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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

        $ $      
      Consideration transferred   960,000      
      Fair value of non-controlling interest   360,000      
      Fair value of net assets:          
      Shares 100,000        
      Retained earnings 480,000         (580,000)      
      Shares (18m × 2/3 × $4.85) 58,200        
      Deferred consideration (18m × $1.98 × 1 / 1.1) 35,640        
      Subsidiary profits ($400,000 x 6/12)                                200,000        
      Write off goodwill (per question, this is fully impaired)                                (12,500)        
      Additional depreciation ($450,000/10 x 6/12)                                (22,500)        
      NCI at 20%                                  35,500        
      Property, plant and equipment                                    3,000        
      Identifiable intangible asset                                      500        
      Inventories                                      300        
      Trade receivables less payables                                      200        
    Lease liabilities ($000)      
        b/f                310      
    Paid (balance)                                                    80 New asset additions                70      
    c/f                                                   300          
                                                       380                 380      
          Plago  Saleo Aroma  
          $'000 $'000 $'000  
      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 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.


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

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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