Basic Consolidation
Question 88
QUESTION 88: BASIC CONSOLIDATION
Highmoor ,a public listed company, acquired 80% of Slowmoor’s ordinary shares on 1 October
2002. Highmoor paid an immediate $1.50 per share in cash and agreed to pay a further $0.60 per
share if Slowmoor made a profit within two years of its acquisition. Highmoor has not recorded the
contingent consideration. The fair value of contingent consideration is to be measured at present
value of the future cash flow. Highmoor’s cost of capital is 10% per annum.
The statements of financial position of the two companies at 30 September 2003 are shown
below:
Highmoor
Slowmoor
$ million
$ million
$ million
$ million
Tangible non-current assets
585
172
Investments (note (ii))
225
13
Software (note (iii))
Nil
40
810
225
Current Assets
Inventory
85
42
Trade receivables
95
36
Tax asset
Nil
80
Bank
20
200
nil
158
1,010
383
Equity and liabilities
Equity:
Ordinary shares of $1 each
400
100
Retained earnings – 1 October 2002
230
150
- profit/ loss for year
100
330
(35)
115
730
215
Non-current liabilities
12% loan note
nil
35
16% Inter Company loan (note (ii))
nil
nil
45
80
Current liabilities
Trade payables
Taxation
Overdraft
Total equity and liabilities
210
70
nil
280
1,010
71
nil
17
88
383
The following information is relevant:
(i)
At the date of acquisition the fair values of Slowmoor’s net assets were approximately equal
to their book values.
(ii)
Included in Highmoor’s investments is a loan of $50 million made to Slowmoor. On 28
September 2003, Slowmoor paid $9 million to Highmoor. This represented interest of $4
million for the year and the balance was a capital repayment. Highmoor had not received
nor accounted for the payment, but it had accrued for the loan interest receivable as part of
its accounts receivable figure. There are no other intra group balances.
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Basic Consolidation
Question 88
(iii)
The software was developed by Highmoor during 2002 at a total cost of $30 million. It was
sold to Slowmoor for $50 million immediately after its acquisition. The software had an
estimated life of five years and is being amortized by Slowmoor on a straight-line basis.
(iv)
Highmoor’s policy is to value non-controlling interest using the proportionate share of
subsidiary’s identifiable net assets.
Required:
(a)
Prepare the consolidated statement of financial position of Highmoor as at 30
September 2003, explaining your treatment of the contingent consideration.
(20 marks)
(b)
Describe the circumstances in which negative goodwill may arise. Your answer
should refer to the particular issues of the above acquisition.
(5 marks)
ACCA F7 – December 2003 – Q1
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Basic Consolidation
Question 88
ANSWER TO QUESTION 88: BASIC CONSOLIDATION
Highmoor Group
Consolidated SFP
As at 30 September 2003
Tangible assets $585+172
Investments $225+13 – 170 J3
Investment in loan notes $50 J3 – 50 J4
Software $40 – 20J6+4J7
$m
757
68
24
849
Current assets
Inventory $85+42
Trade receivables $95+36 – 4J5
Tax refundable
Bank $20+ 5 J4 + 4 J5
127
127
80
29
363
Total assets
$m
1,212
Equity
Equity shares of $1 each
Retained earnings W6
Non Controlling interest W5
Non - current liabilities
12% loan notes
16% inter - company loan notes $45 – 45J4
Current Liabilities
Trade payables $210+71
Taxation
Bank overdraft
Contingent consideration $40 J1 + 4 J2
Total equity and liabilities
W1 GROUP STRUCTURE
Slowmoor Subsidiary Acquisition date:1 Oct 2002
W2 NET ASSETS (of subsidiary) AT ACQUISITION
Equity share capital
Retained earnings (pre)
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400
321.2
721.2
43.8
765
35
-
35
281
70
17
44
Group = 80%
412
1,212
NCI 20%
$m
S
100
150
250
Basic Consolidation
Question 88
W3 GOODWILL
Investment $40 J1+ 120 J3
Less: 250 W2 x 80%W1
S
160
(200)
(40)
40
0
J8
W4 POST ACQUISITION RESERVES (of subsidiary)
Balance given
J7
RE
(35)
4
(31)
W5 NON CONTROLLING INTEREST
250 W2 x 20%W1
(31) W4 x 20% W1
S
50
(6.2)
43.8
W6 GROUP RESERVES
Parent reserves
J2
J6
W3 & J8
RE
330
(4)
(20)
40
346
(24.8)
321.2
(31) W4 x 80% W1
JOURNAL ENTRIES WITH WORKINGS
$m
Dr.
Cr.
Investment in Slowmoor
40
-&
1
(iv)
Contingent consideration
Contingent consideration = $0.6x80%x$100m = $ 48 m x (1 x 1.1 -2) = $40m
40
RE (Highmoor)
Contingent consideration
Finance costs $40m x 10% = $4m
4
(i)
2
4
Investment in Slowmoor
120
Investment in loan
50
Investment (other)
Cancellation of investment in subsidiary shares $ 1.5 x (100 shares x 80%) = $ 120m
(ii)
3
Inter- company loan notes 16%
Cash in transit
Investment in loan
Cancellation of remaining intra group investments
(ii)
4
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170
45
5
50
Basic Consolidation
Question 88
Cash in transit
Receivable
Interest receivable in transit recorded
4
RE (Highmoor)
Software
Elimination of intra group unrealized profit $50 – 30= $20
20
Software
RE (Slowmoor)
Reversal of additional amortization cost on software
$20/5years = $4
4
Goodwill
RE (Highmoor)
Transfer of negative goodwill to retained earnings
40
(ii)
(iii)
(iii)
-
5
6
7
8
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4
20
4
40