ACCM4300 Financial Reporting | Statement of Advice Solution
Assessment Description
Assume that you are a graduate accountant working for Brook Rivers, a public accounting firm
situated at 102 Goulburn Street, Sydney, NSW 2000. The Manager of your firm, Mr. Steve
Kaplan, has asked you to prepare a statement of advice in response to an email received from a
client, Ms. Anna Sunana, the Managing Director of Ferengi Ears Ltd, raising several accounting
issues. Please refer to the email on the next page.
The maximum length for the body of the letter is 1,500 words. You should address all the
technical issues and discussion in your advice, followed by a Reference List.
- Part A: Technical component 20% – This mark covers the technical content of your advice
and the explanation of each of the issues, the calculations and journal entries (where
applicable). - Part B: Communication Skills 10% – This mark covers the generic skills of writing; layout,
clear meaning, structure and organisation, appropriate tone and grammar, spelling, and
punctuation throughout the whole assignment. It also includes referencing.
Case Study
Ferengi Ears Ltd, a publicly traded company listed on the ASX, is a global leader in the
development, manufacturing, and commercialisation of implantable hearing solutions. With shares
trading at $9.20 each on 1 July 2022, the company has invested consistently in research and
development to enhance and expand their product portfolio. As a result, thousands of individuals
worldwide now benefit from Ferengi Ears implants that significantly improve their quality of life and
communication abilities. Under the leadership of our new CEO, Ferengi Ears Ltd has initiated a
strategy of providing personalised solutions and comprehensive support to patients. This approach
includes the acquisition of Precisi Medical Ltd, whose clinics assist in diagnosing patients’ hearing
requirements, ensuring optimal outcomes for those with hearing loss.
Ferengi Ears Ltd’s incremental borrow rate stands at 9%, while the corporate tax rate is 30%.
Draft a business letter in reply and make sure you reference any relevant sources relating to your
advice, for example, AASBs, Corporations Act, and relevant sources. See the email below.
Re: Accounting Issues for year ended 30 June 2024
From: Anna Sunana (ASunana@FerengiEarsLtd.com.au)
Sent: 2 July 2024
To: Steve Kaplan (S. Kaplan@BrookRivers.com.au)
Dear Steve,
I am reaching out to you for assistance as our Chief Accountant is currently on long service
leave. I need to understand the accounting implications of our recent takeover of Precisi Medical
Ltd so that I can present the consolidated financial statements to the Board of directors and
respond to any further questions they may have concerning the accounts for the year ended 30
June 2024. As I do not have any accounting experience, please explain the principles and
concepts for me in simple language.
As you know, we have recently acquired 100% of the issued shares of Precisi Medical Ltd on 1
July 2022 on a cum-div basis. Precisi Medical Ltd was established in 2010, specialising in the
provision of health advice to customers. The terms of the acquisition were that shareholders of
Precisi Medical Ltd would receive $1.10 cash per share plus one share in Ferengi Ears Ltd for
every four ordinary shares of Precisi Medical Ltd. The cash would be payable to shareholders in
two instalments, with half payable at the date of acquisition and the balance payable on 1 July
2023.
The statement of financial position of Precisi Medical Ltd as at 1 July 2022 included the following
information:
Cash $20,000
Accounts receivable (net) 42,000
Inventories 5,000
Property, plant and equipment (net) 228,000
Goodwill 10,000
$305,000
Accounts payable $5,000
Wages payable 4,000
Dividend payable 11,000
Loan payable 100,000
Share capital – $1 share 60,000
Retained earnings 125,000
$305,000
All the assets of Precisi Medical Ltd were recorded at fair value except for some equipment and
inventories whose carrying amounts were each $2,100 less than the fair values. The equipment
consisted of audiomebots used to test for hearing loss. Due to rapid changes in technology, it
was estimated that the useful life of the equipment was only a further three years. It was also
discovered that Precisi Medical Ltd had developed a business magazine containing health advice
for consumers. This magazine was widely sought after. Ferengi Ears Ltd placed a value of
$5,000 on the masthead of this magazine. The intangible asset was not recognised by Precisi
Medical Ltd at acquisition date as it was internally generated and was considered to have an
indefinite life. On 1 June 2022, a major competitor sued Precisi Medical Ltd for alleged damaging
statements made in the magazine, and the court case was in progress at the date of acquisition.
No monetary amount was disclosed in the financial statements, but the company’s lawyers
believed that the probable payout to settle the case was $18,000. The case has yet to be settled.
One of the key rules of acquisition is to never spend more for an acquisition than you have to.
Our Accounts Clerk prepared an acquisition analysis and determined a gain on bargain purchase
of $119,000 (calculated as $66,000 cash paid minus the subsidiary’s equity acquired of
$185,000) to be reported as income in the accounts. Can you check that this right and help me
with the acquisition analysis? It was a fantastic bargain and we managed to sell all of Precisi
Medical Ltd’s existing inventories to one of our main customers within the first month of acquiring
the company, resulting in significant profits for our group.
What journal entries (if any) do I need to make for 30 June 2024 to prepare the consolidated
financial statements? Please show all workings and explain each journal entry, as I need to be
able to respond to questions from the Board of Directors.
Prior to going on long service leave, The Chief Accountant identified two inter-company
transactions for further consideration when preparing the consolidated accounts. Specific details
of these transactions are as follows:
- On the 25th of June 2024, we sold some of our older hearing implants from our
Freedom range of stock costing $30,000 to Precisi Medical Ltd for $50,000 on
credit, recognizing a profit of $20,000 from the sale. At year-end, 90% of these
goods had been sold by Precisi Medical Ltd to external entities at a 20% markup.
Is there anything else we need to do? Please provide any necessary journal
entries. - On 1 January 2023, Ferengi Ears Ltd sold some diagnostic equipment on
favorable terms to Precisi Medical Ltd for $42,000. Ferengi Ears Ltd had originally
paid $85,000 for this asset, and at the time of sale had charged accumulated
depreciation of $37,000. This asset is to be depreciated on a straight-line basis at
10% p.a. on cost and it is still on hand with Precisi Medical Ltd at 30 June 2024.
Please explain what I need to do with this transaction and show any journal entries
necessary for the preparation of Consolidated financial statements.
Please respond by letter (not email) as I would like to present this to the Board. I look forward to
hearing from you shortly.
Regards,
Anna Sunana
Managing Director, Ferengi Ears Ltd
578 Chester Road,
Melbourne Vic 3000