Section B – ALL THREE questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
1
On 1 July 2014 Bycomb acquired 80% of Cyclip’s equity shares on the following terms:
–
–
a share exchange of two shares in Bycomb for every three shares acquired in Cyclip; and
a cash payment due on 30 June 2015 of $1·54 per share acquired (Bycomb’s cost of capital is 10% per
annum).
At the date of acquisition, shares in Bycomb and Cyclip had a stock market value of $3·00 and $2·50 each
respectively.
Statements of profit or loss for the year ended 31 March 2015:
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Finance costs
Profit before tax
Income tax expense
Profit for the year
Bycomb
$’000
24,200
(17,800)
–––––––
6,400
(500)
(800)
(400)
–––––––
4,700
(1,700)
–––––––
3,000
–––––––
Cyclip
$’000
10,800
(6,800)
–––––––
4,000
(340)
(360)
(300)
–––––––
3,000
(600)
–––––––
2,400
–––––––
Equity in the separate financial statements of Cyclip as at 1 April 2014:
$’000
Equity
Equity shares of $1 each
12,000
Retained earnings
13,500
The following information is also relevant:
(i)
At the date of acquisition, the fair values of Cyclip’s assets were equal to their carrying amounts with the
exception of an item of plant which had a fair value of $720,000 above its carrying amount. The remaining life
of the plant at the date of acquisition was 18 months. Depreciation is charged to cost of sales.
(ii) On 1 April 2014, Cyclip commenced the construction of a new production facility, financing this by a bank loan.
Cyclip has followed the local GAAP in the country where it operates which prohibits the capitalisation of interest.
Bycomb has calculated that, in accordance with IAS 23 Borrowing Costs, interest of $100,000 (which accrued
evenly throughout the year) would have been capitalised at 31 March 2015. The production facility is still under
construction as at 31 March 2015.
(iii) Sales from Bycomb to Cyclip in the post-acquisition period were $3 million at a mark-up on cost of 20%. Cyclip
had $420,000 of these goods in inventory as at 31 March 2015.
(iv) Bycomb’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose
Cyclip’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.
(v) On 31 March 2015, Bycomb carried out an impairment review which identified that the goodwill on the
acquisition of Cyclip was impaired by $500,000. Impaired goodwill is charged to cost of sales.
10
Required:
(a) Calculate the consolidated goodwill at the date of acquisition of Cyclip.
(6 marks)
(b) Prepare extracts from Bycomb’s consolidated statement of profit or loss for the year ended 31 March 2015,
for:
(i)
(ii)
(iii)
(iv)
revenue;
cost of sales;
finance costs;
profit or loss attributable to the non-controlling interest.
The following mark allocation is provided as guidance for this requirement:
(i)
(ii)
(iii)
(iv)
1 mark
3 marks
2½ marks
2½ marks
(9 marks)
(15 marks)
11
[P.T.O.
3
(a) On 1 January 2015, Palistar acquired 75% of Stretcher’s equity shares by means of an immediate share
exchange of two shares in Palistar for five shares in Stretcher. The fair value of Palistar and Stretcher’s shares on
1 January 2015 were $4·00 and $3·00 respectively. In addition to the share exchange, Palistar will make a cash
payment of $1·32 per acquired share, deferred until 1 January 2016. Palistar has not recorded any of the
consideration for Stretcher in its financial statements. Palistar’s cost of capital is 10% per annum.
The summarised statements of financial position of the two companies as at 30 June 2015 are:
Assets
Non-current assets (note (ii))
Property, plant and equipment
Financial asset equity investments (note (v))
Current assets
Inventory (note (iv))
Trade receivables (note (iv))
Bank
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Other component of equity
Retained earnings – at 1 July 2014
– for year ended 30 June 2015
Current liabilities (note (iv))
Total equity and liabilities
Palistar
$’000
Stretcher
$’000
55,000
11,500
––––––––
66,500
––––––––
28,600
6,000
–––––––
34,600
–––––––
17,000
14,300
2,200
––––––––
33,500
––––––––
100,000
––––––––
15,400
10,500
1,600
–––––––
27,500
–––––––
62,100
–––––––
20,000
4,000
26,200
24,000
––––––––
74,200
25,800
––––––––
100,000
––––––––
20,000
nil
14,000
10,000
–––––––
44,000
18,100
–––––––
62,100
–––––––
The following information is relevant:
(i)
Stretcher’s business is seasonal and 60% of its annual profit is made in the period 1 January to 30 June
each year.
(ii) At the date of acquisition, the fair value of Stretcher’s net assets was equal to their carrying amounts with
the following exceptions:
An item of plant had a fair value of $2 million below its carrying value. At the date of acquisition it had a
remaining life of two years.
The fair value of Stretcher’s investments was $7 million (see also note (v)).
Stretcher 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.
(iii) Following an impairment review, consolidated goodwill is to be written down by $3 million as at 30 June
2015.
(iv) Palistar sells goods to Stretcher at cost plus 30%. Stretcher had $1·8 million of goods in its inventory at
30 June 2015 which had been supplied by Palistar. In addition, on 28 June 2015, Palistar processed the
sale of $800,000 of goods to Stretcher, which Stretcher did not account for until their receipt on 2 July
2015. The in-transit reconciliation should be achieved by assuming the transaction had been recorded in
the books of Stretcher before the year end. At 30 June 2015, Palistar had a trade receivable balance of
$2·4 million due from Stretcher which differed to the equivalent balance in Stretcher’s books due to the sale
made on 28 June 2015.
6
(v) At 30 June 2015, the fair values of the financial asset equity investments of Palistar and Stretcher were
$13·2 million and $7·9 million respectively.
(vi) Palistar’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose
Stretcher’s share price at that date is representative of the fair value of the shares held by the non-controlling
interest.
Required:
Prepare the consolidated statement of financial position for Palistar as at 30 June 2015.
(25 marks)
(b) For many years, Dilemma has owned 35% of the voting shares and held a seat on the board of Myno which has
given Dilemma significant influence over Myno. The other shares (65%) in Myno were held by many other
shareholders who all owned less than 10% of the share capital. On this basis, Dilemma considered Myno to be
an associate and has used equity accounting to account for its investment.
In March 2015, Agresso made an offer to buy all of the shares of Myno. The offer was supported by the majority
of Myno’s directors. Dilemma did not accept the offer and held on to its shares in Myno.
On 1 April 2015, Agresso announced that it had acquired the other 65% of the share capital of Myno and
immediately convened a board meeting at which three of the previous directors of Myno were replaced, including
the seat held by Dilemma.
Required:
Explain how the investment in Myno should be treated in the consolidated statement of profit or loss of
Dilemma for the year ended 30 June 2015 and the consolidated statement of financial position at 30 June
2015.
(5 marks)
(30 marks)
End of Question Paper
7
3
On 1 January 2014, Plastik acquired 80% of the equity share capital of Subtrak. The consideration was satisfied by
a share exchange of two shares in Plastik for every three acquired shares in Subtrak. At the date of acquisition, shares
in Plastik and Subtrak had a market value of $3 and $2·50 each respectively. Plastik will also pay cash consideration
of 27·5 cents on 1 January 2015 for each acquired share in Subtrak. Plastik has a cost of capital of 10% per annum.
None of the consideration has been recorded by Plastik.
Below are the summarised draft financial statements of both companies.
Statements of profit or loss and other comprehensive income for the year ended 30 September 2014
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Finance costs
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income:
Gain on revaluation of property (note (i))
Total comprehensive income
Plastik
$’000
62,600
(45,800)
–––––––
16,800
(2,000)
(3,500)
(200)
–––––––
11,100
(3,100)
–––––––
8,000
Subtrak
$’000
30,000
(24,000)
–––––––
6,000
(1,200)
(1,800)
(nil)
–––––––
3,000
(1,000)
–––––––
2,000
1,500
–––––––
9,500
–––––––
nil
–––––––
2,000
–––––––
18,700
1,000
–––––––
19,700
–––––––
13,900
nil
–––––––
13,900
–––––––
4,300
4,700
nil
–––––––
9,000
–––––––
28,700
–––––––
1,200
2,500
300
–––––––
4,000
–––––––
17,900
–––––––
10,000
2,000
6,300
–––––––
18,300
–––––––
9,000
nil
3,500
–––––––
12,500
–––––––
2,500
–––––––
1,000
–––––––
3,400
1,700
2,800
–––––––
7,900
–––––––
28,700
–––––––
3,600
nil
800
–––––––
4,400
–––––––
17,900
–––––––
Statements of financial position as at 30 September 2014
Assets
Non-current assets
Property, plant and equipment
Investments: 10% loan note from Subtrak (note (ii))
Current assets
Inventory (note (iii))
Trade receivables (note (iv))
Bank
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Revaluation surplus (note (i))
Retained earnings
Non-current liabilities
10% loan notes (note (ii))
Current liabilities
Trade payables (note (iv))
Bank
Current tax payable
Total equity and liabilities
12
The following information is relevant:
(i)
At the date of acquisition, the fair values of Subtrak’s assets and liabilities were equal to their carrying amounts
with the exception of Subtrak’s property which had a fair value of $4 million above its carrying amount. For
consolidation purposes, this led to an increase in depreciation charges (in cost of sales) of $100,000 in the
post-acquisition period to 30 September 2014. Subtrak has not incorporated the fair value property increase into
its entity financial statements.
The policy of the Plastik group is to revalue all properties to fair value at each year end. On 30 September 2014,
the increase in Plastik’s property has already been recorded, however, a further increase of $600,000 in the
value of Subtrak’s property since its value at acquisition and 30 September 2014 has not been recorded.
(ii) On 30 September 2014, Plastik accepted a $1 million 10% loan note from Subtrak.
(iii) Sales from Plastik to Subtrak throughout the year ended 30 September 2014 had consistently been $300,000
per month. Plastik made a mark-up on cost of 25% on all these sales. $600,000 (at cost to Subtrak) of Subtrak’s
inventory at 30 September 2014 had been supplied by Plastik in the post-acquisition period.
(iv) Plastik had a trade receivable balance owing from Subtrak of $1·2 million as at 30 September 2014. This
differed to the equivalent trade payable of Subtrak due to a payment by Subtrak of $400,000 made in September
2014 which did not clear Plastik’s bank account until 4 October 2014. Plastik’s policy for cash timing differences
is to adjust the parent’s financial statements.
(v) Plastik’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose
Subtrak’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.
(vi) Due to recent adverse publicity concerning one of Subtrak’s major product lines, the goodwill which arose on the
acquisition of Subtrak has been impaired by $500,000 as at 30 September 2014. Goodwill impairment should
be treated as an administrative expense.
(vii) Assume, except where indicated otherwise, that all items of income and expenditure accrue evenly throughout
the year.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income for Plastik for the year
ended 30 September 2014.
(b) Prepare the consolidated statement of financial position for Plastik as at 30 September 2014.
The following mark allocation is provided as guidance for these requirements:
(a) 10 marks
(b) 17 marks
(c) Plastik is in the process of recording the acquisition of another subsidiary, Dilemma, and has identified two items
when reviewing the fair values of Dilemma’s assets.
The first item relates to $1 million spent on a new research project. This amount has been correctly charged to
profit or loss by Dilemma, but the directors of Plastik have reliably assessed the fair value of this research to be
$1·2 million.
The second item relates to the customers of Dilemma. The directors of Plastik believe Dilemma has a particularly
strong list of reputable customers which could be ‘sold’ to other companies and have assessed the fair value of
the customer list at $3 million.
Required:
State whether (and if so, at what value) the two items should be recognised in the consolidated statement
of financial position of Plastik on the acquisition of Dilemma.
(3 marks)
(30 marks)
End of Question Paper
13