Accounting project

CONSOLIDATIONS: HOTTE LTD & STACK LTD

Acquisition of Stack Ltd

On 1st January 2010, Hotte Ltd acquired 75% of the share capital (ex div) of Stack Ltd for $12,000,000. At this date, the accounts of Stack Ltd included the following balances:

·         Share capital (9,000,000 shares) $9,000,000

·         General reserve 2,100,000

·         Retained profits 1,050,000

·         Dividends payable 900,000

All of the identifiable net assets of Stack Ltd were recorded at fair value except for Land which had a fair value of $800,000 above the carrying amount. Adjustments for the differences are made on consolidation and tax-effect entries are NOT needed.

On the 15 June 2012, Stack Ltd paid a cash dividend of $1,350,000 (appropriated from pre-acquisition profits). This amount was recognised as revenue by Hotte Ltd. The Financial Controller of Hotte Ltd felt that the dividend had impaired the value of the company’s investment in Stack Ltd and subsequently records an impairment of the Investment in Stack Account for the applicable amounts received as a dividend.

The following is a list of the transactions between the companies for the year ended June 2014:

(a) On 3 March 2013, Hotte Ltd sold some inventory to Stack Ltd for $78,000, at a profit before tax of $32,000. This was still on hand in Stack Ltd at 30 June 2013, but was all sold by 30th June 2014

(b) On 1st May 2014, Stack sold inventory to Hotte Ltd for $375,000, at a mark-up of 50%. At 30th June 2014, $85,000 of this inventory was still on hand

(c) Hotte Ltd extended a loan of $100,000 to Stack Ltd. This loan was issued on the 1st September 2012 payable over 10 years, with an interest rate on the loan of 5% pa. Interest is paid on the 31st December and 30th June every year.

(d) During the year Hotte Ltd paid $21,000 of Systems Update Fees to Stack Ltd. This amount is disclosed under General Administrative Expenses by Hotte Ltd.

(e) On 1st July 2013, Stack Ltd sold an item of equipment to Hotte Ltd for $920,000 at a before tax loss of $135,000. The equipment has a useful life of 4 years and is depreciated using the straight-line method by both companies.

(f) A goodwill impairment test in December 2014 revealed the need to impair goodwill by $221,600. No other impairment of goodwill has been recorded. For consolidation purposes the partial goodwill method is used.

(g) All dividends are recognised before receipt of cash.

(h) The corporate income tax rate is 30% and the companies in the group have financial years from 1st July to 30th June

REQUIRED:

ConsolidateHotte Ltd andStackLtd:

(a)     Prepare the consolidation journalentries,with narrations,  andthe consolidatedworksheet(using Excelorsimilar) toconsolidateHOTTE Ltd and STACKLtdfor the yearended30thJune 2014.

(b)    Producethe completedConsolidatedFinancialReports(Statementof

ComprehensiveIncomeandStatementofFinancialPosition) for the yearended

30thJune 2014.

You are advised to complywith AASBstandardsandthe requirementsinthe Australian CorporationsLegislation when determiningthestructure andpresentationrequirements forthefinancial reportsin preparingthefinancial statementsforthis assignment.