Basic Consolidation Question 75

QUESTION 75: BASIC CONSOLIDATION

On 1 April 2008, Pedantic acquired 60% of the equity share capital of Sophistic in a share
exchange of two shares in Pedantic for three shares in Sophistic. The issue of shares has not yet
been recorded by Pedantic. At the date of acquisition shares in Pedantic had a market value of $6
each. Below are the summarized draft financial statements of both companies.

Statements of profit or loss for the year ended 30 September 2008

Pedantic Sophistic
$’000 $’000
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
Gross profit 22,000 10,000
Operating expenses (8,300) (5,600)
Profit before tax 13,700 4,400
Income tax expense (4,700) (1,400)
Profit for the year 9,000 3,000

Statements of financial position as at 30 September 2008

Pedantic Sophistic
Assets $’000 $’000
Non-current assets
Property, plant and equipment 40,600 12,600

Current assets 16,000 6,600

Total assets 56,600 19,200

Equity and liabilities

Equity shares of $1 each 10,000 4,000
Retained earnings 35,400 6,500
45,400 10,500
Non-current liabilities
10% loan notes 3,000 4,000

Current liabilities 8,200 4,700

Total equity and liabilities 56,600 19,200

The following information is relevant:

(i) At the date of acquisition, the fair values of Sophistic’s assets were equal to their carrying
amounts with the exception of an item of plant, which had a fair value of $2 million in
excess of its carrying amount. It had a remaining life of five years at that date [straight-line
depreciation is used]. Sophistic has not adjusted the carrying amount of its plant as a result
of the fair value exercise.

(ii) Sales from Sophistic to Pedantic in the post acquisition period were $8 million. Sophistic
made a mark up on cost of 40% on these sales. Pedantic had sold $5·2 million (at cost to
Pedantic) of these goods by 30 September 2008.

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Basic Consolidation Question 75

(iii) Other than where indicated, SPL items are deemed to accrue evenly on a time basis.

(iv) Sophistic’s trade receivables at 30 September 2008 include $600,000 due from Pedantic
which did not agree with Pedantic’s corresponding trade payable. This was due to cash in
transit of $200,000 from Pedantic to Sophistic. Both companies have positive bank
balances.

(v) Pedantic has a policy of accounting for any non-controlling interest at fair value. Fair value
of the non-controlling interest at the acquisition date was $5.9 million. Consolidated goodwill
was impaired by $1 million at 30 September 2008.

Required:
(a) Prepare the consolidated statement of profit or loss for Pedantic for the year ended
30 September 2008. (7 marks)
(b) Prepare the consolidated statement of financial position for Pedantic as at 30
September 2008. (13 marks)

ACCA F7 – December 2008 – Q1

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Basic Consolidation Question 75

ANSWER TO QUESTION 75: BASIC CONSOLIDATION

Pedantic Group
Consolidated Statement of profit or loss
30 September 2008
Pedantic Sophistic x 6/12 Group
$000 $000 $000
Sales revenue 85,000 21,000 (8,000 J4) 98,000
Cost of Sales (63,000) (16,000+ 200 J3 + 800 J5) 8,000 J4 (72,000)
Gross Profit 22,000 4,000 26,000
Operating costs (8,300) (2,800 + 1,000 J7) (12,100)
Profit before tax 13,700 200 13,900
Taxation (4,700) (700) (5,400)
Profit after tax 9,000 (500) 8,500
NCI share of loss $500 x 40% 200
Profit attributable to owners of Parent 8,700

Pedantic Group
Consolidated Statement of Financial Position
As at 30 September 2008
Assets $000 $000
Goodwill W3 3,500
PPE $40,600+12,600+2,000J2 – 200J3 55,000 58,500

Current assets $16,000+6,600 – 800 J5 – 600 J6+200 J6 21,400

Total assets 79,900

Equity
Equity shares of $1 each $10,000+1,600J1 11,600
Share premium J1 8,000
Retained earnings W6 35,100
54,700
Non Controlling Interest W5 5,700 60,400

Non - current liabilities

10% loan notes $3,000+4,000 7,000

Current Liabilities $8,200+4,700 – 400 J6 12,500

Total equity and liabilities 79,900

W1 GROUP STRUCTURE
Sophistic Subsidiary Acquisition date:1 Apr 2008 Group = 60% NCI 40%
$000

W2 NET ASSETS (of subsidiary) AT ACQUISITION S

Equity share capital 4,000
Retained earnings (pre) [$6,500 – 3,000 x 6/12 months] 5,000
J2 2,000
11,000
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Basic Consolidation Question 75

W3 GOODWILL S
InvestmentJ1 9,600
Less: 11,000 W2 x 60%W1 (6,600)
3,000
Fair value of NCI β 5,900
Less: 11,000 W2 x 40%W1 (4,400)
GIVEN 1,500
4,500
J7 (1,000)
3,500

W4 POST ACQUISITION RESERVES (of subsidiary) RE

Balance [3,000 X 6/12] 1,500
J3 (200)
J5 (800)
J7 (1,000)
(500)

W5 NON CONTROLLING INTEREST S

11,000 W2 x 40%W1 4,400
NCI goodwill W3 1,500
(500) W4 x 40% W1 (200)
5,700

W6GROUP RESERVES RE
Parent reserves 35,400
- -
35,400
(500) W4 x 60% W1 (300)
35,100

$ 000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment in Subsidiary 9,600

- 1 Share capital 1,600
Share premium 8,000
Investment 4,000 x 60% x 2/3 x $6 = $9,600
Share capital 4,000 x 60% x 2/3 x $1 = $1,600
Share Premium 4,000 x 60% x 2/3 x $6 = $8,000

PPE 2,000
(i) 2
Reserves Pre (S) 2,000
Fair value adjustment

COS / RE (S) 200

(i) 3
PPE 200
Extra depreciation due to fair value adjustment $2,000 / 5 years = $400 x 6/12 = $200

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Basic Consolidation Question 75

Revenue 8,000
(ii) 4
COS 8,000
Intra group sales and purchase eliminated

COS / RE (S) 800

(ii) 5
Current Assets (Inventory) 800
Unrealised profit in inventory $(8,000-5,200) x 40/140 = $800

Current liabilities (Trade payables) 400

(iv) 6 Current assets (Cash in transit) 200
Current assets (Trade receivables) 600
Intra group balances eliminated and cash in transit recorded

Operating costs / RE (Subsidiary) 1,000

(v) 7
Goodwill 1,000
Impairment of goodwill

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