Advanced Financial Accounting
Unit 2 Solutions
1
Solution to question 1
Goodwill is defined in HKFRS 3 as an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and separately recognised.
Nature of goodwill
• Is it an asset?
• Two types: Internal vs external/acquired goodwill
• Nature of internal goodwill: undervalued/unrecorded assets, core goodwill
• Nature of acquired goodwill? Core goodwill: going concern & combination
• Why did acquirer pay for goodwill? Synergy – extra benefits
How to account for it
• Internal goodwill HKAS 38: not recognised as cannot determine the cost
• Acquired goodwill
• Recognised only in a business combination
• Measured as a residual under HKFRS 3
• Subject to annual impairment test
• If allocated to CGU, write off first if impairment loss
• If reversal of impairment loss, no reinstatement of goodwill
• Future effects on Statement of Comprehensive Income → No cause for concern
• No annual amortisation
• Only expense if impairment loss
• Impairment loss cushioned by various accounting treatments such as use of cost method for
PPE, non-recognition of internally generated goodwill & internally generated intangibles,
therefore, carrying amount usually can be smaller than the fair value
Solution to question 2
1. False, goodwill = Consideration transferred + Fair value of non-controlling interests + Fair value of
previously-held equity interests – Net fair value of identifiable net assets
2. False, goodwill impairment losses will have to be debited to opening retained earnings.
Solution to question 3
1) At 1 July 20X9 (Full Goodwill)
(a) Consideration transferred = (75% x 400,000 shares) x $1.50 = $450,000
(b) Non-controlling interest (fair value) = $147,000
Aggregate of (a) and (b) = $597,000
Net fair value of identifiable assets
and liabilities of Victory Ltd = $400,000 + $50,000 + $40,000
+ $30,000 + $40,000(equity) = $560,000
Goodwill = $37,000
Net fair value acquired by parent = 75% x $560,000 = $420,000
Goodwill (parent) = $450,000 – $420,000 = $30,000
Goodwill (NCI) = $147,000 – 25% x $560,000 = $7,000
At 1 July 20X9
Share capital Dr 400,000
General reserve Dr 50,000
Asset revaluation reserve Dr 40,000
Other components of equity Dr 30,000
Retained earnings Dr 40,000
Goodwill Dr 37,000
Shares in Victory Ltd Cr 450,000
NCI at FV Cr 147,000
Advanced Financial Accounting
Unit 2 Solutions
2
2) At 1 July 20X9 (Partial Goodwill)
(a) Consideration transferred = (75% x 400,000 shares) x $1.50 = $450,000
(b) Non-controlling interest = $560,000 x 25% NCI = $140,000
Aggregate of (a) and (b) = $590,000
Net fair value of identifiable assets
and liabilities of Victory Ltd = $400,000 + $50,000 + $40,000
+ $30,000 + $40,000(equity) = $560,000
Goodwill = $30,000
Net fair value acquired by parent = 75% x $560,000 = $420,000
Goodwill (parent) = $450,000 – $420,000 = $30,000
Goodwill (NCI) = $140,000 – 25% x $560,000 = $0
At 1 July 20X9
Share capital Dr 400,000
General reserve Dr 50,000
Asset revaluation reserve Dr 40,000
Other components of equity Dr 30,000
Retained earnings Dr 40,000
Goodwill Dr 30,000
Shares in Victory Ltd Cr 450,000
NCI Cr 140,000
Solution to question 4
Impairment loss on goodwill
S Co
T Co
$
$
Allocated goodwill (P’s share)
6,000,000
7,000,000
Allocated goodwill (NCI’s share)
1,500,000
1,750,000
Total goodwill (1)
7,500,000
8,750,000
Book value of identifiable net assets
30,000,000
43,000,000
Unamortized balance of FV adjustments
3,000,000
5,000,000
Carrying amount of CGU (2)
40,500,000
56,750,000
Value in use (3)
37,000,000
50,000,000
Fair value of division (4)
33,000,000
46,000,000
Recoverable amount (5) = Higher of Fair
Value (4) or Value in Use (3)
37,000,000
50,000,000
Impairment loss (6) = (2) – (5)
3,500,000
6,750,000
Attributable to:
– Goodwill
3,500,000
6,750,000
– Other assets
0
0
Impairment loss recognized in CFS:
related to goodwill
3,500,000 x 100%
3,500,000
6,750,000 x 80%
5,400,000
Advanced Financial Accounting
Unit 2 Solutions
3
related to other assets
0
0
Total
3,500,000
5,400,000
Solution to question 5
(1) Prepare all necessary consolidation journal entries for 20X3
Consolidation adjustments for 20x3
(1) Elimination entry of balances at 1 Jan 20×1 required again in 20×3
Dr Share capital
190,000
Dr Retained earnings
5,000
Dr Accumulated depreciation (30k→0)
30,000
Dr Goodwill
74,000
Cr Non-current asset (100k→90k)
10,000
Cr Deferred tax liability
4,000
Cr Investment in Silver Ltd
230,000
Cr Non-controlling interests
55,000
Investment in Silver Ltd – consideration transferred
230,000
Fair value of non-controlling interests
55,000
285,000
Fair value of identifiable net assets, after-tax
(211,000)
(Note a)
Goodwill
74,000
Note (a)
Fair value of identifiable net assets
215,000
Deferred tax liability on undervaluation (20% x 20K)
(4,000)
Net fair value
211,000
(2) Past and present impairment entries
Dr Retained earnings
11,840
(80% x 14,800)
Dr Non-controlling interests
2,960
(20% x 14,800)
Dr Impairment of goodwill
7,400
(Current)
Cr Goodwill
22,200
Working
Past impairment of goodwill 20×2
14,800
(20% x 74,000)
Current impairment goodwill 20×3
7,400
(10% x 74,000)
(3) Past and present accumulated depreciation
Dr Retained earnings
6,400
(80% x 8,000)
Dr Non-controlling interests
1,600
(20% x 8,000)
Dr Depreciation (20×3)
4,000
Advanced Financial Accounting
Unit 2 Solutions
4
Cr Accumulated depreciation
12,000
Working
Depreciation of non-current asset (NCA) for 20X1 & 20X2
8,000
(20,000/5×2)
Depreciation of NCA for 20X3
4,000
(20,000/5)
(4) Tax effects of past and present depreciation on undervalued non-current asset
Dr Deferred tax liability
2,400
Cr Retained earnings (6,400 x 20%)
1,280
Cr Non-controlling interests (1,600 x 20%)
320
Cr Tax expense (4,000 x 20%)
800
(5) NCI’s share of post-acquisition RE to beginning of year
Dr Retained earnings
30,000
[20% x (155K – 5K)]
Cr Non-controlling interests
30,000
Note: -2,960 (2) – 1,600 (3) + 320 (4) + 30,000 (5) = 25,760
Or alternatively remove the NCI share in journal entries (2), (3) and (4) and combine all NCI
entries into one journal entry (5):-
(2a) Past and present impairment entries
Dr Retained earnings
14,800
Dr Impairment of goodwill
7,400
(Current)
Cr Goodwill
22,200
(3a) Past and present accumulated depreciation
Dr Retained earnings
8,000
Dr Depreciation
4,000
Cr Accumulated depreciation
12,000
(4a) Tax effects of past and present depreciation on undervalued non-current asset
Dr Deferred tax liability
2,400
Cr Retained earnings
1,600
Cr Tax expense
800
(5a) NCI’s share of post-acquisition RE to beginning of year
Dr Retained earnings
25,760
Cr Non-controlling interests
25,760
Working
R/E as at 1 January 20X3
155,000
Less: excess depreciation on undervalued NCA (after-tax)
(8,000)
Less: goodwill impairment
(14,800)
Advanced Financial Accounting
Unit 2 Solutions
5
Add: Tax on past depreciation
1,600
133,800
Less: R/E at acquisition
5,000
Post-acquisition R/E
128,800
NCI’s share @20%
25,760
(6) NCI’s share of current profit after tax
Dr Income to NCI
33,880
Cr Non-controlling interests
33,880
Working
Profit after tax
180,000
Less: excess depreciation on undervalued NCA (after-tax)
(3,200)
Less: goodwill impairment
(7,400)
169,400
NCI’s share @20%
33,880
(7) Elimination of dividends
Dr Non-controlling interests
7,000
Dr Dividend Income
28,000
Cr Dividends’ paid
35,000
Non-controlling interests = NCI% x Dividends paid
(8) Elimination of intercompany payable and receivable
Dr Due to Prince Ltd
60,000
Cr Due from Silver Ltd
60,000
(2) Prepare the consolidation worksheet for the year ended 31 Dec 20X3
Income Statement for the year ended 31 December 20×3
Consolidation adj
Consolidated
total
Prince Ltd
Silver Ltd
Dr
ref
Cr
$
$
$
$
$
Sales
5,000,000
1,900,000
6,900,000
Cost of sales
(4,250,000)
(1,520,000)
(5,770,000)
Gross profit
750,000
380,000
1,130,000
Other expenses
(185,000)
(155,000)
7,400
J2
(351,400)
4,000
J3
Operating profit
565,000
225,000
778,600
Dividend income
28,000
0
28,000
J7
0
Profit before tax
593,000
225,000
778,600
Tax, at 20%
(113,000)
(45,000)
J4
800
(157,200)
Profit after tax
480,000
180,000
621,400
Income to NCI
33,880
J6
(33,880)
Profit after NCI
587,520
Dividends paid
(100,000)
(35,000)
J4
35,000
(100,000)
Profit retained
380,000
145,000
487,520
R/E, 1 Jan
1,620,000
155,000
5,000
J1, J4
1,280
1,723,040
Advanced Financial Accounting
Unit 2 Solutions
6
11,840
J2
6,400
J3
30,000
J5
R/E, 31 Dec
2,000,000
300,000
126,520
37,080
2,210,560
Statement of financial position as at 31 December 20X3
Silver Ltd
Consolidation adj
Consolidated total
Prince Ltd
Dr
Ref
Cr
$
$
$
$
$
Non-current assets
2,200,000
326,000
20,000
J1, J3
12,000
2,534,000
Goodwill
74,000
J1, J2
22,200
51,800
Investment in Silver Ltd,
230,000
J1
230,000
Other investments
120,000
120,000
Inventories
797,000
106,000
903,000
Trade and other receivables
453,000
50,000
503,000
Due from Silver Ltd
60,000
J8
60,000
Cash
185,000
20,000
205,000
3,925,000
622,000
4,316,800
Share capital
1,150,000
190,000
190,000
J1
1,150,000
Retained earnings
2,000,000
300,000
126,520
37,080
2,210,560
NCI
1,600
J3, J1
55,000
107,640
7,000
J7, J5
30,000
2,960
J2, J6
33,880
J4
320
Due to Prince Ltd
60,000
60,000
J8
Deferred tax liability
2,400
J4, J1
4,000
1,600
Trade and other payables
775,000
72,000
847,000
3,925,000
622,000
484,480
484,480
4,316,800
(3) Analytical check on the balance of NCI
$
20%
NCI $
Book value of shareholders’ equity of Silver as at 31 Dec 20×3
490,000
98,000
Unamortized balance of excess of fair value over book value
8,000
1,600
Tax on unamortized balance of excess
(1,600)
(320)
Adjusted shareholders’ equity
496,400
99,280
NCI’s share @20%
99,280
NCI’s goodwill (a)
8,360
8,360
107,640
107,640
Working (a)
Fair value of NCI at acquisition
55,000
Share of fair value of identifiable net assets
(42,200)
[20% x 211,000]
Goodwill attributable to NCI’s share
12,800
NCI’s share of cumulative impairment
(4,440)
[20% x 30% x74,000]
NCI’s goodwill as at 31 Dec 20X3
8,360
Or alternatively
$
NCI share of Silver’s BV of net assets $490,000 x 20%
98,000
NCI share of Silver’s unamortized FV adjustments
($90,000 – $70,000) x 2/5 x 0.8 (after tax) x 20%
1,280
NCI share of unamortized goodwill
$12,800 (see (a) above) – $74,000 x 30% (cumulative impairment) x 20%
8,360
107,640
Solution to question 6
Consolidation adjustments for year ended 30 June 20×2
Advanced Financial Accounting
Unit 2 Solutions
Dr Share capital
10,000,000
Dr Retained earnings
1,200,000
Dr Investment property (10m→15m)
5,000,000
Dr In-process R&D (
0→6m)
6,000,000
Dr Inventory (500k→750k)
250,000
Dr Goodwill
8,832,000
Cr Plant and equipment (2m→1.8m)
200,000
Cr Contingent liabilities (0→90k)
90,000
Cr Deferred tax liability
2,192,000
Cr Investment in S
26,000,000
Cr Non-controlling interests
2,800,000
(a) Elimination entry as at 1 July 20x1
Working
Book value
Fair value
Useful life
Fair value
difference
Plant and equipment
2,000,000
1,800,000
10
(200,000)
Property
10,000,000
15,000,000
Fair value
5,000,000
In-process R&D
0
6,000,000
6,000,000
Inventory
500,000
750,000
250,000
Accounts receivable
200,000
200,000
0
Cash
10,000
10,000
0
12,710,000
23,760,000
11,050,000
Accounts payable
1,510,000
1,510,000
0
Contingent liabilities
90,000
90,000
Total
22,160,000
10,960,000
Net fair value
19,968,000
Consideration transferred:
2,000,000 shares at $10
Cash
6,000,000
Fair value of NCI
2,800,000
Goodwill
Goodwill attributable to non-controlling interests
Fair value at acquisition date
2,800,000
Goodwill attributable to non-controlling interests
Dr Accumulated depreciation
Cr Depreciation
20,000
(b) Depreciation for year ended 30 June 20x2 ($200K ÷ 10 yr) note a
Dr R&D Impairment
Cr In-process R&D
500,000
(c) Impairment of R&D ($6M – $5.5M) note b
Dr Investment property
1,000,000
Cr Fair value gains
(d) Change in fair value on investment property note d
Dr Cost of Sales
Cr Inventory
