Recognition of ‘Goodwill’ or ‘Gain on Bargain Purchase’ – Acquisition Analysis – Ezy Manufacturing Finance and Accounting Assessment Help

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Ezy Manufacturing Finance and Accounting Assessment Help
Assignment 1
 EZY MANUFACTURING LTD (Ezy)
You are the accountant of Ezy Manufacturing Ltd (Ezy), a listed public company incorporated in Australia. Ezy is
a paper and packaging company that is complemented by an extensive merchant distribution system, with primary markets and manufacturing operations in the Asia Pacific region
. In order to take complete control of its production facilities, Ezy implemented a policy of vertical integration and invested in two of its key suppliers.
You are the accountant of Ezy Manufacturing Ltd (Ezy), a listed public company incorporated in Australia. Ezy is
a paper and packaging company that is complemented by an extensive merchant distribution system, with primary markets and manufacturing operations in the Asia Pacific region
. In order to take complete control of its production facilities, Ezy implemented a policy of vertical integration and invested in two of its key suppliers.
The investments of Ezy as at 30 June 2019 are illustrated below:
Accounts And Finance Assignment Help
RANGE PTY LTD (Range)
Range is a
producer of uncoated paper, industrial and consumer packaging, and pulp. It has been one of the key
suppliers of raw pulp in Australia for the last twenty (20) years. Ezy, Range’s major customer, purchased all ordinary shares of Range on 1 July 2015. Ezy issued 240,000 shares as part of the consideration and paid the balance $2,800 000 in cash. The shares in Ezy were trading on 1 July 2015 for $40 per share but subsequent to the acquisition of Range, fell to $34 per share as the market reacted badly to the purchase price paid by Ezy for its interest in Range.
The identifiable net assets of Range at the date of acquisition were represented by:
Share Capital                                  $
 400,000
Ordinary Shares         2,000,000
200,000 8% Preference Shares 1,000,000
General Reserve                        1,000,000
Retained Earnings                     
1,500,000
                                                   5,50,0000
Ezy holds all preference shares in Range. Preference shares are non-participating, cumulative and redeemable.
All assets of Range were stated at fair value in its accounts on 1 July 2015, except the following:

An item of inventory recorded at $600,000 is obsolete and has an estimated value of only $100,000.

Land recorded at $1,000,000 has been independently valued at $2,000,000.

‘
Property, Plant and Equipment’ included a piece of equipment, which cost Range $750,000 on 1 July 2014 and had a useful life of 10 years. Due to the change in technology, the equipment is now worthless.

At the date of acquisition, Range had internally generated patents that were not recognised in its accounting records, having a fair value of $15 000 and a remaining useful life of five years. Range had no intention of recognising these in its accounting records.
Since 1 July 2018, Range has traded extensively with Ezy. All sales made by Range to Ezy have been at cost plus 40%.

S
WIFT WORKS LTD (SWL)

SWL provides Ezy with
highly automated milling and other machinery, which are required in the manufacture of it’s paper
and packaging products
. There are substantial trading activities carried on between SWL and Ezy. All transactions are on normal commercial terms and conditions, which are calculated on the basis of cost plus 30%.
Ezy acquired 100% of the ordinary issued capital of SWL on 1 July 2017 for $3,600,000. The additional incidental costs of acquisition amounted to $100,000. The identifiable net assets at the date of acquisition were represented by:

$

Share capital

2,500,000

General Reserve

280,000

Retained Earnings

1,100,000

3,880,000

All identifiable net assets were considered to be stated at fair value.

A director of Ezy acted as the representative of Ezy on the board of SWL. He suggested that in order to improve its efficiency, SWL should modernize its facilities. It should replace its old plant and equipment with new automated machinery. He also put forward Ezy’s proposal to finance the automation. The proposal was accepted by the other two directors of SWL. SWL borrowed $1 000 000 from Ezy on 31 December 2017, at an interest of 10% p.a., paid annually on 31 December. The loan is to be repaid as a lump sum at the end of five years.

Additional Information

Ezy values all classes of assets on cost basis.

The inventory turnover period in all group companies is less than one year.

Ezy Group impairs goodwill at 10% every year.

Ezy Ltd. supplies paper and packaging product to other group companies for their internal use at cost plus 20%.

During the year, group companies traded extensively with each other. As at 30 June 2019 the following stocks were, being held by group companies from purchases made from other group companies.

Purchased from

Stock on Hand

$

Annual intra-group purchases*

$

Ezy

Range

140,000

1,000,000

SWL

Ezy

40,000

200,000

All other profits arising on intra-group trading have been realised outside this group.

The taxation rate applicable in Australia is 30%.

The stocks held by group companies as at 30, June 2018 included the following:

Purchased from

Stock on hand

$

Ezy

Range

700,000

SWL

Ezy

–

In the books of SWL on the date of sale

Date of sale

Useful life to Ezy

Cost

Accumulated Depreciation

Selling Price

Machinery 1

1,000,000

250,000

975,000

1 July, 2017

10 years

Machinery 2

1,000,000

200,000

1,040,000

1 July, 2018

8 years

Financial information: Ezy, Range and SWL for the year ended 30 June 2019 are shown below:

 

Ezy Ltd

Range Ltd

Swift Works Ltd

A$

A$

A$

Revenue

44,000,000

2,120,000

3,200,000

Expens _es

29,000,000

1,600,000

2,300,000

Profit before tax

15,000,000

520,000

900,000

Income tax expense

9,000,000

160,000

300,000

Profit

6,000,000

360,000

600,000

Retained Earnings (1/7/18)

7,200,000

1,500,000

1,200,000

13,200,000

1,860,000

1,800,000

Interim Dividend paid

400,000

25,000

Final Dividend declared

600,000

75,000

1,000,000

–

100,000

Retained Earnings (30/06/19)

12,200,000

1,860,000

1,700,000

Non-current assets

Depreciable assets

12,300,000

7,410,000

4,600,000

Accumulated depreciation

-660,000

-1,200,000

-920,000

Investment in other entities

24,000,000

750,000

Loan to SWL

1,000,000

Deferred tax asset

280,000

480,000

160,000

Patents and Trademarks (net)

680,000

Property

254,000

2,000,000

1,200,000

Current assets

Cash

1,184,000

840,000

650,000

Receivables

1,200,000

2,440,000

470,000

Inventory

1,200,000

600,000

470,000

Total Assets

40,758,000

13,320,000

7,310,000

Non-current liabilities

Debentures

1,460,000

1,220,000

680,000

Other Non-current Liabilities

1,500,000

1,000,000

Bank Loan

1,422,000

1,640,000

700,000

Current liabilities

Payables

120,000

1,360,000

220,000

Current tax liability

116,000

740,000

230,000

Dividend payable

800,000

Total liabilities

3,918,000

6,460,000

2,830,000

Net assets

36,840,000

6,860,000

4,480,000

Equity

Share capital -ordinary shares

21,000,000

2,000,000

2,500,000

Share capital -preference shares

3,000,000

1,000,000

General reserve

640,000

2,000,000

280,000

Retained earnings

12,200,000

1,860,000

1,700,000

Total equity _

36,840,000

6,860,000

4,480,000

Prepare the general journal entries in the accounting records of Ezy
Manufacturing
Ltd to record the

acquisition of investments in,

Range Pty Ltd on
1 July 2015;

Swift Works Ltd on 1 July 2017;

dividend received or receivable during the year ended 30

th

June 2019.

Prepare acquisition analyses for Ezy
Manufacturing
Ltd’s investments in subsidiaries on the respective dates of acquisition.

Prepare the consolidation journal entries* required to prepare the consolidated worksheet of the Ezy Group as at 30 June 2019. Show all workings providing explanations and justifications with reference to appropriate accounting standards, where necessary.

The consolidation journal entries must address

differences between fair value and book value of identifiable net assets acquired by Ezy on the dates of acquisition;

elimination of investments in subsidiaries;

recognition of ‘Goodwill’ or ‘Gain on Bargain Purchase’;

elimination of intercompany transactions and balances, such as,

dividends paid or payable by subsidiaries;

intercompany sales of inventory;

unrealised profit in closing inventory;

unrealised profit in opening inventory;

intercompany sale of the non-current asset;

intercompany receivables and payables

intercompany revenues and expenses

tax effect adjustments, where necessary.

Complete the consolidated worksheet of the Ezy Group for the year ended 30 June 2019. An incomplete proforma consolidation worksheet of the Ezy Group is available on VU Collaborate in Excel format.

Answer the following questions:

Why is an impairment test considered necessary?

What effect does impairment have on a company’s Balance Sheet and Profit and Loss Statement?

What are the value of Goodwill for Myer Holdings on 29th July 2017 and 28th July 2018? Provide some possible reasons for this change.

Which other Intangible assets have been impaired between 2017 and 2018?

Explain what impact does change (increasing or decreasing) the discount rate have on the calculation of impairment losses?

Can we reverse impairment losses for all assets? Explain.

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