Operating Segment

Practice Exam Solutions

QUESTION 1 (PART B

What is an operating segment?

AASB 8 defines an operating segment as:

… a component of an entity:

• that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
• whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and

(c)        for which discrete financial information is available.

(AASB 8, Appendix A)

Briefly explain how we determine an entity’s operating segments.

The first step is to apply the ‘definition’ in AASB 8.

Some activities may not relate to an operating segment (AASB 8.6). In contrast, operating segments includes those in the start-up phase for which there may be minimal or no revenues (AASB 8.5). Application of the definition can be problematic due to the possibility of apparently overlapping operating segments (AASB 8.10) or when there are multiple internal reporting process indicating differing operating segments AASB 8.8).

What is a reporting segment?

A reportable segment is an operating segment that, under AASB 8, must be included in a particular entity’s segment report (AASB 8.11).

Briefly explain how we determine an entity’s reporting segments.

 

The rules for determining which segments are reportable segments are found in AASB 8.13-19. These requirements, summarised on pages 946–947, are reproduced below:

1        A segment must be classified as a reportable segment if any of the following conditions is satisfied:

(a)     its reported revenue – including both sales to external customers and inter-segment sales or transfers – is 10% or more of the combined revenue (internal and external) of all operating segments; or

(b)     the absolute amount of its reported profit or loss is 10% or more of the greater of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported losses of all operating segments reporting a loss; or

(c)     its assets are 10% or more of total assets for all operating segments (AASB 8.13).

2        If ‘total external revenues reported by the operating segments’ constitutes less than 75% of the ‘entity’s revenue’, additional reportable segments must be identified, even though they do not meet the test in 1 above, until at least 75% of the entity’s revenue is included in the reportable segments (AASB 8.15).

3        Internally reported segments that are ‘substantially similar’, that is they meet the requirements of AASB 8.12 discussed above, may be combined (AASB 8.14).

4        An internally reported segment that is not classified as reportable under 1 above is treated in one of three ways:

(a)     it is designated as reportable despite its size because management believes information about the segment will be useful to users (AASB 8.13); or

(b)     it is combined, in accordance with 3 above, into a separately reportable segment with one or more ‘substantially similar’ segments that do not satisfy 1; or

(c)     information about other non-reportable segments and that relating to other business activities are combined and reported as ‘all other segments’ and is distinguished from the items in the reconciliation required by AASB 8.28 (AASB 8.16).

5        If the management judges that an operating segment that was a reportable segment in the prior reporting period ‘is of continuing significance’, information about that segment must be reported separately in the current period. Despite test 1 not being satisfied it must be classified as a reportable segment in the current reporting period (AASB 8.17).

If, in the current reporting period, a segment is now reportable under 1, prior-period segment data are restated to reflect this newly reportable segment, unless it is impracticable to do so (AASB 8.18).

QUESTION 2

 

1. Cymbal Ltd does not prepare consolidated financial statements

 

The entries in the books of Cymbal Ltd at 30 June 2016 are:

 

Cash                                                                      Dr           1 600

Investment in Gong Ltd ↓                              Cr                                   1 600

(40% x $4 000 – dividend paid)

 

Dividend receivable                                              Dr           2 000

Investment in Gong Ltd ↓                              Cr                                   2 000

(40% x $5 000 – dividend declared)

 

Investment in Gong Ltd ↑                                    Dr           6 260

Share of profits or losses of associates          Cr                                   6 260

2. Cymbal Ltd prepares consolidated financial statements

 

The consolidation worksheet entries at 30 June 2016 are:

 

 

Investment in Gong Ltd ↑                                    Dr           1 776                                 Retained earnings (1/7/15)  Cr                                                                                   1 776

 

 

Investment in Gong Ltd ↑                                    Dr           6 260

Share of profits or losses of associates          Cr                                 6 260

 

Dividend revenue                                                  Dr           1 600

Investment in Gong Ltd ↓                              Cr                                   1 600

(40% x $4 000 – dividend paid)

 

Dividend revenue                                                  Dr           2 000

Investment in Gong Ltd ↓                              Cr                                   2 000

(40% x $5 000 – dividend provided)

QUESTION 3

 

1. Preparation of a report as to affairs

 

2. Realization of assets
3. The CA of all assets (except cash and assets subject to a security interest) and all contra-asset accounts are transferred to the liquidation account

 

 

Liquidation                                                           Dr                            744 900

Accounts Receivable                                   Cr                                                           97 000

Inventory                                                         Cr                                                         146 400

Shares in Bee Pty Ltd                                  Cr                                                           17 500

Vehicles                                                            Cr                                                           29 000

Plant & Equipment                                       Cr                                                         181 000

Land and Buildings                                       Cr                                                         250 000

Goodwill                                                           Cr                                                           24 000

(Asset accounts transferred to liquidation)

 

 

 

Accum. Depreciation – Vehicles                   Dr                               17 000

Accum. Depreciation – P&E                            Dr                               40 000

Allowance for Doubtful Debts                      Dr                                 1 000

Liquidation                                                     Cr                                                           58 000

(Contra-assets transferred)

 

1. On realisation (sale) of the assets, the cash account is debited and the liquidation account credited

 

Cash                                                                        Dr                            547 000

Liquidation                                                      Cr                                                         547 000

(Proceeds on sale of assets)

 

 

 

3. Possession of assets secured by creditors – Not required, bank gave permission to liquidator to sell

 

 

 

4. Payment to other creditors in order of priority

 

1. Unrecorded liabilities (e.g. liquidation expenses) are debited to the liquidation account and credited to the liability accounts

 

Liquidation                                                           Dr                               18 800

Liquidation Expenses Payable                 Cr                                                             2 100

Liquidator’s Remun. Payable                   Cr                                                             4 000

Bank Overdraft                                              Cr                                                             2 000

Accrued Expenses                                        Cr                                                                 200

Unsecured Notes                                         Cr                                                             4 500

Debentures                                                    Cr                                                             6 000

(Unrecorded liabilities, debited to liquidation account and representing

interest on unsecured notes and debentures, and liquidation expenses)

 

1. Record any discounts

 

Accounts Payable                                              Dr                                 2 000

Liquidation                                                      Cr                                                             2 000

(Discount given by payables)

 

 

1. Liquidator pays off all remaining creditors in strict order of priority from the cash balance

 

Liquidation Expenses Payable                      Dr                                 2 100

Bank Overdraft (+ interest)                           Dr                            116 000

Debentures (+ interest)                                 Dr                            206 000

Liquidator’s Remun. Payable                        Dr                                 4 000

Unsecured Notes (+ interest)                      Dr                            154 500

Accounts Payable                                              Dr                               89 000

Accrued Expenses                                             Dr                                 2 200

Cash                                                                   Cr                                                         573 800

(Liabilities paid in order of priority)

 

 

 

5. Return of capital and surplus (if any) to SHs

 

1. Calculate the appropriate distribution of funds for each class of shareholder in accordance with the rights of contributories

 

See later

 

1. Make any necessary calls on the various classes of shareholders (due to priority of payment) and receipt cash from calls or calls in arrears

 

Call – ‘B’ Ordinary                                               Dr                               60 000

Call – ‘C’ Ordinary                                               Dr                               80 000

Share Capital – ‘B’ Ordinary                       Cr                                                           60 000

Share Capital – ‘C’ Ordinary                       Cr                                                           80 000

(Call made on ‘B’ ordinary shares (60c) and ‘C’ ordinary shares (80c)

 

 

Cash                                                                        Dr                            126 000

Call – ‘B’ Ordinary                                          Cr                                                           54 000

Call – ‘C’ Ordinary                                          Cr                                                           72 000

(Receipt of cash on 90 000 ‘B’ ordinary @ 60c and 90 000 ‘C’ ordinary @ 80c)

 

1. Forfeit the shares with unpaid calls

 

Share Capital – ‘B’ Ordinary                            Dr                               10 000

Call – ‘B’ Ordinary                                          Cr                                                             6 000

Forfeited Shares Reserve                         Cr                                                             4 000

(Forfeiture of 10 000 ‘B’ Ordinary shares paid to 40c)

 

Share Capital – ‘C’ Ordinary                            Dr                               10 000

Call – ‘C’ Ordinary                                          Cr                                                             8 000

Forfeited Shares Reserve                         Cr                                                             2 000

(Forfeiture of 10 000 ‘C’ ordinary shares paid to 20c)

 

 

1. Transfer all reserve accounts (including any forfeited shares surplus and retained earnings) to the Liquidation account.

 

Liquidation                                                     Dr                                  174 000

Forfeited Shares Reserve                        Dr                                       6 000

Retained Earnings (accum losses)    Cr                                                               180 000

(Transfer of accumulated

losses and forfeited shares reserve to liquidation)

 

 

1. Pay any appropriate capital distribution to the various classes of shareholders

 

 

Share Capital – Preference                       Dr                                     50 000

Share Capital – ‘A’ Ordinary                     Dr                                  200 000

Share Capital – ‘B’ Ordinary                      Dr                                     90 000

Share Capital – ‘C’ Ordinary                      Dr                                     90 000

Shareholders’ Distribution                  Cr                                                               430 000

(Transfer of share capital to shareholders’ distribution)

 

 

CURRENT POSITION:

Cash =

Opening balance                                    100

Liquidation of assets                   +547,000

Calls on shares                              +126,000

Pay liabilities                                  – 573,800

Balance                                              +99,300

 

Share capital=

Preference                                       50,000

A ordinary                                       200,000

B ordinary                                         90,000

C ordinary                                         90,000

Total share capital                      430,000

 

Deficiency                                     -330,700

 

 

 

 

Share of cash

* After paying preference shares $50 000 = 99,300 – 50,000 = 49,300

 

No of        Paid to    Notional       Notional            Actual   Deficiency

                                                 Shares                                    Call          Refund          Refund           share

                                                                                                                              17c              (Call)

 

A                   B                   C                      D                       E                    F

(A x 17c)            (D – C)          (E – B)

$                    $                       $                       $                    $

‘A’ Ordinary                        200 000       200 000                    –             34 000             34 000       166 000

‘B’ Ordinary                          90 000         90 000                    –             15 300             15 300         74 700

290 000       290 000                    –             49 300             49 300       240 700

‘C’ Ordinary                          90 000         90 000                    –                        –                        –         90 000

380 000       380 000                    –             49 300             49 300       330 700

Cash available                                            49 300         49 300

Deficiency                                                 330 700                     .

Total notional cash                                                         49 300

 

Total notional cash per ‘A’ and ‘B’ ordinary share = $49 300 ÷ 290 000 = 17c per share

 

 

 

 

Shareholders’ Distribution                       Dr                                     99 300

Cash                                                             Cr                                                                 99 300

(Final payment to shareholders as per schedule)

 

 

 

1. Transfer the balance of the Liquidation account (representing the deficiency or surplus) to the Shareholders’ Distribution account.

 

 

Shareholders’ Distribution                       Dr                                  330 700

Liquidation                                                Cr                                                               330 700

(Deficiency on liquidation transferred)

 

 

 

At this point, all accounts in the ledger should be closed.

 

 

 

 

 

B.

Liquidation

Asset balances transferred	744 900	Contra-Assets transferred	58 000
Unrecorded liabilities	18 800	Cash (Sale of Assets)	547 000
		Creditors (discount)	2 000
		Shareholder’s Distrib:	330 700
Accumulated losses and	174 000	(deficiency)
Forfeited Shares Reserve		(‘A’ Ord. $166 000)
		(‘B’ Ord. 74 700)
		(‘C’ Ord. 90 000)
	937 700		937 700

 

 

 

 

 

 

 

 

 

Cash

Balance	100	Payment of liabilities	573 800
Liquidation (Sale of Assets)	547 000	Payment to: Preference	50 000
Calls on ‘B’ Ordinary		‘A’ Ordinary	34 000
and ‘C’ Ordinary shares	126 000	‘B’ Ordinary	15 300
	673 100		673 100

 

 

 

 

 

 

 

Shareholders’ Distribution

Liquidation (deficiency)	330 700	Share Capital	430 000
(‘A’ Ord. 166 000)
(‘B’ Ord. 74 700)
(‘C’ Ord. 90 000)
Cash	99 300
(Preference 50 000)
(‘A’ Ord. 34 000)
(‘B’ Ord. 15 300)
	430 000		430 000

 

 

 

 

 

 

 

 

 

 

 

 

QUESTION 4

1. KOALA LTD – KOOKABURRA LTD

 

75%

Koala Ltd                                               Kookaburra Ltd

                                                                                                             Koala Ltd    75%

                                                                                                             NCI             25%

 

1. Acquisition analysis (determine goodwill or gain on bargain purchase)

 

At 1 July 2007:

 

Net fair value of identifiable assets,

liabilities and contingent liabilities

of Kookaburra Ltd                                  =          $30 000 + $6 000 (equity)

=          $36 000

 

Net FV acquired                                     =          75% x $36 000

=          $27 000

Consideration transferred                     =          $27 600

 

Goodwill                                                =          $600

 

 

2. Business combination valuation entries (adjust all INA to FV)

N/A All identifiable net assets at FV

 

 

 

 

3. Pre-acquisition entry (reverse investment of parent)

 

At 1 July 2007:

 

Retained Earnings (1/7/07)                       Dr                4 500

(6,000 x 75%)

Share Capital                                             Dr              22 500

(30,000 x 75%)

Goodwill                                                    Dr                   600

Shares in Kookaburra Ltd                Cr                                          27 600

 

 

At 30 June 2012 SAME:

 

Retained Earnings (1/7/11)                       Dr                4 500

Share Capital                                             Dr              22 500

Goodwill                                                    Dr                   600

Shares in Kookaburra Ltd                Cr                                          27 600

 

 

 

NEXT account for NCI share of equity:

1. At acquisition date
2. In between acquisition date and current year

• In current year

 

 

 

 

4. NCI share of equity i) at acquisition date – 1/7/07

 

Retained Earnings (1/7/11)                       Dr                1 500

(6,000 x 25%)

Share Capital                                             Dr                7 500

(30,000 x 25%)

NCI                                                   Cr                                            9 000

 

5. NCI share of equity ii) in between acquisition date and current year: 1/7/07 – 30/6/11

 

Retained Earnings (1/7/11)                                     Dr           2 125

([14,500-6,000] x 25%)

Other Components of Equity (1/7/11)                     Dr           1 000

(4,000 [bal at 1/7/11 d)]x 25%)

NCI                                                                 Cr                              3 125

 

 

6. NCI share of equity iii) in current year: 1/7/11 – 30/6/12

 

 

Profit 11/12

Sales revenue               80,000

– Cost of sales               58,500

– Selling expenses         6,000

– Other expenses          1,500

– Financial expenses     2,000

– Income tax expense   5,500

= Profit                          6,500

 

 

NCI Share of Profit                                                   Dr           1 625

NCI ↑                                                             Cr                              1 625

(6,500 x 25%)

 

 

Gain/losses: Other Components of Equity               Dr              250

NCI ↑                                                             Cr                                 250

([5,000 {bal at 30/6/12}-4,000 {bal at 1/7/11}] x 25%)

 

 

NCI ↓                                                                       Dr              600

Dividend Paid                                                 Cr                                 600

(2,400 x 25%)

NOTE: Dividend paid reduces NCI share of equity

 

 

NEXT adjust for intragroup transactions

REMEMBER only upstream transactions effect the profits of the Subsidiary i.e. Kookaburra to Koala, so only adjust NCI for upstream transactions

 

1.Opening inventory                  

1. b) Unrealised profit on inventory held 1/7/11 – $800 before tax

 

 

2.Closing inventory

1. a) Intragroup sales of inventory for year ended 30/6/12 – $19,000
2. c) Unrealised profits on inventory held 30/6/12 – $1,200 before tax

 

 

3.Debentures

TB 10% debentures in Kookaburra Ltd $2,500

TB Interest received from debentures $250

 

 

4.Dividend

TB Dividend paid (by Kookaburra) $2,400

 

 

 

 

7. Profit in opening inventory: Kookaburra Ltd – Koala Ltd (realised in current yr)

 

↓Retained Earnings (1/7/11)¹                                Dr              560

(800 x [1-0.3])

↑Income Tax Expense²                                           Dr              240

(800 x 30%)

↓Cost of Sales³                                              Cr                                 800

(reverse intragroup transaction)

 

¹Reduce prior period profit – transfer to current year

²Increase ITE as profit transferred to current year

³Reduce cost of sales to group cost

 

 

8. NCI adjustment

 

↓NCI                                                                        Dr              140

↑Retained Earnings (1/7/11)                       Cr                                 140

(560 x 25%)

(reduce share of profit for previous year)

 

NCI share of profit                                                   Dr              140

↑NCI                                                              Cr                                 140

(increase share of profit in current year)

 

OR together

 

NCI share of profit                                                            Dr              140

Retained Earnings (1/7/11)                                     Cr                                 140

 

 

 

 

 

9. Profit in ending inventory: Kookaburra Ltd – Koala Ltd

 

↓Sales¹                                                                    Dr         19 000

↓Cost of Sales²                                              Cr                            17 800

↓Inventory³                                                   Cr                              1 200

(reverse intragroup transaction)

 

¹Reverse intragroup sales/revenue

²Reverse cost of intragroup sales

³Record inventory at cost (remove unrealized profit)

 

↑Deferred Tax Asset                                              Dr              360

↓Income Tax Expense                                  Cr                                 360

(1,200 x 30% – Create DTA for tax paid on intragroup profit)

 

 

 

10. NCI adjustment

 

↓NCI                                                                        Dr              210

↓NCI Share of Profit                                     Cr                                 210

(1,200 x [1-0.3] x 25%)

 

 

 

 

 

 

 

 

 

 

11. Debentures (Koala to Kookaburra – downstream)

 

10% Debentures (Kookaburra)                                Dr           2 500

10% Debentures in Kookaburra Ltd (Koala)  Cr                              2 500

(reverse intragroup transaction – principal of debenture/loan)

 

 

12. Debenture interest

 

Interest Revenue (Koala)                                         Dr              250

Financial Expenses (Kookaburra)                   Cr                                 250

(reverse intragroup transaction – interest revenue)

 

 

NOTE: No effect on NCI share of equity

 

 

 

 

13. Dividend paid

 

Dividend Revenue                                                    Dr           1 800

Dividend Paid                                                 Cr                              1 800

($2,400 x 75% – reverse dividend payment to parent)

 

NOTE: Dividend payment to NCI adjusted in Step 6

 

 

 

 

 

 

ii)

Under (a): Full goodwill method, goodwill attributable to both the parent + NCI is measured

 

Under (b): Partial goodwill method, goodwill attributable to parent only is measured

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