116 000 2½
(Elimination of intragroup profit on sale of equipment)
J2 Deferred tax (SFP) ^ [21 600 x 28%] 6 048 (^) c. (16 marks)
Share of profit of associate (P/L) ^ 6 048 Property, plant and equipment
(Tax implication on elimination of intragroup profit on
sale of equipment) Champion Limited [1 028 500 + 378 000] 1 406 500 ^
Beast Limited [1 166 600 + 400 000] 1 566 600 ^
(do NOT penalize again if Kolbe is included here)
J3 Accumulated depreciation: Equipment (SFP) ^ 3 240
Unrealised profit on intragroup sale of equipment [W2] (18 360)
Share of profit of associate (P/L) ^ 3 240
[21 600(^) / 5yrs^ x 9/12^] Carrying amount on 31 December 2018 2 954 740 2
(Realisation of intragroup profit on sale of equipment)
Carrying amount of investment in associate
J4 Share of profit of associate (P/L) ^ 907 (^)
Deferred tax (SFP) ^ [3 240 x 28%] 907 Cost of investment in ordinary shares 30 000 ^
(Tax implication on realisation of intragroup profit on Gain on bargain purchase 14 362 2½
sale of equipment) Share of since acquisition reserves [W1] 105 120 2½
Carrying amount on 31 December 2018 149 482 5½
b. (6 marks)
Goodwill
Cost of sales
Beast only (deduct ½ mark if Kolbe is included here) 4 000
Champion Limited 6 000 000 Retained earnings
Beast Limited 3 040 000
Kolbe Limited (deduct ½ mark if Kolbe is included here) 0 Champion Limited:
Intragroup sales (195 000) ^ Opening retained earnings 890 000 ^
Intragroup profit realised on opening inventories Profit for the year 910 000 ^
[36 000^ x 20/120^] (6 000) () Dividends paid (20 000)
Unrealised intragroup profit on closing inventories Beast Limited 688 950
[48 000^ x 20/120^] 8 000 1 Kolbe Limited 105 120 (^)
8 847 000 3½ Unrealised profit on intragroup sale of equipment (13 219) ()
Gain on bargain purchase 14 362 ()
Unrealised profit on intragroup sale of inventories
[8 000(^) x 72%^] (5 760) 1
Retained earnings balance on 31 December 2018 2 569 453 6½
Other components of equity
Kolbe Limited Nil
a. (8 marks) Champion Limited 80 000
CHAMPION LIMITED GROUP Beast Limited 105 000
EQUITY ACCOUNTING JOURNAL ENTRIES FOR THE YEAR ENDED Kolbe Limited (deduct ½ mark if Kolbe is included here) 0
31 DECEMBER 2018 Intragroup dividends
Debit Credit - Beast Limited [10 000 x 75%] (7 500) ^
- Kolbe Limited [5 000 x 30%] (1 500) ^
J1 Share of profit of associate (P/L) ^ 21 600 Intragroup management fee (60 000) ^
[25/75^ x 216 000^ x 30%^ (15 000/ 50 000)] Intragroup rent (deduct ½ mark if included here) –
Equipment at cost (SFP) ^ 21 600 116 000 2½
(Elimination of intragroup profit on sale of equipment)
J2 Deferred tax (SFP) ^ [21 600 x 28%] 6 048 (^) c. (16 marks)
Share of profit of associate (P/L) ^ 6 048 Property, plant and equipment
(Tax implication on elimination of intragroup profit on
sale of equipment) Champion Limited [1 028 500 + 378 000] 1 406 500 ^
Beast Limited [1 166 600 + 400 000] 1 566 600 ^
(do NOT penalize again if Kolbe is included here)
J3 Accumulated depreciation: Equipment (SFP) ^ 3 240
Unrealised profit on intragroup sale of equipment [W2] (18 360)
Share of profit of associate (P/L) ^ 3 240
[21 600(^) / 5yrs^ x 9/12^] Carrying amount on 31 December 2018 2 954 740 2
(Realisation of intragroup profit on sale of equipment)
Carrying amount of investment in associate
J4 Share of profit of associate (P/L) ^ 907 (^)
Deferred tax (SFP) ^ [3 240 x 28%] 907 Cost of investment in ordinary shares 30 000 ^
(Tax implication on realisation of intragroup profit on Gain on bargain purchase 14 362 2½
sale of equipment) Share of since acquisition reserves [W1] 105 120 2½
Carrying amount on 31 December 2018 149 482 5½
b. (6 marks)
Goodwill
Cost of sales
Beast only (deduct ½ mark if Kolbe is included here) 4 000
Champion Limited 6 000 000 Retained earnings
Beast Limited 3 040 000
Kolbe Limited (deduct ½ mark if Kolbe is included here) 0 Champion Limited:
Intragroup sales (195 000) ^ Opening retained earnings 890 000 ^
Intragroup profit realised on opening inventories Profit for the year 910 000 ^
[36 000^ x 20/120^] (6 000) () Dividends paid (20 000)
Unrealised intragroup profit on closing inventories Beast Limited 688 950
[48 000^ x 20/120^] 8 000 1 Kolbe Limited 105 120 (^)
8 847 000 3½ Unrealised profit on intragroup sale of equipment (13 219) ()
Gain on bargain purchase 14 362 ()
Unrealised profit on intragroup sale of inventories
[8 000(^) x 72%^] (5 760) 1
Retained earnings balance on 31 December 2018 2 569 453 6½
Other components of equity
Kolbe Limited Nil
