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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:

    $ $    
  Consideration transferred   960,000    
  Fair value of non-controlling interest   360,000    
      1,320,000    
  Fair value of net assets:        
  Shares 100,000      
  Retained earnings 480,000         (580,000)    
      740,000    
      650,000    
    $'000      
  Shares (18m × 2/3 × $4.85) 58,200      
  Deferred consideration (18m × $1.98 × 1 / 1.1) 35,640      
    93,840      
           
  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)      
                                   165,000      
           
  NCI at 20%                                  35,500      
           
                                   177,500      
           
    $'000      
  Property, plant and equipment                                    3,000      
  Identifiable intangible asset                                      500      
  Inventories                                      300      
  Trade receivables less payables                                      200      
                                       4,000      
           
           
           
           
Lease liabilities ($000)    
    b/f                310    
Paid (balance)                                                    80 New asset additions                70    
c/f                                                   300        
           
           
                                                   380                 380    
           
           
       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.

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