On 1 July 2010 Anderson Ltd acquires 70 percent of the equity capital of Arthur
ID: 2428386 • Letter: O
Question
On 1 July 2010 Anderson Ltd acquires 70 percent of the equity capital of Arthur Ltd at a cost of $4 million. At the date of acquisition all assets of Arthur are fairly stated and the total shareholder funds of Arthur Ltd are $4.4 million consisting of:$
Share Capital 3 000 000
Retained Earnings 1 400 000
4 400 000
As at 30 June 2012 (two years after the date of acquisition) the financial statements of the two companies are as follows:
Anderson Ltd Arthur Ltd
($ 000) ($ 000)
Detailed reconciliation of opening and closing retained earnings
Sales Revenue 800 200
Cost of Goods Sold (200) (80)
Other Expenses (120) (60)
Other Revenue 310 85
Profit 790 145
Tax 170 35
Profit After Tax 620 110
Retained Earnings-30 June 2011 2 000 1 600
2 620 1 710
Dividends Paid (400) (80)
Retained Earnings-30June 2012 2 220 1 630
Statement of Financial Position
Shareholders Equity
Retained Earnings 2 220 1 630
Share Capital 8 000 3 000
Current Liabilities
Accounts Payable 120 80
Non-current Liabilities
Loans 1 200 500
11 540 5 210
Current Assets
Cash 300 50
Accounts Receivable 500 350
Inventory 1 000 600
Non-current Assets
Land 2 800 2 210
Plant 2 940 2 000
Investment in Arthur Ltd 4 000 -
11 540 5 210
Additional Information
The Management of Anderson Ltd measures any non-controlling interest in Arthur Ltd at fair value. During the 2012 financial year Arthur Ltd sells $45 000 of inventory to Anderson Ltd. At year end Anderson has sold this inventory.
The tax rate is 30 percent.
Required
Showing all workings, including a consolidation worksheet and journal entries, prepare the consolidated statement of financial position, consolidated statement of comprehensive income and consolidated statement of changes in equity for Anderson Ltd and its controlled entity.
Explanation / Answer
4. Problem 8-12 WWWeb Marketing WWWeb Marketing is a decentralized firm specializing in designing and operating internet marketing web sites. The firm is four years old and has been growing rapidly, but it only shows a small profit. WWWeb has three profit centers: Design Division, Server Operations, and the Crawler Division. The Design Division devises internet marketing strategies for external clients, including innovative web sites and web based marketing strategies. Server Operations maintain s the clients’ Web sites on WWWeb servers. The Crawler Division operates WWWeb’s proprietary search engine that clients can use for internet-based marketing research. In addition to these three profit centers, WWWeb has an IT group that maintains WWWeb’s servers and telecommunication lines to the internet. The IT group is a cost center. The current annual IT budget is $548,000 for personnel, hardware and software leases for the servers, and telecommunication costs. The cost of the IT group is not allocated back to the three divisions. The CEO of WWWeb argues that the IT group is a common (shared) resource and is essentially a fixed cost. Adding another client Web site or performing a Web search does not generate any additional IT cost to the firm because WWWeb’s IT group has excess capacity. WWWeb’s CEO argues, “any charge for IT back to the divisions will cause the division to avoid our IT resources. As long as we have unused capacity on our systems we should be encouraging our people to use that capacity. WWWeb currently uses about 80 percent of the capacity of its servers, routers, and fiber optic high speed lines to the internet. The high speed lines are the “pipes” through which all client server web traffic flows. These high speed lines are also used by WWWeb’s email traffic and the crawler Division s marketing research Web searches. Currently, the IT systems are performing well and WWWeb users experience few delays and minimal interference from other users. However, the three profit center managers are projecting growth in their businesses and expect to reach capacity on their servers and communication lines within the next 12 months. When this happens, the managers predict that they will experience significant service degradation. Jose Coronas, head of WWWeb’s IT group, has called a meeting of the three division managers to discuss the terrific deals being offered by telecom companies and hardware providers. Given the current slump in the economy, WWWeb can roughly double the capacity of its servers and high speed access lines and lock in those low rates for two years, The incremental cost of doubling the IT group’s capacity is to raise its hardware lease cost and access line cost by 20 percent. IT currently spends $18,000 a month on hardware leases and access lines. If it were to double its existing capacity, the total monthly cost would rise to $21,600. Mr. Coronas believes his existing IT personnel can handle the additional server and line capacity. Coronas and the three division managers recommend that WWWeb acquire the additional capacity and lock in these attractive rates. Required: a. Analyze WWWeb’s current policy of how the three divisions are charged for IT costs and whether WWWeb should acquire the additional capacity. b. Should WWWeb change its policy of how it charges IT cost to the division? If so, what changes would you recommend.
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