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PFR 6-2

Cooper Case
Polestar OTQ case
Depay Co Case
Plago Co Case
Tiara Co
Patel Co
Dolby Co (Mar/Jun17)
Glosgow Co Case
Foxvord (Mar/Jun 18)
Party Co
Devil Co
Promise Co
Cooper Case

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Cooper Case

The following scenario relates to questions 210–214.

The assistant accountant of Cooper has started work on the statement of cash flows for the year ended

31 December 20X8, completing a draft of the cash generated from operations as shown below.

 

$000

Profit from operations                                                                  3,500

Depreciation                                                                               4,600

Release of government grant                                                        1,400

Profit on disposal of property                                                     (3,700)

Increase in inventories                                                                  (400)

Decrease in trade and other receivables                            (300)

Increase in trade and other payables                                              900

Cash generated from operations                                              13,400

In addition to this, the assistant has seen that the balance of property was $39.5 million at 1 January 20X8 and $29 million at 31 December 20X8. There were no additions of property in the year.

There was also a deferred income balance relating to government grants of $6 million at 1 January 20X8. The closing deferred income balance was $8 million.

 

210. What method has Cooper’s assistant accountant used to calculate the cash generated from operations?

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211. In relation to the calculation of cash generated from operations, select the TWO cells which contain errors made by the assistant.

$000

Profit from operations                                                                         3,500

Release of government grant

Depreciation                                                                                           4,600

Release of government grant                                                              1,400

Profit on disposal of property                                                             (3,700)

Increase in inventories                                                                         (400)

Decrease in trade and other receivables                                           (300)

Increase in trade and other payables                                                 900

Cash generated from operations                                                         6,000

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212. How much would be recorded in Cooper’s statement of cash flows in relation to the sale of property?

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213. What will be recorded as the receipt of government grants in the year?

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214. Cooper’s assistant accountant has been studying statements of cash flows and is unsure whether the information contained in the study material is true.

Which, if any, of the following statements is/are true?

Statement 1: Intangible assets will have no impact on the statement of cash flow as they have no physical substance.

Statement 2: A rights issue of shares will increase the cash flows from financing activities.

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Polestar OTQ case

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1 / 6

Polestar OTQ case

The following scenario relates to questions 215–219.

On 1 April 20X3, Polestar Co acquired 75% of the 12 million 50 cent equity shares of Southstar Co.

Polestar Co made an immediate cash payment of $1.50 per share. The statements of profit or loss for

the year ended 30 September 20X3 show revenue for Polestar Co and Southstar Co as $110million and

$66 million respectively. Revenue accrued evenly over the year.

Additional information:

1             At the date of acquisition, the fair values of Southstar Co’s assets were equal to their carrying amounts with the exception of right-of-use property held under a lease agreement. This had a fair value of $2 million above its carrying amount and a remaining lease term of ten years at that date. All depreciation is included in cost of sales.

2             Contingent consideration was estimated to be $1.8 million at 1 April 20X3, but by 30 September 20X3 due to continuing losses, its value was estimated at only $1.5 million. The contingent consideration has not been recorded by Polestar Co and the directors expect the acquisition to be a bargain purchase

3             Polestar sold materials at their cost of $4 million to Southstar Co in June 20X3. Southstar Co processed all of these materials at an additional cost of $1.4 million and sold them back to Polestar Co in August 20X3 for $9 million. At 30 September 20X3 Polestar Co had $1.5 million of these goods still in inventory. There were no other intragroup sales.

4          Polestar Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. Southstar Co’s share price of $1.20 per share at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest. The retained earnings of Southstar at the acquisition date were $14.3 million.

 

215. What was the fair value of Southstar Co’s net assets at the acquisition date? Submit your answer to one decimal place.

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216. What is consolidated revenue for the year ended 30 September 20X3?

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217. Due to lower than expected profits of the acquired company, Southstar Co, the estimated value of the contingent consideration has fallen from $1.8million to $1.5million.

Using the drag and drop options below, show how this be accounted for in Polestar Co.

A. Debit

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B. Credit

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218. What is the amount of the adjustment to profit attributable to the non-controlling interest in respect of unrealised profit?

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219. Polestar Co measures the non-controlling interest in Southstar Co at fair value. Which of the following applies when non-controlling interest is measured at fair value?

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Depay Co Case

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Depay Co Case

The following scenario relates to questions 220–224

Extracts from Depay’s financial statements for the year ended 30 September 20X2 are shown below.

Statement of profit or loss extract:                                                                                     $000

Finance costs                                                                                                                             (60)

Profit before tax                                                                                                                       142

Income tax expense                                                                                                                 (57)

Profit for the year                                                                                                                     85

 

Statement of financial position extract:                                              20X2                                    20X1

$000                                    $000

Retained earnings                                                                                       900                                      940

5% loan notes                                                                                              515                                      500

Deferred tax liability                                                                                   150                                      125

Tax payable                                                                                                   30                                         40

Lease liabilities                                                                                            300                                      310

 

The following information is relevant:

1          Depay disposed of some land during the year, which had a remaining revaluation surplus at disposal of $20,000.

2          $40,000 of the finance costs relate to the loan notes which are repayable at a premium, making the effective rate of interest 8%. The remaining interest relatesto the lease liabilities.

3          During the year, Depay received a dividend from a subsidiary.

4          Depay acquired $70,000 of new assets under lease agreements during the year. Depay makes annual payments under leases on 30 September each year.

 

220. What will be recorded in Depay’s statement of cash flows under dividends paid?

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221. What will be recorded in Depay’s statement of cash flows under interest paid?

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222. What will be recorded in Depay’s statement of cash flows under tax paid?

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223. Where should the dividend received be shown in Depay’s statement of cash flows?

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224. How much should be shown within financing activities in respect of lease liabilities repaid?

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Plago Co Case

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Plago Co Case

On 1 April 20X3 Plago acquired 75% of Saleo’s equity shares in a share exchange of three shares in Plago for every two shares in Saleo. The market prices of Plago’s and Saleo’s shares at the date of acquisition were $3.20 and $4.50 respectively.

In addition to this Plago agreed to pay a further amount on 1 April 20X4 that was contingent upon the post‐acquisition performance of Saleo. At the date of acquisition Plago assessed the fair value of this contingent consideration at $4.2 million, but by 31 March 20X4 it was clear that the actual amount to be paid would be only $2.7 million (ignore discounting). Plago has recorded the share exchange and provided for the initial estimate of $4.2 million for the contingent consideration.

On 1 October 20X3 Plago also acquired 40% of the equity shares of Aroma paying $4 in cash per acquired share and issuing at par one $100 7% loan note for every 50 shares acquired in Aroma. This consideration has also been recorded by Plago.

Plago has no other investments.

The summarised statements of financial position of the three entities at 31 March 20X4 are

Plago Saleo Aroma
$’000 $’000 $’000
Assets
Non‐current assets
Property, plant and equipment          37,500   24,500      21,000
Investments          45,000  Nil  Nil
         82,500   24,500      21,000
Current assets
Inventory          10,000     9,000        5,000
Trade receivables            6,500     1,500        3,000
Total assets          99,000   35,000      29,000
Equity
Equity shares of $1 each          25,000     8,000        5,000
Share premium          19,800  Nil  Nil
Retained earnings  – at 1 April 20X3          16,200   16,500      15,000
                                       – for the year ended 31 March          11,000     1,000        6,000
         72,000   25,500      26,000
Non‐current liabilities
7% loan notes          14,500     2,000  Nil
Current liabilities
Contingent consideration            4,200  Nil  Nil
Other current liabilities            8,300     7,500        3,000
Total equity and liabilities          99,000   35,000      29,000

The following information is relevant:

1          At the date of acquisition the fair values of Saleo’s PPE was equal to its carrying amount with the exception of Saleo’s factory which had a fair value of $2 million above its carrying amount. Saleo has not adjusted the carrying amount of the factory as a result of the fair value exercise. This requires additional annual depreciation of $100,000 in the consolidated financial statements in the post‐ acquisition period.

Also at the date of acquisition, Saleo had an intangible asset of $500,000 for software in its statement of financial position. Plago’s directors believed the software to have no recoverable value at the date of acquisition and Saleo wrote it off shortly after its acquisition.

 

2          At 31 March 20X4 Plago’s current account with Saleo was $3.4 million (debit). This did not agree with the equivalent balance in Saleo’s books due to some goods‐in transit invoiced at $1.8 million that were sent by Plago on 28 March 20X4, but had not been received by Saleo until after the year end. Plago sold all these goods at cost plus 50%.

 

3          Plago’s policy is to value the non‐controlling interest at fair value at the date of acquisition. For this purpose Saleo’s share price at that date can be deemed to be representative of the fair value of the shares held by the non‐controlling interest.

 

4          Impairment tests were carried out on 31 March 20X4 which concluded that the value of the investment in Aroma was not impaired but, due to poor trading performance, consolidated goodwill was impaired by $3.8 million.

 

5          Assume all profits accrue evenly through the year.

 

Required:

A. Prepare the consolidated statement of financial position for Plago as at 31 March 20X4.

Consolidated statement of financial position of Plago as at 31 March 20X4

 

$000                                    $000

Non‐current assets:

Property, plant and equipment (37,500 + 24,500 + 2,000

FV adj – 100 FV depn)                                                                                                                                            63,900

Goodwill (16,000 – 3,800 (W3))                                                                                                                          12,200

Investment in associate (W6))                                                                                                                            13,200

89,300

 

Current assets 

Inventory (10,000 + 9,000 + 1,800 GIT – 600 PUP (W7)))                                20,200

Trade receivables (6,500 + 1,500 – 3,400 intra‐group (W7))                             4,600

24,800

 

 

Total assets                                                                                                                                                            114,100              

 

 

 

Equity and liabilities 

Equity attributable to owners of the parent         

Equity shares of $1 each                                                                                                                                       25,000

Share premium                                                                                                          19,800

Retained earnings (W5))                                                                                          27,500                                47,300

72,300

Non‐controlling interest (W4))                                                                                                                             8,400

Total equity                                                                                                                                                              80,700

 

Non‐current liabilities 

7% loan notes (14,500 + 2,000)                                                                                                                          16,500

 

Current liabilities 

Contingent consideration                                                                                        2,700

Other current liabilities (8,300 + 7,500 – 1,600 intra‐ group (W7))              14,200                                 16,900

 

 

Total equity and liabilities                                                                                                                                 114,100

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B. At 31 March 20X4 the other equity shares (60%) in Aroma were owned by many separate investors. Shortly after this date Spekulate (an entity unrelated to Plago) accumulated a 60% interest in Aroma by buying shares from the other shareholders. In May 20X4 a meeting of the board of directors of Aroma was held at which Plago lost its seat on Aroma’s board.

Required:

Explain, with reasons, the accounting treatment Plago should adopt for its investment in Aroma when it prepares its financial statements for the year ending 31 March 20X5.  

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Tiara Co

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226. Tiara Co

Given Below are the statements of profit or loss and other comprehensive income of Tiara Co, its subsidiary Donut Co and associate Feeble Co at 31 December 2020. Tiara Co, Donut Co and Feeble Co are public limited companies.

Tiara  Co Donut Co Feeble Co
$m $m $m
Revenue               500             150             70
Cost of sales              (270)              (80)            (30)
Gross profit               230               70             40
Other expenses              (150)              (20)            (15)
Finance income                 15               10              –
Finance costs                (20)               –            (10)
Profit before tax                 75               60             15
Income tax expense                (25)              (15)              (5)
PROFIT FOR THE YEAR                 50               45             10
Other comprehensive income:
Gains on property revaluation, net of tax                 20               10               5
TOTAL COMPREHENSIVE INCOME FOR THE YEAR                 70               55             15

You are also given the following additional information:

1             Tiara Co acquired 80million shares in Donut Co for $188million three years ago when Donut Co had a credit balance on its reserves of $40million. Donut Co has 100million $1 ordinary shares.

2             Tiara Co acquired 40million shares in Feeble Co for $60million two years ago when that company had a credit balance on its reserves of $20million. Feeble Co has 100million $1 ordinary shares.

3             During the year Donut Co sold some goods to Tiara Co for $66million (cost $48million). None of the goods had been sold by the year end.

4             Group policy is to measure non-controlling interests at acquisition at fair value. The fair value of the non-controlling interests in Donut Co at acquisition was $40million. An impairment test carried out at the year end resulted in $15million of the recognised goodwill relating to Donut Co being written off and recognition of impairment losses of $2.4million relating to the investment in Feeble Co.

 

Required

Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2020 for Tiara Co, incorporating its associate.

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2020

$m

 

Revenue (500 + 150 – 66)                                                                                                                                     584

Cost of sales (270 + 80 – 66 + (W3) 18)                                                                                                           (302)

Gross profit                                                                                                                                                               282

Other expenses (150 + 20 + 15)                                                                                                                          (185)

Finance income (15 + 10)                                                                                                                                         25

Finance costs                                                                                                                                                             (20)

Share of profit of associate ((10 × 40%) – 2.4*)                                                                                                 1.6

Profit before tax                                                                                                                                                     103.6

Income tax expense (25 + 15)                                                                                                                               (40)

Profit for the year                                                                                                                                                   63.6

Other comprehensive income:

Gains on property revaluation, net of tax (20 + 10)                                                                                          30

Share of other comprehensive income of associate (5 × 40%)                                                                        2

Other comprehensive income for the year, net of tax                                                                                  32.0

Total comprehensive income for the year                                                                                                       95.6

 

 

 

Profit attributable to:

Owners of the parent (63.6 – 2.4)                                                                                                                      61.2

Non-controlling interests (W2)                                                                                                                             2.4

63.6

 

 

Total comprehensive income attributable to:

Owners of the parent (95.6 – 4.4)                                                                                                                      91.2

Non-controlling interests (W2)                                                                                                                             4.4

95.6

 

 

 

*Impairment losses could either be included in expenses or deducted from the share of profit of associates figure. IAS 28 is not prescriptive.

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Patel Co

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227. Patel Co

On 1 October 20X0, Patel secured a majority equity shareholding in Secret on the following terms:

  • an immediate payment of $4 per share on 1 October 20X0.
  • and a further amount deferred until 1 October 20X1 of $5.4 million

The immediate payment has been recorded in Patel’s financial statements, but the deferred payment has not been recorded. Patel’s cost of capital is 8% per annum.

On 1 February 20X1, Patel also acquired 25% of the equity shares of Augusta paying $10 million in cash. Augusta made a profit of $1.2 million for the year ended 30 September 20X1.

The summarised statements of financial position of the three entities at 30 September 20X1 are:

 Patel Secret Adier
$’000 $’000 $’000
Assets
Non‐current assets
Property, plant and equipment          40,000   31,000      21,000
Intangible assets            7,500
Investments – Saracen (8 million shares at $4 each)          32,000  Nil
                   – Augusta          10,000  Nil
         89,500   31,000      21,000
Current assets          22,000   13,700
Total assets        111,500   44,700      29,000
Equity
Equity shares of $1 each          50,000   10,000        5,000
Retained earnings   – at 1 October 20X0          25,700   12,000      15,000
                                        – for year ended 30 September 20X1            9,200     6,000        6,000
         84,900   28,000      26,000
Non‐current liabilities
Deferred tax          15,000     8,000  Nil
Current liabilities          11,600     8,700
Total equity and liabilities        111,500   44,700      29,000

The following information is relevant:

1             Patel’s policy is to value the non‐controlling interest at fair value at the date of acquisition. For this purpose the directors of Patel considered a share price for Secret of $3.50 per share to be appropriate.

2             At the date of acquisition, the fair values of Secret’s property, plant and equipment was equal to its carrying amount with the exception of Secret’s plant which had a fair value of $4 million above its carrying amount. At that date the plant had a remaining life of four years. Secret uses straight‐line depreciation for plant assuming a nil residual value.

Also at the date of acquisition, Patel valued Secret’s customer relationships as an intangible asset at fair value of $3 million. Secret has not accounted for this asset. Trading relationships with Secret’s customers last on average for six years

3             At 30 September 20X1, Secret’s inventory included goods bought from Patel (at cost to Secret) of $2.6 million. Patel had marked up these goods by 30% on cost.

4             Impairment tests were carried out on 30 September 20X1 which concluded that consolidated goodwill was not impaired, but, due to disappointing earnings, the value of the investment in Augusta was impaired by $2.5 million.

5             Assume all profits accrue evenly through the year.

Required:

Prepare the consolidated statement of financial position for Patel as at 30 September 20X1.

Consolidated statement of financial position of Patel as at 30 September 20X1

$000

 

Assets

               Non‐current assets: 

Property, plant and equipment

(40,000 + 31,000 + 4,000 FV – 1,000 FV depreciation)                                                   74,000

Intangible assets

–  goodwill (W3)                                                                                                                        15,000

–  other intangibles (7,500 + 3,000 FV – 500 FV amortisation)                                     10,000

Investment in associate (W6)                                                                                                  7,700

 

106,700

 

Current assets (22,000 + 13,700 – 600 PUP (W7))                                                           35,100

 

 

Total assets                                                                                                                                141,800

 

 

Equity and liabilities 

Equity attributable to owners of the parent

Equity shares of $1 each                                                                                                         50,000

Retained earnings (W5)                                                                                                          35,200

 

85,200

Non‐controlling interest (W4)                                                                                                 7,900

 

 

Total equity                                                                                                                               93,100

               Non‐current liabilities    

Deferred tax (15,000 + 8,000)                                                                                               23,000

 

Current liabilities  (11,600 + 8,700 + 5,400 deferred consideration)                           25,700
Total equity and liabilities                                                                                                     141,800

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228. Dolby Co (Mar/Jun17)

On 1 January 20X6, Dolby Co acquired 75% of Laven Co’s equity shares by means of a share exchange of two shares in Dolby Co for every three Laven Co shares acquired. On that date, further consideration was also issued to the shareholders of Laven Co in the form of $100 8% loan notes for every 100 shares acquired in Laven Co. None of the purchase consideration, nor the outstanding interest on the loan notes at 31 March 20X6, has yet been recorded by Dolby Co. At the date of acquisition, the share price of Dolby Co and Laven Co is $3·20 and $1·80 respectively.

The summarised statements of financial position of the two companies as at 31 March 20X6 are:

Dolby Co Laven Co Adier
$’000 $’000 $’000
Assets
Non‐current assets
Property, plant and equipment (note (i))          75,200      31,500      21,000
Investment in Amery Co at 1 April 20X5 (note (iv))            4,500             –
         79,700      31,500      21,000
Current assets
Inventory (note (iii))          19,400      18,800        5,000
Trade receivables (note (iii))          14,700      12,500        3,000
Bank            1,200           600
         35,300      31,900
Total assets        115,000      63,400      29,000
Equity and liabilities
Equity
Equity shares of $1 each          50,000      20,000        5,000
Retained earnings – at 1 April 20X5          20,000      19,000      15,000
                             – for year ended 31 March 20X6          16,000        8,000        6,000
         86,000      47,000      26,000
Non‐current liabilities
8% loan notes            5,000  Nil  Nil
Current liabilities (note (iii))          24,000      16,400
Total equity and liabilities        115,000      63,400      29,000

The following information is relevant:

1             At the date of acquisition, the fair values of Laven Co’s assets were equal to their carrying amounts. However, Laven Co operates a mine which requires to be decommissioned in five years’ time. No provision has been made for these decommissioning costs by Laven Co. The present value (discounted at 8%) of the decommissioning is estimated at $4million and will be paid five years from the date of acquisition (the end of the mine’s life).

2             Dolby Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. Laven Co’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest            

3             The inventory of Laven Co includes goods bought from Dolby Co for $2·1million. Dolby Co applies a consistent mark-up on cost of 40% when arriving at its selling prices.

               On 28 March 20X6, Dolby Co despatched goods to Laven Co with a selling price of $700,000. These were not received by Laven Co until after the year end and so have not been included in the above inventory at 31 March 20X6.

At 31 March 20X6, Dolby Co’s records showed a receivable due from Laven Co of $3million, this differed to the equivalent payable in Laven Co’s records due to the goods in transit.

The intra-group reconciliation should be achieved by assuming that Laven Co had received the goods in transit before the year end.

4             The investment in Amery Co represents 30% of its voting share capital and Dolby Co uses equity accounting to account for this investment. Amery Co’s profit for the year ended 31 March 20X6 was $6million and Amery Co paid total dividends during the year ended 31 March 20X6 of $2million. Dolby Co has recorded its share of the dividend received from Amery Co in investment income (and cash).

5             All profits and losses accrued evenly throughout the year.

6             There were no impairment losses within the group for the year ended 31 March 20X6

 Required:

Prepare the consolidated statement of financial position for Dolby Co as at 31 March 20X6.

DOLBY CO – CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X6

 

$’000                    $’000

 

ASSETS

Non-current assets

Property, plant and equipment (75,200+31,500+4,000 re mine – 200 depreciation)            110,500

Goodwill (W1))                                                                                                                                             11,000

Investment in associate (4,500+1,200 (W3)                                                                                           5,700

127,200

 

 

Current assets

Inventories (19,400+18,800+700 GIT – 800 URP (W2)                                     38,100

Trade receivables (14,700 + 12,500 – 3,000)                                                      24,200

Cash and cash equivalents (1,200+600)                                                                  1,800                     64,100

 

 

Total assets                                                                                                                                               191,300

 

 

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Equity shares of $1 each ( 50,000 + 10,000 (W1))                                                                              60,000

Other equity reserves (share premium) (W1)                                                    22,000

Retained earnings (W3)                                                                                           37,390                      59,390

 

 

119,390

Non-controlling interest (W4)                                                                                                                    9,430

Total equity                                                                                                                                                128,820

 

Non-current liabilities

8% loan notes (5,000 +15,000 consideration)                                                    20,000

Accrued loan interest (W3)                                                                                          300

Environmental provision (4,000 + 80 interest (W3))                                          4,080                      24,380

Current liabilities (24,000+16,400-(3,000-700 GIT) intra-group W2))                                           38,100

Total equity and liabilities                                                                                                                      191,300

 

 

Workings (figures in brackets are in $’000)

 

1             Goodwill in Laven Co

 

$’000                    $’000

 

Controlling interest

Share exchange (20,000 u 75% x 2/3 = 10,000 x $3.20)                                                 32,000

8% loan notes (20,000 x 75% x $1,000/1,000)                                                                  15,000

Non-controlling interest (20,000 x 25% x $1.80)                                                                 9,000

56,000

Equity shares                                                                                               20,000

Retained earnings at 1 April 20X5                                                          19,000

Earnings 1 April 20X5 to acquisition (8,000 x 9/12)                             6,000

Fair value adjustments – asset re mine                                                  4,000

– Provision re mine                                        (4,000)                (45,000)

 

 

Goodwill arising on acquisition                                                                                            11,000

 

 

 

The share exchange of $32 million would be recorded as share capital of $10 million (10,000 u $1) and share premium of $22 million (10,000 u ($3.20 – $1.00)).

 

Applying the group policy to the environmental provision would mean adding $4 million to the carrying amount of the mine and the amount recorded as a provision at the date of acquisition. This has no overall effect on goodwill, but it does affect the consolidated statement of financial position and post-acquisition profit

 

2             Inventory

              

               The inventory of Laven Co includes unrealised profit (URP) of $600,000 (2,100 x 40/140).              Similarly, the goods in transit sale of $700,000 includes URP of $200,000 (700 x 40/140).

 

3             Consolidated retained earnings

              

                                                                                                                                                      $’000

Dolby Co’s retained earnings                                                                                  36,000

Laven Co’s post-acquisition profit (1,720 x 75% see below)                             1,290

Unrecorded share of Amery’s retained profit ((6,000 – 2,000) x 30%)          1,200

Outstanding loan interest at 31 March 20X6 (15,000 x 8% x 3/12)                 (300)

URP in inventory (W2)                                                                                                 (800)

37,390

 

The adjusted post-acquisition profits of Laven Co are:

As reported and time apportioned (8,000 x 3/12)                                              2,000

Interest on environmental provision (4,000 x 8% x 3/12)                                                   (80)

Additional depreciation re.mine (4,000/5 years x 3/12)                                    (200)

1,720

 

4             Non-controlling interest

 

$’000

Fair value on acquisition (W1)                                                                                 9,000

Post-acquisition profit (1,720 x 25% (W4)                                                               430

9,430

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Glosgow Co Case

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229. Glosgow Co Case

On 1 October 20X3, Glosgow acquired 90 million of Sandal’s 150 million $0.50 equity shares. Glosgow will pay $1.54 cash on 30 September 20X4 for each share acquired. Glosgow’s finance cost is 10% per annum. Sandal’s share price as at 1 October 20X3 was $1.25. The statements of profit or loss and other comprehensive income for the year ended 31 March 20X4 are:

Glosgow Sphere Frank Co
$’000 $’000 $’000
Revenue         620,000       310,000             70
Cost of sales       (400,000)     (150,000)            (30)
Gross profit         220,000       160,000             40
Distribution costs         (40,000)       (20,000)
Administrative expenses         (36,000)       (25,000)
Investment income            5,000          1,600
Finance costs           (2,000)         (5,600)            (10)
Profit before tax         147,000       111,000             30
Income tax expense         (45,000)       (31,000)              (5)
PROFIT FOR THE YEAR         102,000         80,000             25
Other comprehensive income:
Gain/(loss) on revaluation of land (note (ii))           (2,200)          1,000               5
TOTAL COMPREHENSIVE INCOME FOR THE YEAR           99,800         81,000             30

The following information is relevant:

1             A fair value exercise on 1 October 20X3 concluded that the carrying amounts of Sandal’s net assets were equal to their fair values with the following exceptions:

–              Plant with a remaining life of two years had a fair value of $6 million in excess of its      carrying amount. Plant depreciation is charged to cost of sales.

–              Glosgow placed a value of $5 million on Sandal’s good relationships with its customers.         Glosgow expected, on average, a customer relationship to last for a further five years.            Amortisation is charged to administrative expenses.

2             Sandal’s land, valued using the revaluation model, increased by $1 million since the acquisition.

3             After the acquisition Glosgow sold goods to Sandal for $20 million at a 25% mark‐up. Sandal had one fifth of these goods still in inventory at 31 March 20X4.

4             All items accrue evenlyover the year unless otherwise indicated. Sandal had retained earnings of $70 million at 1 April 20X3. There were no other components of equity at this date

5             Glosgow measures the non‐controlling interest at fair value at the date of acquisition. To calculate fair value, the share price of Sandal should be used.

 

Required:

A. Calculate goodwill arising on the acquisition of Sandal as at 1 October 20X3.    

2 / 2

B. Prepare the consolidated statement of profit or loss and other comprehensive income of Glosgow for the year ended 31 March 20X4.  

Glosgow – Consolidated statement of profit or loss and other comprehensive income for the year ended 31 March 20X4

$000

 

Revenue (620,000 + (310,000 × 6 /12) – 20,000 intra‐group sales)              755,000

Cost of sales (W2)                                                                                                      (457,300)

 

Gross profit                                                                                                                   297,700

Distribution costs (40,000 + (20,000 × 6 /12))                                                      (50,000)

Administrative expenses (36,000 + (25,000 × 6 /12) +

(5,000/5 × 6 /12 re customer list))                                                                           (49,000)

Investment income (5,000 + (1,600 × 6 /12))                                                          5,800

Finance costs (2,000 + (5,600 × 6/12) + (126,000 × 10% ×

6 /12 re deferred consideration))                                                                            (11,100)

 

Profit before tax                                                                                                        193,400

Income tax expense (45,000 + (31,000 × 6 /12))                                               (60,500)

 

Profit for the year                                                                                                      132,900

Other comprehensive income

Loss on revaluation of land (2,200 – 1,000 gain for Sandal)              (1,200)

 

 

Total comprehensive income for the year                                                          131,700

 

 

 

Profit attributable to:

Owners of the parent (balance)                                                              117,700

Non‐controlling interest (W2)                                                                    15,200

 

132,900

 

 

Total comprehensive income attributable to:

Owners of the parent (balance)                                                              116,100

Non‐controlling interest (W3)                                                                   15,600

131,700

 

Workings           

 

W1         Net assets of Sandal at acquisition

$000

Share capital                                                                                                                 75,000

Retained earnings (70,000 b/f + 40,000 pre‐acquisition)                                110,000

Fair value adjustment – plant                                                                                      6,000

Fair value adjustment – customer relationships                                                    5,000

 

196,000

 

W2         Cost of sales

              

                                                                                                                                                      $000

Glosgow                                                                                                                       400,000

Sandal (150,000 × 6 /12)                                                                                            75,000

Intra‐group purchases                                                                                              (20,000)

Additional depreciation of plant (6,000/2 years × 6 /12)                                    1,500

Unrealised profit in inventory (20,000 × 1 /5 × 25/125)                                         800

 

457,300

W3         Non‐controlling interest in profit for the year

                                                                                                                                                      $000

 

Sandal’s profit (80,000 × 6 /12 )                                                             40,000

Fair value depreciation – plant                                                                              (1,500) 

               Fair value amortisation – customer list                                                                   (500)

 

Sandal adjusted profit                                                                                              38,000

Non‐controlling interest at 40%                                                                            15,200

 

 

Non‐controlling interest in total comprehensive income

 

                                                                                                                                                      $000

 

Non‐controlling interest in statement of profit or loss (above)                     15,200

Other comprehensive income (1,000 × 40%)                                                          400

 

15,600

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Foxvord (Mar/Jun 18)

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230. Foxvord (Mar/Jun 18)

Below is the trial balance for Foxvord Co at 31 December 20X7:

$’000                                   $’000

Property – carrying amount 1 January 20X7 (note (iv))                    18,000

Ordinary shares $1 at 1 January 20X7 (note (iii))                                                                            20,000

Other components of equity (Share premium) at 1 January 20X7 (note (iii))                            3,000

Revaluation surplus at 1 January 20X7 (note (iv))                                                                                800

Retained earnings at 1 January 20X7                                                                                                   6,270

Draft profit for the year ended 31 December 20X7                                                                          2,250

4% Convertible loan notes (note (i))                                                                                                     8,000

Dividends paid                                                                                               3,620

Cash received from contract customer (note (ii))                                                                             1,400

Cost incurred on contract to date (note (ii))                                          1,900

Inventories (note (v))                                                                                   4,310

Trade receivables                                                                                         5,510

Cash                                                                                                               10,320

Current liabilities                                                                                                                                     1,840

43,660                                43,660

 

The following notes are relevant:

1             On 1 January 20X7, Foxvord Co issued 80,000 $100 4% convertible loan notes. The loan notes can be converted to equity shares on 31 December 20X9 or redeemed at par on the same date. An equivalent loan without the conversion rights would have required interest of 6%. Interest is payable annually in arrears on 31 December each year. The annual payment has been included in finance costs for the year. The present value of $1 receivable at the end of each year, based on discount rates of 4% and 6%, are:

 

                                                                           4%                                        6%

               End of year 1                                    0.962                                   0.943

               End of year 2                                    0.925                                   0.890

               End of year 3                                    0.889                                   0.840

 

2             During the year, Foxvord Co entered into a contract to construct an asset for a customer, satisfying the performance obligation over time. The contract had a total price of $14million. The costs to date of $1·9million are included in the above trial balance. Costs to complete the contract are estimated at $7·1million.

               At 31 December 20X7, the contract is estimated to be 40% complete. To date, Foxvord Co has received $1·4million from the customer and this is shown in the above trial balance.

3             Foxvord Co made a 1 for 5 bonus issue on 31 December 20X7, which has not yet been recorded in the above trial balance. Foxvord Co intends to utilise the share premium as far as possible in recording the bonus issue

4             Foxvord Co’s property had previously been revalued upwards, leading to the balance on the revaluation surplus at 1 January 20X7. The property had a remaining life of 25 years at 1 January 20X7.

               At 31 December 20X7, the property was valued at $16million.

No entries have yet been made to account for the current year’s depreciation charge or the property valuation at 31 December 20X7. Foxvord Co does not make an annual transfer from the revaluation surplus in respect of excess depreciation.

5             It has been discovered that inventory totalling $0·39million had been omitted from the final inventory count in the above trial balance

Required

A. Calculate the adjusted profit for Foxvord Co for the year ended 31 December 20X7

2 / 3

B. Prepare the statement of changes in equity for Foxvord Co for the year ended 31 December 20X7              

Statement of changes in equity for the year ended 31 December 20X7

Share capital OCE Retained earnings Revaluation surplus Option
$’000 $’000 $’000 $’000 $’000
Balance as at 1 January 20X7       20,000          3,000         6,270               800           –
Profit – from (a)         3,305
Revaluation loss (W4)              (800)
Bonus issue (W3)         4,000         (3,000)       (1,000)
Convertible loan notes issued (W1)         424
Dividend paid       (3,620)
Balance as at 31 December 20X7       24,000               –         4,955                 –         424

3 / 3

C. Prepare the statement of financial position for Foxvord Co as at 31 December 20X73

Statement of financial position for Foxvord Co as at 31 December 20X7

 

$’000

 

ASSETS

Non-current assets

Property (W3)                                                               16,000

Current assets

Inventory (W5)                                                                4,700

Trade receivables                                                           5,510

Contract asset (W2)                                                       2,500

Cash                                                                                 10,320

 

 

Total assets                                                                    39,030

 

 

EQUITY AND LIABILITIES

Equity

Share capital                                                                  24,000

Retained earnings                                                          4,955

Convertible option                                                            424

Total equity                                                                    29,379

 

Non-current liabilities

Convertible loan notes (W1)                                        7,711

Current liabilities                                                            1,940

Total equity and liabilities                                          39,030

 

Workings

1             Convertible loan notes

Payment Discount rate Present value
$’000 $’000 $’000
20X7              320 0.943 302
20X8              320 0.890 285
20X9           8,320 0.840 6,989
                    7,576

As the full amount of $8m has been taken to liabilities, adjustment required is:

 

Dr Liability                         $424k Cr

Cr  Equity                                          $424k

 

The liability should then be held at amortised cost, using the effective interest rate.

Balance                              Interest                              Payment                             Balance

b/f                                       6%                                       Payment                             c/f

$000                                    $000                                    $000                                    $000

7,576                                   455                                      (320)                                   7,711

 

As only $320k has been recorded in finance costs:

Dr Finance costs               $135k

Cr Liability           $135k

 

2             Contract with customer Overall contract:

 

Price                                                                  14,000

Costs to date                                                   (1,900)

Costs to complete                                         (7,100)

 

5,000

 

 

Progress: 40%

 

Statement of profit or loss:

 

$000

 

Revenue ($14,000 u 40%)                           5,600

Cost of sales ($9,000 x 40%)                     (3,600)

2,000

 

 

Statement of financial position

$000

 

Revenue ($14,000 x 40%)                            1,900

Cost of sales ($9,000 x 40%)                       2,000

(1,400)

2,500

$5.6m should be recorded in revenue, and $3.6m in cost of sales, giving an overall increase to the draft profit of $2m. $2.5m should then be recorded in the statement of financial position as a current asset.

 

3             Bonus issue

The 1 for 5 bonus issue will lead to an increase in share capital of $4m ($20m x 1/5). Of this, $3m will be debited to other components of equity to take it to zero. The remaining $1m will be deducted from retained earnings.

Adjustment:

Dr Share premium           $3m

Dr Retained earnings      $1m

Cr Share capital                $4m

 

 4             Property

The asset should first be depreciated. $18m/25 = $720k. This should be deducted fromthe draft profit and the asset, giving a carrying amount of $17,280k.

 

Dr Draft profit    $720k

Cr Property $720k

Then the asset should be revalued from $17,280k to $16,000k, giving a revaluation loss  of $1,280k. As the revaluation surplus is only $800k, only $800k can be debited to this, with the remaining $480k being debited from the draft profit for the year.

 

Dr Revaluation surplus   $800k

Dr Draft profit                   $480k

Cr Property                        $1,280k

 

 5             Inventories

Closing inventories should be adjusted from $4,310k to $4,700k.

Dr           Inventories        $390k

Cr           Draft profit         $390k

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1 / 2

231. Party Co

The following are the draft statements of financial position of Party Co and Single Co as at 30 September 20X5:

Party Co Single Co Adier
$’000 $’000 $’000
Assets
Non‐current assets
Property, plant and equipment        392,000 84,000      21,000
Investments        120,000  Nil
       512,000          84,000      21,000
Current assets          94,700          44,650
Total assets        606,700        128,650
Equity and liabilities
Equity
Equity shares 190,000 60,000        5,000
Retained earnings 210,000 36,500      15,000
Revaluation surplus 41,400 4,000        6,000
       441,400        100,500      26,000
Non‐current liabilities
Deferred consideration 28,000  Nil  Nil
Current liabilities 137,300 28,150
Total equity and liabilities        606,700        128,650      29,000

The following information is relevant:

1             On 1 October 20X4, Party Co acquired 80% of the share capital of Single Co. At this date the retained earnings of Single Co were $34m and the revaluation surplus stood at $4m. Party Co paid an initial cash amount of $92m and agreed to pay the owners of Single Co a further $28m on 1 October 20X6. The accountant has recorded the full amounts of both elements of the consideration in investments. Party Co has a cost of capital of 8%. The appropriate discount rate is 0∙857

2             On 1 October 20X4, the fair values of Single Co’s net assets were equal to their carrying amounts with the exception of some inventory which had cost $3m but had a fair value of $3∙6m. On 30 September 20X5, 10% of these goods remained in the inventories of Single Co.

3             During the year, Party Co sold goods totalling $8m to Single Co at a gross profit margin of 25%. At 30 September 20X5, Single Co still held $1m of these goods in inventory. Party Co’s normal margin (to third party customers) is 45%.

4             The Party group uses the fair value method to value the non‐controlling interest. At acquisition the non‐controlling interest was valued at $15m.

 

Required:

A. Prepare the consolidated statement of financial position of the Party group as at 30 September 20X5. 

Consolidated statement of financial position for Party Co as at 30 September 20X5

 

$000

Assets

Non‐current assets:

Property, plant and equipment (392,000 + 84,000)                                                                       476,000

Investments (120,000 – 92,000 – 28,000)                                                                                               0

Goodwill                                                                                                                                                      32,396

 

508,396

Current assets: (94,700 + 44,650 + 60 FV – 250 PUP)                                                                    139,160

 

 

Total assets                                                                                                                                               647,556

 

 

Equity and liabilities

Equity:

Share capital                                                                                                                                             190,000

Retained earnings (W5)                                                                                                                         209,398

Revaluation surplus                                                                                                                                  41,400

 

 

440,798

Non‐controlling interest (W4)                                                                                                                15,392

 

 

Total equity                                                                                                                                               456,190

 

Non‐current liabilities:

Deferred consideration (23,996 + 1,920)                                                                                            25,916

Current liabilities: (137,300 + 28,150)                                                                                                165,450

 

 

Total equity and liabilities                                                                                                                    647,556

 

 

W1         Group structure

 

               Party Co owns 80% of Single Co.

Party Co has owned Single Co for one year.

 

W2         Net assets

 

                                                            Acquisition                        Year‐end                            Post acq’n

 

$000                                  $000                                       $000

 

Share capital                                       60,000                             60,000                                         0

Retained earnings                             34,000                             36,500                                     2,500

Revaluation surplus                           4,000                                4,000                                          0

Fair value adj inventory                      600                                       60                                       (540)

 

 

98,600                               100,560                                    1,960

 

 

W3         Goodwill

 

                                                                                                                        $000

 

Cash                                                                                                92,000

Deferred cash (28m × 0.857)                                                    23,996

NCI at acquisition                                                                        15,000

Less: Net assets at acquisition                                                (98,600)

 

Goodwill at acquisition                                                              32,396

 

 

W4          Non‐controlling interest

 

                                                                                                                        $000

 

NCI at acquisition (W3)                                                              15,000

NCI % of Single post acquisition (1,960 (W2)× 20%)          392

 

 

15,392

 

W5         Retained earnings

 

$000

 

Party Co                                                                                                        210,000

P’s % of Single post acquisition RE (1,960 (W2)× 80%)           1,568

Unwinding discount on deferred consideration

(23,996 (W3) × 8%)                                                                                       (1,920)

Unrealised profit (1,000 × 25%)                                                                   (250)

209,398

2 / 2

B. Party Co has a strategy of buying struggling businesses, reversing their decline and then selling them on at a profit within a short period of time. Party Co is hoping to do this with Single Co.

As an adviser to a prospective purchaser of Single Co, explain any concerns you would raise about making an investment decision based on the information available in the Party Group’s consolidated financial statements in comparison to that available in the individual financial statements of Single Co.      

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Devil Co

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1 / 2

232. Devil Co

Below are the statements of financial position of Devil Co as at 31 March 20X8 and 31 March 20X7, together with the statement of profit or loss and other comprehensive income for the year ended 31 March 20X8.

C 20X8 20X7 Adier
$’000 $’000 $’000
Assets
Non‐current assets
Property, plant and equipment               925 737      21,000
Development expenditure               290               160
           1,215               897      21,000
Current assets
Inventories               360               227
Trade receivables               274               324
Investments               143                46
Cash and cash equivalents                29               117
              806               714
Total assets            2,021            1,611
Equity and liabilities
Equity
Share capital – $1 ordinary shares               500               400        5,000
Share premium               350               100
Revaluation surplus               160                60      15,000
Retained earnings               229               255        6,000
           1,239               815      26,000
Non‐current liabilities
6% debentures               150               100
Lease liabilities               100                80
Deferred tax                48                45  Nil
              298               225
Current liabilities
Trade payables               274 352
Lease liabilities                17 12
Current tax                56               153  Nil
Debenture interest                  5                 –        3,000
Bank overdraft               132                54
              484               571
Total equity and liabilities            2,021            1,611      29,000

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

$’000

Revenue                                                                                                                                                     1,476

Cost of sales                                                                                                                                                (962)

 

Gross profit                                                                                                                                                 514

Other expenses                                                                                                                                        (157)

Finance costs                                                                                                                                              (15)

Profit before tax                                                                                                                                       342

Income tax expense                                                                                                                                (162)

Profit for the year                                                                                                                                      180

Other comprehensive income:

Gain on revaluation of property, plant and equipment                                                                   100

Total comprehensive income for the year                                                                                         280

Notes

1 During 20X8, amortisation of $60,000 was charged on development projects.

2 During 20X8 items of property, plant and equipment with a carrying amount of $103,000 were sold for $110,000. Profit on sale of these items was netted off against ‘other expenses’. Depreciation charged in the year on property, plant and equipment totalled $57,000. Devil Co acquired $56,000 of property, plant and equipment by means of leases with payments being made in arrears on the last day of each accounting period.

3 The current asset investments are government bonds and management has decided to classify themas cash equivalents.

4 The new debentures were issued on 1 April 20X7. Finance cost includes debenture interest and leasefinance charges only.

5 During the year Devil Co made a 1 for 8 bonus issue, capitalising its retained earnings, followed by a rights issue.

 

Required

A. Prepare an extract from the statement of cash flows for Devil Co from the net cash generated from operations line only. Use the indirect method. The net cash from operating activities was a $40,000 inflow.

STATEMENT OF CASH FLOWS FOR YEAR ENDED 31 MARCH 20X8

 

Cash flows from operating activities                                                     $’000                                   $’000

               Net cash from operating activities                                                                                                         40

 

Cash flows from investing activities

               Development expenditure (W1)                                                             (190)

Purchase of property, plant & equipment (W1)                                 (192)

Proceeds from sale of property, plant & equipment                           110

 

Net cash used in investing activities                                                                                                   (272)

 

Cash flows from financing activities

Proceeds from issue of shares (W2)                                                      300

Proceeds from issue of debentures (W3)                                               50

Payment of lease liabilities (W3)                                                            (31)

Dividends paid (W2)                                                                                  (156)

 

Net cash from financing activities                                                                                                       163

Net decrease in cash and cash equivalents                                                                                       (69)

Cash and cash equivalents at beginning of period                                                                          109

Cash and cash equivalents at end of period                                                                                       40

 

 

Workings

 

1             Assets

 

Development expenditure

Property, plant

and equipment

 

 

$’000                                                                 $’000

 

B/d                                                                      737                                                                  160

Disposals                                                          (103)

P/L                                                                       (57)

OCI                                                                     100

Purchase under lease                                      56

Additions (β)                                                                                                                              190

Amortisation                                                                                                                              (60)

Cash additions (β)                                          192                                                                      –

 

C/d                                                                    925                                                                    290

 

 

2             Equity  

 

Retained earnings
Revaluation surplus
Share capital and premium

              

 

 

 

 

                                                                  $’000                                           $’000                                          $’000

 

B/d                                                            500                                                   60                                              255

P/L                                                                                                                                                                          180

OCI                                                                                                                    100

Bonus issue                                              50                                                                                                       (50)

Rights issue (β)                                      300

Dividend paid (β)                                    –                                                    –                                               (156)

 

 

C/d                                                          850                                                160                                                 229

 

 

 

3             Liabilities

 

                                                                                                         Debentures                                      Leases

$’000                                              $’000

 

B/d                                                                                           100                                                    92*

SPLOCI

New lease                                                                                                                                          56

Cash received (paid) (β)                                                                      50                                                    (31)

 

 

C/d                                                                                          150                                                    117

 

*Non-current     + current             **Deferred         + current

2 / 2

B. The Board of Directors of Devil Co want explanations as to why the statement of cash flow is showing a net cash outflow whilst the company has made a profit. Explain to the Board where Devil Co has generated and spent its cash during the year, including any concerns or comments where appropriate.

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Promise Co

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1 / 1

233. Promise Co

On 1 January 20X5, Promise acquired 75% of Strey’s equity shares by means of an immediate share exchange of two shares in Promise for five shares in Strey. The fair value of Promise and Strey’s shares on 1 January 20X5 were $4 and $3 respectively. In addition to the share exchange, Promise will make a cash payment of $1.32 per acquired share, deferred until 1 January 20X6. Promise has not recorded any of the consideration for Strey in its financial statements. Promise’s cost of capital is 10% per annum.

Promise Strey
$’000 $’000
Assets
Non‐current assets (note (ii))
Property, plant and equipment          55,000 28,600
Financial asset equity investments (note (v))          11,500            6,000
         66,500          34,600
Current assets
Inventory (note (iv))          17,000          15,400
Trade receivables (note (iv))          14,300          10,500
Bank            2,200            1,600
         33,500          27,500
Total assets        100,000          62,100

The summarised statements of financial position of the two entities as at 30 June 20X5 are:

The following information is relevant:

1             Strey’s business is seasonal and 60% of its annual profit is made in the period 1 January to 30 June each year.

2             At the date of acquisition, the fair value of Strey’s net assets was equal to their carrying amounts with the following exceptions:

The fair value of Strey’s financial asset equity investments, carried at a value of $6 million, was $7 million (see also note (v)).

Strey owned the rights to a popular mobile (cell) phone game. At the date of acquisition, a specialist valuer estimated that the rights were worth $12 million and had an estimated remaining life of five years.

3             Following an impairment review, consolidated goodwill is to be written down by $3 million as at 30 June 20X5.

4             Promise sells goods to Strey at cost plus 30%. Strey had $1.8 million of goods in its inventory at 30 June 20X5 which had been supplied by Promise. In addition, on 28 June 20X5, Promise processed the sale of $800,000 of goods to Strey, which Strey did not account for until their receipt on 2 July 20X5. The in‐transit reconciliation should be achieved by assuming the transaction had been recorded in the books of Strey before the year end. At 30 June 20X5, Promise had a trade receivable balance of $2.4 million due from Strey which differed to the equivalent balance in Strey’s books due to the sale made on 28 June 20X5.

5             At 30 June 20X5, the fair values of the financial asset equity investments of Promise and Strey were $13.2 million and $7.9 million respectively

6             Promise’s policy is to value the non‐controlling interest at fair value at the date of acquisition. For this purpose the value given for Strey’s shares may be used.

Required:

Prepare the consolidated statement of financial position for Promise as at 30 June 20X5.  

Promise – Consolidated statement of financial position as at 30 June 20X5

 

Assets                                                                                                                                                                        $000

Non‐current assets

Property, plant and equipment (55,000 + 28,600)                                                                                        83,600

Goodwill (W3)                                                                                                                                                           3,000

Game rights (12,000 – 1,200 (W2))                                                                                                                    10,800

Financial asset equity investments (13,200 + 7,900)                                                                                     21,100

118,500

 

Current assets

Inventory (17,000 + 15,400 + 800 GIT – 600 (W6))                                                                                       32,600

Trade receivables (14,300 + 10,500 – 2,400 intra‐group)                                                                            22,400

Bank (2,200 + 1,600)                                                                                                                                                3,800

 

 

58,800

 

 

Total assets                                                                                                                                                            177,300

 

 

 

Equity and liabilities

Equity attributable to owners of the parent

Equity shares of $1 each (20,000 + 6,000 (W3))                                                                                             26,000

Other components of equity (share premium) (4,000 + 18,000 (W3))                                                     22,000

Retained earnings (W5)                                                                                                                                        52,425

 

100,425

 

Non‐controlling interest (W4)                                                                                                                          15,675

 

 

Total equity                                                                                                                                                         116,100

 

Current liabilities

Deferred consideration (18,000 + 900 finance cost (W5))                                                                        18,900

Other current liabilities (25,800 + 18,100 + 800 GIT – 2,400 intra‐group)                                            42,300

 

 

61,200

 

 

Total equity and liabilities                                                                                                                               177,300

 

 

 

Workings  

 

(W1) Group structure

Promise ———– Strey

75% – owned for 6 months

 

(W2) Net assets  

Acquisition                        Reporting date                               Post‐

acquisition

 

$000                                     $000                                             $000

 

Share capital                                      20,000                                   20,000                                               –

Retained earnings

(see below)                                        18,000                                   24,000                                           6,000

Fair value: game rights                    12,000                                    12,000                                              –

Amortisation × 1 /5 × 6 /12                                                             (1,200)                                         (1,200)

Fair value investments                                    1,000                                      1,900                                               900

 

51,000                                   56,700                                            5,700

 

 

W3                                                                                            W4/W5

 

Strey makes 60% of its profit in the period from 1 June. Therefore the post‐ acquisition retained earnings is $6 million (60% × $10 million), making the retained earnings at acquisition $18 million ($24 million less $6 million).

 

(W3) Goodwill in Strey

 

                                                                                                                                                                     $000

Share exchange (20,000 × 75% × 2 /5) = (6,000 × $4)                                                                    24,000

Deferred consideration (20,000 × 75% × $1.32/1.1)                                                                      18,000

Non‐controlling interest (20,000 × 25% × $3)                                                                                  15,000

 

 

57,000

 

Net assets at acquisition                                                                                                                        (51,000)

 

 

Goodwill on acquisition                                                                                                                             6,000

 

Impairment                                                                                                                                                  (3,000)

 

 

Goodwill at 30 June 20X5                                                                                                                          3,000

 

 

The shares issued by Promise (6 million at $4 – see above) would be recorded as share capital of $6 million (6,000 × $1) and share premium in other components of equity of $18 million (6,000 × $3).

 

(W4) Non‐controlling interest

 

                                                                                                                                                                     $000

Fair value on acquisition (W3)                                                                                                              15,000

Post‐acquisition profit (5,700 × 25% (W2))                                                                                         1,425

NCI share of impairment (3,000 × 25%)                                                                                                (750)

 

 

15,675

 

(W5) Consolidated retained earnings:

 

                                                                                                                                                                     $000

Promise’s retained earnings (26,200 + 24,000)                                                                               50,200

Strey’s adjusted post‐acquisition profit (5,700 (W2) × 75%)                                                          4,275

Promise’s share of impairment (3,000 × 75%)                                                                                 (2,250)

Finance cost on deferred consideration (18,000 × 10% × 6 /12)                                                    (900)

PUP in inventory (W6)                                                                                                                               (600)

Gain on equity investments (13,200 – 11,500)                                                                                  1,700

 

 

52,425

 

 

(W6) Provision for unrealised profit (PUP)

 The inventory of Strey at 30 June 20X5 (adjusted for goods‐in‐transit (GIT) sale of $800,000) is $2.6 million (1,800 + 800). The unrealised profit on this will be $600,000 ($2.6m × 30/130)

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