Consolidated Accounts
Problem Solutions
Ch 22 Review Questions
1. See p.590.591 Arises when the acquirer pays more than the fair value of the
identifiable net assets for the acquisition.
Negative goodwill is recognised immediately in the Statement of
comprehensive Income
2. See p.595/596. Fair value is defined in IFRS 13 as “The price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date”
For inventories, fair value is “the lower of cost and net realisable value” as
defined in IAS 2 – Inventories.
The fair value of monetary assets that includes cash and cash equivalents is
considered to approximate their respective carrying values by definition and
due to their maturity of less than 3 months.
3. Subsidiary’s assets are valued at fair value to establish the goodwill (if any)
paid for the subsidiary. Also, to ensure that all profits, both realised and
unrealised, are reflected in the value of the net assets at date of acquisition and
to prevent distortion of EPS in periods following the acquisition.
4.
5. Both tangible and intangible assets must be identified at acquisition date –
otherwise, goodwill would be reported at an incorrect value.
Exercises
Ch 22 – Questions 1-5
Ch 23 Review Questions
1(a) Inter-company sales, loans, dividends
(b) The accounting effect of the transaction is removed from the consolidated
accounts.
(c) If intra-group transactions are not removed, there would be double-counting
of assets, or liabilities.
2. Goodwill relates to the value of the business at the date of acquisition.
Therefore, it needs to be established as at acquisition date.
Non-controlling interest is calculated at the end of the year because part of
the subsidiary’s earnings for the year belong to the outside (minority)
interests and so must be identified as such.
3. Pre-acquisition profits are included in the value of net assets at acquisition
date, and so form part of the acquisition price. They belonged to the seller.
Post-acquisition profits are earnings of the business after acquisition and
belong to the group.
4. (a)
(b)
There is no effect on the non-controlling interest when parent sells to
child.
When child sells to parent, the no n-controlling interest will be charged
with its share of any provision for unrealised profit.
Ch 23 Question 2 – Summer plc
Statement of financial position as at 31 December 20X1
ASSETS
£000
Non-current assets
Property, plant and equipment
200 + 200
400.0
Goodwill
W1
15.0
Current assets
100 + 140
240.0
655.0
Equity shares
Retained earnings
161 + 60% (40 − 35) − (60% of 3)
Share capital and reserves
Non-controlling interests
(40% of 220) + 6 − (40% of 3)
Current liabilities
80 + 120
200.0
162.2
362.2
92.8
200.0
655.0
W1 – Goodwill
Cost of investment
60% of net assets of Winter at date of acquisition 0.6(180 + 35)
141
129
Fair value of non-controlling interest
40% of net assets of Winter at date of acquisition (215 x 0.4)
92
(86)
Impairment
(16.67%)
Ch 23 Question 3 – Gold plc
Statement of financial position as at 31 December 20X1
ASSETS
Non-current assets
Property, plant and equipment (including land) [82,300 + 108,550 + 3,000]
Goodwill (Note 1)
Current assets
Inventories [23,200 + 10,000 − 300]
Other current assets [5,000 + 7,500]
Total assets
Equity shares
Preferred shares
Retained earnings
12
6
18
(3)
15
£
193,850
1,240
32,900
12,500
240,490
60,000
10,000
[(75,000 + 75% (21,200 − 16,000)) − 300 − 310)]
Share capital and reserves
Non-controlling interest (Note 2)
Non-current liabilities [12,500 + 14,000]
Current liabilities
Bond interest payable [625 + 875 – 175]
Other current liabilities [18,550 + 18,875]
78,290
148,290
26,950
26,500
1,325
37,425
38,750
240,490
Note 1: Goodwill
£
Investment in Silver
Acquired 75% × 27,600
30% × 20,000
20% × 17,500
75% × 3,000
75% × 16,000
Goodwill
Impairment @ 20% =
Goodwill at 31.12.20X1 = £1,550 − 310 = £1,240
£
46,000
20, 700
6,000
3,500
30,200
2,250
12,000
44,450
1,550
£310
Note 2: Non-controlling interest
25% × 27,600
70% × 20,000
25% × 3,000
25% × 21,200
(share capital)
(preference shares)
(land revaluation)
(retained earnings)
£
6,900
14,000
750
5,300
26,950
Ch 24 Review Questions
1. The dividends deducted in the Statement of Changes in Equity are those paid
out to the outside shareholders of the Parent. Dividends paid by the subsidiary
to the Parent are eliminated as part of the inter-company transactions.
2. Unrealised profits arise when one member of the group sells goods to another
member of the group. Therefore, the group has not made any profit on the
transaction – the “profits” have been retained in the group. If they are not
removed, false information is being reported to the outside interests.
3. Profits earned before the date of acquisition belong to the shareholders of the
subsidiary. Profits earned after the acquisition belong to the group. Therefore
the subsidiary’s total profits for the year need to be apportioned accordingly.
4. These are inter-company transactions – i.e. remain within the group. Therefore
if they are not eliminated, assets and liabilities will be overstated.
5. Inter-company management fees, interest, sales, rent, consulting fees
To ensure assets and liabilities are not overstated.
6. The Income Statements of each company would include profits from intercompany sales made between them. As these are still held within the group,
they must be eliminated.
Ch 24 – Question 3 – Bill plc
Bill plc
Consolidated statement of comprehensive income for the year ended
31 December 20X1
Note
£
Revenue [300,000 + 180,000 − 12,000]
1
468,000
Cost of sales [90,000 + 90,000 − 12,000 + 2,000]
1
170,000
Gross profit
298,000
Expenses [88,623 + 60,000]
148,623
Impairment of goodwill
3,000
Profit before taxation
146,377
Taxation [21,006 + 9,000]
30,006
Profit after taxation
116,371
Attributable to:
Equity shareholders of Bill
109,021
Non-controlling interest
2
7,350
116,371
Notes
1. Elimination of inter-company sales and unrealised profits
2. Non-controlling interest:
Profit after tax (Ben’s profit for period)
Dividends on preferred shares (Note 3)
Profit after dividend
Non-controlling interest
£
21,000
4,500
16,500
NCI
£
90%
20%
4,050
3,300
7,350
3. Bill received £450 dividend for holding of preference shares. £450 = 10% of total
dividend paid. Therefore, total preference dividend is £4,500
Ch 24 Question 5 – River plc
River plc
Consolidated statement of comprehensive income for the year ended
31 December 20X1
£
Sales [100,000 + [(9/12 × 60,000)]
145,000
Cost of sales [30,000 + [(9/12 × 30,000)]
52,500
Gross profit
92,500
Expenses [20,541 + (9/12 × 15,000)]
31,791
Interest payable on 5% bonds [9/12 × (5,000 − 500)]
3,375
Impairment of goodwill
4,000
Profit before taxation
53,334
Taxation [7,002 + (9/12 × 3,000)]
9,252
Profit after taxation
44,082
Other comprehensive income
Gain on revaluation
15,000
Total comprehensive income
59,082
Profit attributable to:
Equity shareholders of River
Non-controlling interest [10% × 7,000 × 9/12]
Total comprehensive income attributable to:
Equity shareholders of River
Non-controlling interest [10% × 7,000 × 9/12]
43,557
525
44,082
58,557
525
59,082
Ch 24 Question 6 – Mars plc
Ch 24 Question 9 – White and Brown
(b) Inter-coy sales, unrealised profit and goodwill impairment adjustments
Working:
Goodwill at acquisition:
Cost of investment
Brown
Ordinary shares
Reserves
Retained earnings
70%
Goodwill at 30.9.20X9
Impairment since acquisition
24,000
30,000
500
1,500
32,000
22,400
1,600
(800)
800
Consolidated profit: 27,300 – 1,440 (unrealised) + 70% of (9,280 – 1,500 (preacquisition profit)) – 800 (goodwill impairment) = 30,506.
Opening balance
Dividends
Comprehensive income
Closing balance
Opening balance
Dividend
Comprehensive income
Closing balance
Statement of changes in equity
Share
Retained
Capital
Earnings
100,000
16,856
(20,000)
33,650
100,000
30,506
White
Group
126,406
(20,000)
33,650
140,056
Reserve
9,550
9,550
White
Group
126,406
(20,000)
33,650
140,056
NCI
Total
10,584
(3,000)
4,500
12,084
136,990
(23,000)
38,150
152,140
Ch 25 Review Questions
1(a) Associates
(b) Equity method: a method of accounting by which an equity investment is
initially recorded at cost and subsequently adjusted to reflect the investor's
share of the net assets of the associate (investee).
(c) Share of Associate’s profit
(d) Under consolidation, the subsidiary company’s assets and liabilities are
included in the group’s Balance Sheet.
Under the Equity method, the associate is shown as an Investment in the noncurrent assets section of the Balance Sheet
2.
The equity method records the value of the investment in the associate
company to the investor and provides more informative reporting of the net
assets and profit or loss of the investor.
3.
In the subsidiary situation, the transaction is completely within the group and
so is eliminated in the consolidation process.
With Associates, the major part of the unrealised profits belong to outside
shareholders (for sales from Associate to the investor company) and so their
proportionate share remains in the reported income. For sales from Investor to
Associate, the unrealised profits belong to Investor so do not affect the
Associates outside shareholders.
4.
“Distributions received” is usually defined as “dividends received.” These
may bear little relation to the performance of the Associate, in which case,
they are not an adequate measure of the incomes earned from the investment
in Associate.