Basic Consolidation
Question 71
QUESTION 71: BASIC CONSOLIDATION
On 1 June 2010, Premier acquired 80% of the equity share capital of Sanford. The consideration
consisted of two elements: a share exchange of three shares in Premier for every five acquired
shares in Sanford and $800,000 cash. The share issue has not yet been recorded by Premier. At
the date of acquisition shares in Premier had a market value of $5 each. Below are the
summarized draft financial statements of both companies.
Statements of profit or loss and other comprehensive income
For the year ended 30 September 2010
Premier
$’000
Revenue
92,500
Cost of sales
(70,500 )
Gross profit
22,000
Other expenses
(12,000 )
Profit for the year
10,000
Other comprehensive income:
Gain on revaluation of land
nil
Total comprehensive income
10,000
Statements of financial position as at 30 September 2010
Assets
Non-current assets
Property, plant and equipment
25,500
Investments
1,800
27,300
Current assets
12,500
Total assets
39,800
Equity and liabilities
Equity
Equity shares of $1 each
12,000
Other equity reserve – 30 September 2009 (note (iv))
500
Retained earnings
12,300
24,800
Current liabilities
15,000
Total equity and liabilities
39,800
Sanford
$’000
45,000
(36,000 )
9,000
(5,100 )
3,900
nil
3,900
13,900
nil
13,900
2,400
16,300
5,000
nil
4,500
9,500
6,800
16,300
The following information is relevant:
(i)
At the date of acquisition, the fair values of Sanford’s assets were equal to their carrying
amounts with the exception of its property. This had a fair value of $1·2 million below its
carrying amount, and had a remaining useful life of 8 years at the date of acquisition.
Sanford has not incorporated this in its financial statements.
(ii)
Sales from Sanford to Premier throughout the year ended 30 September 2010 had
consistently been $1 million per month. Sanford made a mark-up on cost of 25% on these
sales. Premier had $2 million (at cost to Premier) of inventory that had been supplied in the
post-acquisition period by Sanford as at 30 September 2010.
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Basic Consolidation
Question 71
(iii)
Premier had a trade payable balance owing to Sanford of $350,000 as at 30 September
2010. This did not agree with the corresponding receivable in Sanford’s books due to a
$130,000 payment made to Sanford, which Sanford has not yet recorded.
(iv)
Premier’s investments include investment in shares which at the date of acquisition were
classified as fair value through other comprehensive income. The investments have
increased in value by $300,000 during the year. The other equity reserve relates to these
investments and is based on their value as at 30 September 2009. There were no
acquisitions or disposals of any of these investments during the year ended 30 September
2010.
(v)
Premier’s policy is to value the non-controlling interest at fair value at the date of acquisition
deemed to be $3.5 million.
(vi)
There has been no impairment of consolidated goodwill.
Required:
(a)
Prepare the consolidated statement of profit or loss and other comprehensive
income for Premier for the year ended 30 September 2010.
(6 marks)
(a)
Prepare the consolidated statement of financial position for Premier as at 30
September 2010.
(14 marks)
ACCA F7 – December 2010 – Q1
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Basic Consolidation
Question 71
ANSWER TO QUESTION 71: BASIC CONSOLIDATION
Premier Group
Consolidated SPL & OCI
For the year ended 30 September 2010
Premier
Sanford x 4/12
$000
$000
92,500
15,000
(70,500)
(12,000 – 50 J4 + 400 J6)
22,000
2,650
(12,000)
(1,700)
10,000
950
Sales revenue
Cost of Sales
Gross Profit
Other expenses
Profit after tax
Other Comprehensive
income
Gain on revaluation
Gain on investments
0
300 J8
300
10,300
Adj.
– 4,000 J5
4,000 J5
0
Group
$000
103,500
(78,850)
24,650
(13,700)
10,950
0
300
11,250
(190)
0
11,060
Total Comprehensive Income
950
NCI share profit $950 x 20%
NCI share of OCI Nil x 20%
Total Comprehensive Income attributable to owners of Parent
Premier Group
Consolidated SFP as at 30 September 2010
Assets
PPE $25,500+13,900 -1,200 J3 +50 J4
Goodwill W3
Other investments $1,800 – 800 J1 + 300 J8
$000
38,250
9,300
1,300
Current assets $12,500+2,400 – 400 J6 + 130 J7– 480 J7
Total assets
Equity
Equity shares $12,000+2,400 J2
Share premium J2
Other reserves W6
Retained earnings W6
48,850
14,150
63,000
14,400
9,600
800
13,060
37,860
3,690
Non Controlling Interest W5
$000
41,550
Current Liabilities $15,000+6,800 – 350 J7
21,450
Total equity and liabilities
63,000
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Basic Consolidation
Question 71
W1 GROUP STRUCTURE
Sanford
Subsidiary Acquisition date: 1 Jun 2010
Group = 80%
NCI 20%
$000
W2 NET ASSETS (of subsidiary) AT ACQUISITION
Equity share capital
Retained earnings (pre) ($4,500 – 3,900)+$3,900 x 8/12 months
J3
S
5,000
3,200
(1,200)
7,000
W3 GOODWILL
Investment 800 J1 + 12,000 J2
Less: 7,000 W2 x 80% W1
S
12,800
(5,600)
7,200
3,500
(1,400)
2,100
9,300
Fair value of NCI
Less: 7,000 W2 x 20% W1
W4 POST ACQUISITION RESERVES (of subsidiary)
Balance [3,900 x 4/12]
J4
J6
RE
1,300
50
(400)
950
W5 NON CONTROLLING INTEREST
7,000 W2 x 20% W1
NCI goodwill W3
950 W4 x 20% W1
S
1,400
2,100
190
3,690
W6 GROUP RESERVES
Parent reserves
J8
OR
500
300
800
0
800
0 & 950 W4 x 80% W1
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RE
12,300
12,300
760
13,060
Basic Consolidation
Question 71
JOURNAL ENTRIES WITH WORKINGS
Investment in subsidiary
Other investments
Cash included in other investment $800
(-)
1
Investment in subsidiary
(-)
2
Share capital
Share premium
5,000 x 80% x 3/5 x $5 = $12,000
Reserve Pre (Sanford)
PPE
Fair value adjustment
(i)
3
(i)
4
$ 000
Dr.
Cr.
800
800
12,000
2,400
9,600
1,200
1,200
PPE
50
COS / RE (Sanford)
Reduction in depreciation due to fair value adjustment 1,200 / 8 years x 4/12 = 50
Revenue
COS
Cancellation of intra group trading $1,000 x 4 months = $4,000
(ii)
5
4,000
4,000
COS / RE (Sanford)
Current assets (inventory)
Unrealized profit $2,000 x 25/125 = $400
400
Current liabilities
Cash in transit
Current assets
Cancellation of intra group balances
350
130
Other Investments
OCI / OR (Premier)
Increase in fair value of investments through OCI recorded
300
(ii)
(iii)
(iv)
6
7
8
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50
400
480
300