Advanced Accounting

Advanced Accounting
Question 1.1
Problem Solving (Marks 25)
Whopper Ltd is a manufacturer of specialized industrial machinery seeking to diversify its operations. After protracted negotiations, the directors decided to purchase the assets and liabilities of Weenie Ltd and the spare parts retail division of Nathan Ltd.
At 30 June 2008, the balance sheets of the three entities were as follows.
__________________________________________________________________
Whopper Weenie Nathan
Ltd Ltd Ltd
Land and buildings (net) $60,000 $25,000 $40,000
Plant and machinery (net) 100,000 36,000 76,000
Office equipment (net) 16,000 4,000 6,000
Shares in listed companies 24,000 15,000 20,800
Debentures in listed companies 20,000 – –
Accounts receivable 35,000 26,000 42,000
Inventory 150000 54,000 30,200
Cash 59,000 11,000 9,000
Goodwill – 7,000 –
__________ ________ ________
$464,000 $178,000 $224,000
_________ ________ __________

 

Accounts payable $26,000 $14,000 $27,000
Current tax liability 21,000 6,000 7,000
Provision for leave 36,000 10,000 17,500
Bank loan 83,000 16,000 43,500
Debentures 60,000 50,000 –
Share Capital
(Issued at $1, fully paid ) 200,000 60,000 90,000
Retained earnings 38,000 22,000 39,000
_________ _______ ________
$464000 $178000 $224000
_________ ________ ________
_____________________________________________________________________
The acquisition agreement details are as follows:
Weenie Ltd
Whopper Ltd is to acquire all of the assets (other than cash and liabilities (other than debentures, provisions and tax liabilities) of Weenie Ltd for the following purchase consideration:
• Shareholder in Weenie Ltd are to receive three shares in Whopper Ltd, credited as fully paid, in exchange for every four shares held. The shares in Whopper Ltd are to be issued at their fair value of $3.00 per share. Costs of share issue amounted to $2000.
• Whopper Ltd is to provide sufficient cash which, when added to the cash already held, will enable Weenie Ltd to pay out the current tax liability and provision for leave, to redeem the debentures at a premium of 5%, and to pay its liquidation expenses of $2500
The fair value of the assets and liabilities of Weenie Ltd are equal to their carrying amounts with the exception of the following.
___________________________________________________________________
Fair Value
Land and buildings $60,000
Plant and machinery 50,000
Inventory 50,000
_____________________________________________________________________
Incidental costs associated with the acquisition amount to $2500
Nathan Ltd
Whopper Ltd is to acquire the spare parts retail business of Nathan Ltd. The following information is available concerning that business, relative to the whole of Nathan Ltd
Total amount Spare parts division
Carrying amt Carrying amt Fair value
Land and buildings (net) $40,000 $20,000 $30,000
Plant and machinery (net) 76,000 32,000 34,500
Office equipment (net 6,000 2,000 2,500
Accounts receivable 42,000 21,000 20,000
Inventory 30,200 12,000 12,000
Accounts payable 27,000 14,000 14,000
Provision for leave 17,500 7,000 7,000
The divisional net assets are to be acquired for $10,000 cash , plus 11,000 ordinary shares in Whopper Ltd issued at their fair value of $3, as well as the land and buildings that have been purchased from Weenie Ltd
Incidental costs associated with the acquisition are $1000

1. Prepare the acquisition analyses for the acquisition transactions of Whopper Ltd (10 marks)
2. Prepare the liquidation account for Weenie Ltd (8 Marks)
3. Prepare the journal entries for the acquisition transactions in the records of Whopper Ltd and Nathan Ltd. (7 Marks)

Question 2.1

Problem Solving (Marks 25)

Larry Ltd is a diversified financial institution. It provides three main types of services – banking, funds management and life insurance. Each of these services provides different products, serves different types of customer and has different distribution processes. Its operations are located mainly in NZ although 12% of revenues from external customers are from bank branches in Australia. Internally, Larry Ltd is divided into three Business Units that report separately to top management. The Business Units are Banking, Funds Management and Life Insurance. In accordance with NZ IFRS 8 Larry Ltd has identified its Operating Segments as three – Banking, Funds Management and Life Insurance.

All three Business Units earn a majority of their revenues from external customers. Each Business Unit reported the following financial information to the company’s CEO for the year ended 30 June 2009:
Banking
$ Funds Management
$ Life Insurance
$ All Segments
$
Revenue –
external sales 850m (all
interest income) 90m (fees and
commissions) 10m (premium income and
other fees) 950m
Segment result (profit before
amortisation, depreciation and income tax expense) 130m 16m 1m 147m
Segment Assets 12,750m 630m 100m 13,480m

For the year ended 30 June 2009 the total consolidated revenue of Larry Ltd is $984m. Larry Ltd owns three properties with a total written-down value at 30 June 2009 of $300m. One of the properties, with a written-down value of $220m, is the corporate head office, where administration for the entire company is performed. The other two properties are large regional bank branches. Customers visiting those branches purchase mainly banking services but the company’s full range of services may be provided at any bank branch office. The Company’s CFO has determined that these bank branch properties should be allocated to all three segments in proportion to the revenues generated by each business segment. Depreciation on the corporate head office property for the year was $4.4m. Depreciation on the bank branch properties for the year was $1.6m. During the year, Larry Ltd sold an investment property, realising a gain of $34m. The investment property had not been allocated to any of the business segments in prior years.
The Banking Segment’s assets are mainly loan receivables. A provision for doubtful debts of $630m has been deducted in determining that Segment’s assets. During the year, the provision was increased by $30m. The Banking Segment’s result also includes a share of profits from an associated entity of $2m. The investment in the associated entity, carried at 30 June 2009 at $25m, is included in the Banking Segment’s assets because it is part of that Segment’s operations.

As at 30 June 2009, Larry Ltd has $200m of goodwill (written-down value) that it has not allocated to any of the business segments because there was no reasonable basis to do so. Goodwill amortisation for the year ended 30 June 2009 is $20m.

For the year ended 30 June 2009, Larry Ltd’s total consolidated profit, after income tax expense of $36m, is $85m.

Total consolidated liabilities of Larry Ltd at 30 June 2009 are $11,250m. These include borrowings and deposits of $11,000m that relate to the Banking segment’s operations and are directly attributable to that segment. Related interest expense for the year ended 30 June 2009 is $400m. Creditors and policyholder liabilities that relate to the Funds management and Life Insurance segments’ operations and are directly attributable to those segments are $200m and $50m respectively. There is no related interest expense. A payable of $35m from the Life Insurance segment to the Fund Management segment was eliminated in calculating total consolidated liabilities of Company Larry as at 30 June 2009. The related receivable is not included in the segment assets figure in the table above.

Other information:

• Only 2% of Larry Ltd’s total assets are located in Australia.
• There were no inter-segment sales during the year.
• The products and services offered by each business segment are as follows:
• Banking: provides a full range of banking services for consumers and corporate customers
• Funds Management: provides wealth creation, management and protection products and services to consumers
• Life Insurance: provides life insurance policies and other protection products to consumers
• There are no other internally reported segments.

Required:

Prepare the segment disclosures note for Larry Ltd for the year ended 30 June 2009 in accordance with NZ IFRS 8. Ignore comparative figures. Show all workings. Perform your workings in the following order

1. Identify the business operating segments (Marks 2)
2. What should information about geographical aspects of the entity’s operation and what specific information be disclosed (Marks 2)
3. Determine which segments are reportable segments (Marks 2)
4. Allocate relevant assets, liabilities, revenues and expenses to the reportable segments. In doing so specifically consider:
(a) the corporate head office and related depreciation
(b) the regional bank branch properties and related depreciation
(c) the gain on sale of investment properties
(d) the investment in the associated entity and related share of profits
(e) goodwill and related amortization
(f) interest income and interest expense ( Marks 4)

5. Identify which segment assets, liabilities, revenues and expenses require
Separate disclosure, including amounts to be disclosed or eliminated on consolidation (Marks 5)
6. Calculate consolidated profit after tax (Marks 5)
7. Prepare the required segment disclosures (Marks 5)

Question 3
Demonstration of analytical and interpretational skills (Marks 25)
You are required to write a report addressing the issues set out from (a) to (c) after analysing the latest financial statements and related information of the Restaurant Brands New Zealand Limited- Financial Statement for the year ended 28.02.2011/2012.
Required
Based on the Financial Statements of the company, address the following issues.

(a) i) Describe the meaning of segment reporting using the relevant NZ IFRS and
identify, some examples from the selected company. (2 marks)
ii) Discuss the benefits of segment disclosure from an investor’s perspective.
Give examples from the financial statements of the company selected by you.
(2 marks)
iii) Discuss the disadvantages of segment reporting to the entity and its future
competitiveness. Give examples from the selected financial statements.
(2 marks)
iv) Describe, how the Segment reporting complies in accordance with the
NZ IAS 8. (2 marks)

(b) i) What are the classes of related parties identified in NZ IAS 24?
Give examples from the selected company’s financial statements.
(2 marks)
ii) Review the executives and directors disclosures made by the company in its report and identify which transactions would cause most concern. Explain the reasons for your concern. (2 marks)
iii) What would be the cost involved in making such disclosures and what would be some of the benefits? (3 marks)
(c) i) Identify and list out the finances raised by way of issuing primary financial
instruments and derivative financial instruments by the company. What would be the percentage of each category of the total debt finance of the company?
(5 marks)
ii) NZ IAS 32 requires the issuing entity classify a financial instrument, or its
component parts, as a liability or as equity in accordance with the economic substance of the instrument at the time of initial recognition. Analyse the financial statement of the company and make a presentation
on your findings? (5 marks)

Instructions

• You must carry out an extensive search of company’s news bulletins, news
items released to the press, reports from the financial analysts and published financial statements.

• You must critically analyse the information collected by applying NZ IAS
And forward your arguments on your words. You may paraphrase but appropriate referencing is necessary, otherwise, it will be plagiarism.

• Upon completion of the project, report your findings as a group in the report.
– Each group is required to submit one report in hardcopy. Appendices and
footnotes may be used but do not form part of the 2,000 word limit.
Keep a copy of the report for yourself.
Layout and presentation

1. Your report should be no more than 2,000 words. A word count is required.
2. Your work will be penalised if you exceed the word count by 10%.
3. Your report must be word processed and double-spaced. You must do a spell check and a grammar check before submit to the Department.
4. The pages of the report should be numbered and must be printed on one side of A4 sheet.
5. The font style should be Times Roman and font size not less than 11.
6. You must attach the perfected “Assignment Cover Sheet” issued to you along with these instructions.

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