AFA Problem 5.

1i. Determine the cost of the warehouse for the economic entity as at 1 Oct 20X6

Group ("What
P Co ("What is") Difference
should be")
Interest capitalized 350,000 (note 1) 200,000 (note 2) 150,000
Construction cost 3,150,000 3,150,000 -
Total cost of warehouse 3,500,000 3,350,000 150,000

Note 1: $200,000 + $150,000 = $350,000

Interest capitalized by P Co (interest charged by X Co - intergroup transaction)

Note 2: $120,000 + $80,000 = $200,000

Interest capitalized by the Group (interest charged by the bank - 3rd party transaction)

1ii. Determine the NBV of the warehouse for the legal entity (P Co) and the economic
entity as at 31 Dec 20X6

Group ("What
P Co ("What is") Difference
should be")
Total cost of warehouse 3,500,000 3,350,000 150,000
Less: Depreciation 43,750 (note 3) 41,875 (note 4) 1,875
NBV 3,456,250 3,308,125 148,125

Note 3: (3/240)*$3,500,000 = $43,750

Depreciation charges from 1 October 20X6 to 31 December 20X6

Note 4: (3/240)*$3,350,000 = $41,875

Depreciation charges from 1 October 20X6 to 31 December 20X6

2. Prepare consolidation entries for the year ended 31 Dec 20X6

CJE 1: Eliminate investment in X Co

Dr Share capital (X Co) 500,000
Dr Retained earnings (X Co) 400,000
Dr Goodwill 322,000
Dr Equipment ($600,000 - $480,000) 120,000
Cr Investment in X Co (P Co's books)
Cr Non-controlling interests
Cr Deferred tax liability (20%*$120,000)
1,342,000

FV of INA = $500,000 + $400,000 + $120,000 - $24,000

= $996,000

Goodwill = FV of consideration transferred + FV of NCI - (Net FV of INA - DTL)

= $1,200,000 + $118,000 - ($996,000)
= $322,000

NCI's portion of goodwill = FV of NCI - NCI's share of INA at acquisition date

= $118,000 - 10%($996,000)
= $18,400

CJE 2: Adjust past depreciation of under-valued equipment

 AFA Problem 5.9

Dr Opening RE 54,000
Dr Non-controlling interests (10%*$60,000) 6,000
Cr Accumulated depreciation ((3/6)*$120,000)

CJE 3: Tax effects of CJE 2

Dr Deferred tax liability (20%*$60,000) 12,000
Cr Opening RE
Cr Non-controlling interests

CJE 4: Allocate post-acquisition change in RE of X Co to NCI

Dr Opening RE 25,000
Cr Non-controlling interests

RE as at 1 Jan 20X6 650,000

RE as at acquisition date 400,000
Change in RE 250,000
NCI's share @ 10% 25,000

CJE 5: Recognize partial realization of profit from 20X5 upstream sale

Dr Opening RE (90%*60%*$15,000) 8,100
Dr Non-controlling interests (10%*60%*$15,000) 900
Cr Cost of Sales (50%*$15,000)
Cr Inventory (10%*$15,000)

CJE 6: Recognize tax on partial realization of profit from 20X5 upstream sale
Dr Tax expense (20%*$7,500) 1,500
Dr Deferred tax asset (20%*$1,500) 300
Cr Opening RE (90%*$1,800)
Cr Non-controlling interests (10%*$1,800)

CJE 7: Adjust past capitalized interest in warehouse

Dr Fixed asset - Warehouse 120,000
Cr Opening RE
Cr Non-controlling interests

CJE 8: Tax effects of CJE 7

Dr Opening RE 21,600
Dr Non-controlling interests 2,400
Cr Deferred tax asset (20%*$120,000)

CJE 9: Adjust past capitalized interest income and internal interest in warehouse
Dr Opening RE 180,000
Dr Non-controlling interests 20,000
Cr Fixed asset - Warehouse

CJE 10: Tax effects of CJE 9

Dr Deferred tax asset (20%*$200,000) 40,000
Cr Opening RE
Cr Non-controlling interests

CJE 11: Eliminate current year's capitalized internal interest in warehouse

Dr Interest income 150,000
 AFA Problem 5.9

Cr Fixed asset - Warehouse

CJE 12: Tax effects of CJE 11

Dr Deferred tax asset (20%*$150,000) 30,000
Cr Tax expense

CJE 13: Capitalize current year's external interest in warehouse

Dr Fixed asset - Warehouse 80,000
Cr Interest expense

CJE 14: Tax effects of CJE11

Dr Tax expense (20%*$80,000) 16,000
Cr Deferred tax asset

CJE 15: Adjust excess depreciation in warehouse

Dr Accumulated depreciation (From part 1ii) 1,875
Cr Depreciation

CJE 16: Tax effects of CJE 15

Dr Tax expense (20%*$1,875) 375
Cr Deferred tax asset

CJE 17: Adjust depreciation of under-valued equipment

Dr Depreciation ($120,000/6) 20,000
Cr Accumulated depreciation

CJE 18: Tax effects of CJE 17

Dr Deferred tax liability (20%*$20,000) 4,000
Cr Tax expense

CJE 19: Eliminate dividend income and dividend declared

Dr Dividend income (P Co) (90%*$90,000) 81,000
Dr Non-controlling interests (10%*$90,000) 9,000
Cr Dividend declared (X Co)

CJE 20: Eliminate loan payable and loan receivable

Dr Loan payable (P Co) 1,000,000
Cr Loan receivable (X Co)

CJE 21: Eliminate interest expense and interest income

Dr Interest income (X Co) 30,000
Cr Interest expense (P Co)

CJE 22: Allocate current year's income to NCI

Dr Income to non-controlling interests (P&L) 57,550
Cr Non-controlling interests (B/S)
 AFA Problem 5.9

Net profit after tax of X Co

Less: Additional depreciation of undervalued equipment
Add: Tax on excess depreciation of equipment
Add: Excess depreciation on capitalized interest on warehouse
Less: Tax on excess depreciation of warehouse
Add: Realized profit from previous year upstream sale
Less: Tax on realized profit from previous year upstream sale
Less: Excess interest income charged by X Co to P Co
Add: Tax on excess interest income charged by X Co to P Co
Adjusted profit after tax of X Co
NCI's share @ 10%

3. Perform an analytical check of the balance in NCI as at 31 Dec 20X6

Non-controlling interests' balance as at 31 Dec 20X6

CJE 1: Eliminate investment in X Co
CJE 2: Adjust past depreciation of under-valued equipment
CJE 3: Tax effects of CJE 2
CJE 4: Allocate change in post-acquisition RE to NCI
CJE 5: Recognize partial realization of profit from 20X5 upstream sale
CJE 6: Recognize tax on partial realization of profit from 20X5 upstream sale
CJE 7: Adjust to past capitalized interest on warehouse
CJE 8: Tax effects of CJE 7
CJE 9: Adjust past capitalized interest income and internal interest in warehouse
CJE 10: Tax effects of CJE 9
CJE 19: Eliminate dividend income and dividend declared
CJE 22: Allocate current year's income to NCI
NCI balance as at 31 Dec 20X6

Reconciliation
Shareholders' equity (book value) of X Co as at 31 Dec 20X6
($500,000 + $1,200,000)

Adjustments to book value:

Unrealized profit in inventory, after tax
(20%*80%*$1,500)

Undepreciated balance of under-valuation of equipment, after tax

((2/6)*80%*$120,000)

Unamortized balance on excess interest capitalized, after tax

((237/240)*80%*$150,000)
Adjusted shareholders' equity
NCI's share of adjusted net assets @ 10%
Goodwill attributable to NCI (refer to CJE1 workings)
NCI's balance as at 31 Dec 20X6

4. Perform an analytical check of the consolidated RE as at 31 Dec 20X6

Listing method:
Retained earnings
 AFA Problem 5.9

P Co
X Co

CJE 1: Eliminate investment in X Co

CJE 2: Adjust past depreciation of under-valued equipment
CJE 3: Tax effects of CJE 2
CJE 4: Allocate post-acquisition change in RE of X Co to NCI
CJE 5: Recognize partial realization of profit from 20X5 upstream sale
CJE 6: Recognize tax on partial realization of profit from 20X5 upstream sale
CJE 7: Adjust past capitalized interest in warehouse
CJE 8: Tax effects of CJE 7
CJE 9: Adjust past capitalized interest income and internal interest in warehouse
CJE 10: Tax effects of CJE 9
CJE 11: Eliminate current year's capitalized internal interest in warehouse
CJE 12: Tax effects of CJE 11
CJE 13: Capitalize current year's external interest in warehouse
CJE 14: Tax effects of CJE11
CJE 15: Adjust excess depreciation in warehouse
CJE 16: Tax effects of CJE 15
CJE 17: Adjust depreciation of under-valued equipment
CJE 18: Tax effects of CJE 17
CJE 19: Eliminate dividend income and dividend declared
CJE 22: Allocate current year's income to NCI

Analytical method:
Retained earnings
P Co's legal entity RE
P Co's share of post-acq RE of X Co (90%*($1,200,000 - $400,000))
Adjustments (after tax):
P's share of unrealized profit at 31 Dec 20X5 (90%*80%*10%*$15,000)
P's share of undepreciated under-valued equipment (90%*80%*(4/6)*$120,000)
P's share of unamortized excess interest capitalized (90%*80%*(237/240)*$150,000)
 AFA Problem 5.9

at 1 Oct 20X6

y transaction)

nd the economic

1,200,000
118,000
24,000
1,342,000
 AFA Problem 5.9

60,000

10,800
1,200

25,000

7,500
1,500

1,620
180

108,000
12,000

24,000

in warehouse

200,000

36,000
4,000
 AFA Problem 5.9

150,000

30,000

80,000

16,000

1,875

375

20,000

4,000

90,000

1,000,000

30,000

57,550
 AFA Problem 5.9

640,000
- 20,000
4,000
1,875
- 375
7,500
- 1,500
- 70,000
14,000
575,500
57,550

118,000
- 6,000
1,200
25,000
- 900
180
12,000
- 2,400
- 20,000
4,000
- 9,000
57,550
179,630

1,700,000

- 1,200

32,000

- 118,500

1,612,300
161,230
18,400
179,630
 AFA Problem 5.9

2,860,000
1,200,000
4,060,000
- 400,000
- 54,000
10,800
- 25,000
- 600
120
108,000
- 21,600
- 180,000
36,000
- 150,000
30,000
80,000
- 16,000
1,875
- 375
- 20,000
4,000
9,000
- 57,550
3,414,670

2,860,000
720,000

- 1,080
- 57,600
- 106,650
3,414,670