Question

please don't answer my by hand written, better if use your PC to answer and hopefully the answer would include the methods.

Thanks in advance

a) You are analysing the potential purchase of 100% Sohu Corp by your company, Sina Corp. The information below is provided. Your company, Sina Corp pays in cash RM200,000 for Sohu Corp and the cash is obtained via issuing new share. Sina Sohu Historical Value Historical Value Fair Value RM'000 RM'000 RM'000 80 60 65 40 30 100 60 80 Current Assets Land Plants, net Equipment, net Cash Total assets 10 390 160 195 60 Current liabilities Shareholders' equity Total Liabilities and equityll 240 150 390 100 160 Required: Prepare a consolidated balance sheet AND inter-company transaction. (20 marks) b) What are the major accounting distortions for debt securities investment? (5 marks)

Answer 1

Note 1 : Calculation of Goodwill
Particulars	Amount (RM'000)
Current Assets	65
Land	60
Plants, net	30
Equipment, net	30
Cash	10
Total Assets of Sohu Inc	195
Less : Current liabilities	60
Identifiable Net Assets of Sohu Inc (B)	135
Amount paid for purchase of business (A)	200
Goodwill (A-B)	65
Note 2 : Journal Entries to be passed for inter-company transactions
Entries to be passed for acquisition of business :
Particulars	Dr. (RM'000)	Cr. (RM'000)
Business purchase a/c ..Dr	200
To Vendor (Sohu Inc.) a/c		200
(Being acquistion of business of Sohu Inc)
Identifiable Net assets a/c (Refer to the working note 1 above)..Dr	135
Goodwill a/c ..Dr	65
To Business Purchase a/c		200
(Being entry for recognition of identifiable net assets of Sohu Inc.)
Cash a/c ..Dr	200
To Shareholders' Equity		200
(Being issue of shares)
Vendor (Sohu Inc.) a/c …Dr	200
To Cash a/c		200
(Being payment made to Sohu Inc. for acquisiton of business)
Consolidated Balance sheet of Sina Inc as on December 31, 20XX
Particulars	Amount (RM'000)
Current Assets	145
Land	160
Plants, net	110
Equipment, net	100
Goodwill	65
Cash	70
Total assets	650
Current liabilities	300
Shareholders' Equity	350
Total Liabilities and Equity	650

b. First of all let's understand what accounting distortions are. Accounting distortions are deviations of reported information in financial statements from the underlying business reality. These distortions generally arise from the nature of accrual accounting and can be due to several reasons such as accounting standards, estimation errors, earnings management etc.

The major accounting distortions in debt securities investment are as follows :

-> Liabilities recognized at cost may be amortized.

-> Inconsistent definition and classification of equity instruments.

-> Making classification of debt and other securities based on intent.

-> The standard covering accounting for debt securities and equity instruments is a compromise between historical cost and fair value leaving opportunity for earnings management. Earnings management refers to when management manipulates the accounts for their own gain by manipulating accounts involving use of judgement and estimation.

-> Avoiding debt covenants and ultimately defaulting on borrowings.