QUESTION 1 ACCOUNTING FOR LEASES Read the newspaper article by Leon Gettler called 'Lion Nathan rethinks bricks and porter strategy' and answer the...

QUESTION 1 ACCOUNTING FOR LEASES

Read the newspaper article by Leon Gettler called 'Lion Nathan rethinks bricks and porter strategy' and answer the questions.

Lion Nathan rethinks bricks and porter strategy

Leon Gettler

The Age, 29 January 2004, p. 3

Lion Nathan has put its pubs operation under review, four years after embarking on an aggressive plan in which it spent $65 million on hotel assets to ratchet up its low share of the Victorian beer market.

The brewer said yesterday that it was reviewing its ownership of 41pubs in Melbourne and Geelong after receiving expressions of interest. This is expected to involve various sale and leaseback options.

Contracts for long - term supply arrangements are expected to be part of any deal.

Lion Nathan is revisiting the pubs business after its rival, Foster's, spun off its own hotels and gaming business, Australian Leisure and Hospitality.

Lion Nathan's pub-buying spree was at odds with its strategy of not owning or operating hotels, but the brewer wanted to make an exception in Victoria, the backyard of Foster's.

In June 2000, it had a 13% share of the Victorian beer market but by November 2003, Lion Nathan's share had crept up to only 13.2%.

Lion Nathan had shrewdly targeted the 18 to 25-year-old segment in Victoria, but the strategy has been criticized because of the difficulties of coming in as an outsider and using an exclusive retail network to drive market share from such a low base.

In that time, Lion Nathan had also written down the value of its Victorian hotels.

Yesterday, the group said the change did not indicate a reduction in its plans for Victoria but rather a switch in focus by increasing its investment across brands including Tooheys, Becks, Hahn, James Squire and XXXX.

Analysts said yesterday that the news was in line with Lion Nathan overhauling its Victorian strategy, something which had been under way for 12 - 18 months.

Lion Nathan is believed to have raised $20 million from the sale and leaseback of about a third of its Victorian portfolio about 12 months ago.

In a statement to the market, Lion Nathan said it was not looking to sell individual venues and was committed to retaining ownership and control of the portfolio 'if that will deliver the best outcome for Lion Nathan and maximize shareholder value'.

Hotels in the brewer's portfolio include Pugg Mahone's and The Imperial in the central business district, the Albert Park Hotel, Limerick Arms and Golden Gate in South Melbourne and the Builders Arms in Fitzroy. Lion Nathan Australia Managing Director, Andrew Reeves; said yesterday; 'Hotel ownership and management was only one part of our Victorian growth strategy, the objectives of which have been largely achieved. We have never viewed hotel ownership as a core business and, given the recent focus on investment in the sector, we considered that now was an opportune time to review the future of these venues in our Victorian growth strategy'.

Questions

(a) Identify some benefits that might accrue to Lion Nathan as a result of the sale and leaseback transactions.

(b) Would you expect the related leases to be finance leases or operating leases? Explain your answer.

(c) How should Lion Nathan account for any profit or loss on the sale of the pubs?

(d) If it sells the pubs and then leases them back would you expect Lion Nathan to change how it accounts for the depreciation of the buildings?

QUESTION 2 ACCOUNTING FOR REVENUE RECOGNITION

Read Georgina Safe's article 'Change of mind gives gallery a $1m surprise' and determine whether the gallery should treat the donation as revenue. Further, if the donation is treated as revenue, how would that revenue be measured?

Change of Mind Gives Gallery a $1m Surprise

Georgina Safe

The Australian, 28 November 2000, p. 6

A million dollar painting, one of the most reproduced works in the country and due to be auctioned at Sotheby's tonight, has been withdrawn and donated to the National Gallery of Victoria.

The portrait Jeanne, by Australian artist Hugh Ramsay, was on show at Sotheby's Melbourne auction house yesterday morning before its scheduled sale for an estimated $1million. But by 3 pm the painting, one of Ramsay's best known works, had been delivered to the gallery's doorstep as a surprise gift from its owner, John Wicking.

The 1901 painting of Jeanne Garreau, a six-year-old French girl, had previously been on show at the gallery for 40 years.

It was lent to the gallery in 1947 by Ramsay's niece, the late Janet Wicking, but by the 1980's she had become unhappy that the work was hung in a gloomy corridor and she withdrew it.

The painting was put up for sale, at a Sotheby's auction of Australian and International Painting, by John Wicking on behalf of his wife, who died last year.

But Mr. Wicking had second thoughts after the catalogue was printed and resolved to donate the painting to the gallery, fearing that it might otherwise leave Australia.

'I am honoring my wife's ambition that the painting should go to a great public institution to ensure that this masterpiece....is enjoyed by the widest possible audience,' Mr. Wicking said in a statement.

Gallery director Gerard Vaughan said yesterday his limited acquisitions budget meant the gallery would not have been able to afford the 'staggeringly generous' gift at auction.

'We have made it very clear to Mr. Wicking that Jeanne will take pride of place,' Dr. Vaughan said.

The gallery's senior curator of Australian art, Terence Lane, said Jeanne was a masterwork that would complement the gallery's existing collection of 10 paintings by the artist, who died of tuberculosis in Melbourne in 1906, aged 28.

Thirteen of Ramasay's paintings have been offered at auction over the past 10 years, with the highest price being $28750 for Portrait of a Young Girl, achieved in August 1994.

The Australian's market analyst, Michael Reid, said Sotheby's had placed an ambitious value on the work and it may have been passed in at auction. 'The asking price of $1million to $1.2 million was exceptionally strong, given the track record of Ramsay over the past decade,' Mr. Reid said.

Sotheby's managing director Paul Sumner said he was delighted the painting had gone to a public gallery where it could be seen by all Australians.

QUESTION 3 CONSOLIDATIONS

The following financial statements of Joel Ltd and its subsidiary Parko Ltd have been extracted from their financial records at 30 June 2012.

Joel Ltd

Parko Ltd

$ thousands

$ thousands

Reconciliation of opening and closing retained earnings

Sales revenue

671.40

540.00

Cost of goods sold

(464.00)

(238.00)

Gross profit

207.40

302.00

Dividends received from Parko Ltd

93.00

Management fee revenue

26.50

Gain on sale of plant

40.00

35.00

Expenses

Administrative expenses

(30.80)

(38.70)

Depreciation

(29.50)

(56.80)

Management fee expense

(26.50)

Other expenses

(101.10)

(72.00)

Profit before tax

205.50

143.00

Tax expense

61.50

42.20

Profit for the year

144.00

100.80

Retained earnings - 30 June 2011

319.40

239.20

463.40

340.00

Dividends paid

(137.40)

(93.00)

Retained earnings - 30 June 2012

326.00

247.00

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Joel Ltd

Parko Ltd

$ thousands

$ thousands

Statement of financial position

Shareholders' equity

Retained earnings

326

247

Share capital

350

200

Current liabilities

Accounts payable

54.7

46.3

Tax payable

41.3

25

Non-current liabilities

Loans

173.5

116

945.5

634.3

Current assets

Accounts receivable

59.4

62.3

Inventory

92

29

Non-current assets

Land and building

224

326

Plant - at cost

299.85

355.8

Accumulated depreciation

-85.75

-138.8

Investment in Parko Ltd

356

945.5

634.3

Other Information

 Joel Ltd acquired its 100 percent interest in Parko Ltd on 1 July 2007 that is five years earlier. At that date the capital and reserves of Parko Ltd were:

Share capital $200 000

Retained earnings $180 000

$380 000

At the date of acquisition all assets were considered to be fairly valued.

 During the year Joel Ltd made total sales to Parko Ltd of $60 000, while Parko Ltd sold $50000 in inventory to Joel Ltd.

 The opening inventory in Joel Ltd as at 1 July 2011 included inventory acquired from Parko Ltd for $40 000 that cost Parko Ltd $30 000 to produce.

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 The closing inventory in Joel Ltd includes inventory acquired from Parko Ltd at a cost of $33000. This cost Parko Ltd $28 000 to produce.

 The closing inventory of Parko Ltd includes inventory acquired from Joel Ltd at a cost of $12000. This cost Joel Ltd $10 000 to produce.

 On 1 July 2011Parko Ltd sold an item of plant to Joel Ltd for $116 000 when its carrying value in Parko Ltd's accounts was $81 000 (cost $135 000, accumulated depreciation $54000). This plant is assessed as having a remaining useful life of six years.

 Parko Ltd paid $26 500 in management fees to Joel Ltd.

 The tax rate is 30 percent.

Required:

1. Prepare the acquisition analysis to determine any goodwill or gain from bargain purchase.

2. Prepare the journal entries necessary for consolidation purposes.

3. Prepare the consolidation worksheet.

4. Prepare the statement of comprehensive income for the year ended 30 June 2012.

5. Prepare the statement of financial position as at 30 June 2012.