CUAC 205 2016 TUTORIAL QUESTIONS(PART 2)
1. ASSOCIATE
QUESTION 1
P Ltd acquired 60% shares of S Ltd., and 25% shares of A Ltd., on 31 December 2014. Their Statements of Financial Position as at 31 December 2015 were as under:
P Ltd / S Ltd / A Ltd$000 / $000 / $000
Non-Current Assets
Property, plant and equipment / 385 / 205 / 330
Investments / 236
621 / 205 / 330
Current Assets
Inventories / 142 / 92 / 155
Trade receivables / 135 / 99 / 76
Cash and cash equivalents / 45 / 29 / 24
322 / 220 / 255
Total Assets / 943 / 425 / 585
Liabilities and Equity
Share capital / 210 / 100 / 85
Share premium / 80 / 75 / 140
Retained earnings / 566 / 190 / 290
856 / 365 / 515
Current Liabilities
Trade payables / 87 / 60 / 70
Total Liabilities and Equity / 943 / 425 / 585
Additional Information:
(i) The investments of P Ltd. comprise investment in S Ltd for $141,000 and in A Ltd for $95,000.
(ii) The pre-acquisition retained earnings balances were as follows:
S Ltd. - $25,000
A Ltd. - $130,000
(iii) At the time of acquisition fair value of property, plant and equipment of S Ltd., was greater than its book value by $50,000. If S Ltd., had revalued its property, plant and equipment on 31 December 2014, an additional depreciation of $5,000 would have been charged to the statement of profit or loss for the year ended 31 December 2015.
(iv) The book value of inventory of S Ltd. was in excess of its fair value by $20,000 at acquisition date. The inventory was sold during the year.
(v) During the year, P Ltd sold goods to S Ltd for $21,000, this originally cost P Ltd $15,000. 13rd of the goods were still unsold as of 31 December 2015.
(vi) Share capital and share premium accounts remained unchanged since acquisition.
(vii) There is no impairment of goodwill since acquisition.
Required:
Prepare the Consolidated Statement of Financial Position of P Group as at 31 December 2015. (20 marks)
QUESTION 2
Inca Ltd (Inca) is a large public limited company based in Zimbabwe. It has shareholdings in two other companies. These are called Java Ltd (Java) and Lava Ltd (Lava). Statements of Financial Position are shown below for all three companies as at 31 July 2012.
Statements of Financial Position as at 31 July 2012
Inca Ltd Java Ltd Lava Ltd
$ million $ million $ million
Non-current assets:
Property, plant & equipment 180 43 37
Investments 83 27 -
263 70 37
Current assets:
Inventories 46 23 16
Receivables 32 14 12
Cash & bank 8 2 0
86 39 28
Total assets 349 109 65
Equity:
Equity share capital of $1 each 100 50 25
Share premium 75 20 8
Retained earnings 132 16 12
307 86 45
Current liabilities:
Payables 29 18 13
Bank overdraft 7
Dividends proposed 13 5 0
42 23 20
Total equity & liabilities 349 109 65
The following additional information is to be taken into account in so far as it is relevant:
(i) Inca bought 45m equity shares in Java on 1 August 2011. The consideration consisted of an immediate cash payment of $58 million together with a deferred payment of $30 million due on 1 August 2013. The $58 million has been accounted for in the accounts of Inca, but no record has been made of the deferred payment. Inca’s cost of capital can be taken to be 10%.
(ii) Inca also bought 10m equity shares in Lava on 1 November 2011, paying an amount of $25m cash for these shares. This investment has been correctly recorded at cost.
(iii) The equity share capital and share premium of Java and Lava have not changed since their respective dates of acquisition. The retained earnings reserves were as follows on the respective acquisition dates: Java $10.6m, Lava $9m.
(iv) Group accounting policy is to value non-controlling interests at fair value at the date of acquisition, and goodwill should be calculated accordingly. On 1 August 2011, the fair value of the non-controlling interest in Java was $9.2 million. No impairment losses are considered necessary at 31 July 2012.
(v) On the acquisition date, the fair values of the assets of Java were equivalent to their book values with two exceptions. Certain plant was worth $4m in excess of its book value on the date Inca acquired its holding. Also, Java’s investments, carried at $27 million, had a fair value of $28 million at the acquisition date. The plant was estimated to have had a five-year useful life from the date of acquisition. The value of the investments has not changed since the acquisition date.
(vi) During the financial year ended 31 July 2012, Java had sold goods to Inca amounting to $6m. These goods were sold inclusive of a mark-up of 50% on cost. 30% of these goods remained in the inventory of Inca at the reporting date.
(vii) Since acquiring its holding in Lava, Inca purchased $3 million of goods from Lava which had cost Lava $2 million. All of these remained in inventory at the reporting date.
(viii) There was an intra-group balance of $2.2m owed by Inca to Java at the reporting date. This amount was the same in the books of both companies. An amount of $1.5 million was owed by Inca to Lava at the reporting date. Both sets of books were again in agreement on the amount outstanding.
(ix) Inca has not accounted for any dividend receivable from its group companies. Both Inca and Java have proposed dividends as shown in current liabilities. Java’s proposed dividend relates to the post-acquisition period only.
(x) Inca exercises significant influence over its investment in Lava.
(xi) The present value interest factors for 10% may be taken as follows: Year 1 = 0.91, Year 2 =0.83
Required:
(a) Prepare the Consolidated Statement of Financial Position for the Inca group as at 31 July 2012 in accordance with International Financial Reporting Standards. [22 marks]
(b) Write a short memorandum to a client explaining the two methods permitted by IFRS 3 Business Combinations for calculating goodwill on the acquisition of a subsidiary. (5 marks)
QUESTION 3
Horsefield, a public company, acquired 90% of Sandfly's $1 ordinary shares on 1 April 2000 paying $3.00 per share. The acquisition of shares in satisfies the criteria of control under IFRS 10. The balance on Sandfly's retained earnings at this date was $800,000. On 1 October 2001, Horsefield acquired 30% of Anthill's $1 ordinary shares for $3.50 per share.
The statements of financial position of the three companies at 31 March 2002 are shown below:
Horsefield Sandfly Anthill
$’000 $’000 $’000
Noncurrent assets
Property plant and equipment 8,050 3,600 1,650
Investments 4,000 910 -
12,050 4,510 1,650
Current assets
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240 - 100
Total assets 13,640 5,140 2,350
Equity and liabilities
Capital and reserves
Ordinary shares $1 each 5,000 1,200 600
Reserves
Retained earnings – up to 1
April 2001 6,000 1,400 800
- Profit year to 31 March 2002 1,300 800 600
12,300 3,400 2,000
Non-current liabilities
10% Loan notes 500 240 -
Current liabilities
Accounts payable 420 960 200
Taxation 220 250 150
Proposed dividends 200 100 -
Overdraft - 190 -
Total equity and liabilities 13,640 5,140 2,350
The following information is relevant:
(i) Fair value adjustments:
On 1 April 2000 Sandfly owned an investment property that had a fair value of $120,000 in excess of its book value. The value of this property has not changed since acquisition.
Just prior to its acquisition, Sandfly was successful in applying for a six-year licence to dispose of hazardous waste. The licence was granted by the government at no cost; however Horsefield estimated that the licence was worth $180,000 at the date of acquisition.
(ii) In January 2002 Horsefield sold goods to Anthill for $65,000. These were transferred at a markup of 30% on cost. Two thirds of these goods were still in the inventory of Anthill at 31 March 2002.
(iii) To facilitate the consolidation procedures the group insists that all intercompany current account balances are settled prior to the year-end. However a cheque for $40,000 from Sandfly to Horsefield was not received until early April 2002. Intercompany balances are included in accounts receivable and payable as appropriate.
(iv) Anthill is to be treated as an associated company of Horsefield.
(vi) It is the group’s policy to value NCI at the acquisition date at fair value. The fair value of the non-controlling interest at the date of acquisition is $300,000.
Required:
Prepare the consolidated statement of financial position of Horsefield as at 31 March 2002.
[20 marks]
2. VERTICAL GROUP
QUESTION 1
Statements of Financial Position of three companies as at 30 June 2015 are given below:
ASSETS / X Ltd / Y Ltd / Z LtdNon-current assets: / $ / $ / $
Property, plant and equipment / 870,450 / 740,250 / 40,000
Investments at cost:
225,000 shares in Y Ltd / 320,000
40,000 shares in Z Ltd / 68,600
1,190,450 / 808,850 / 40,000
Current assets
Inventory / 140,000 / 61,500 / 75,000
Accounts receivables / 100,000 / 98,000 / 5,000
Cash / 120,000 / 49,500 / 20,000
360,000 / 209,000 / 100,000
Total Assets / 1,550,450 / 1,017,850 / 140,000
LIABILITIES AND EQUITY
Equity
Ordinary shares of $1 each / 400,000 / 300,000 / 50,000
Retained earnings / 259,200 / 187,600 / (5,000)
Total Equity / 659,200 / 487,600 / 45,000
Non-Current Liability / 450,450 / 350,250 / 25,000
Current liabilities
Accounts payable / 320,800 / 159,000 / 70,000
Taxation / 120,000 / 21,000 / 0
440,800 / 180,000 / 70,000
Total liabilities and Equity / 1,550,450 / 1,017,850 / 140,000
Additional Information:
(i) X Ltd, acquired shares in Y Ltd, on 1 July 2009 when the retained earnings of Y Ltd, were $120,000.
(ii) Y Ltd, acquired shares in Z Ltd, on 1 July 2010 when the retained earnings of Z Ltd, were showing a debit(negative) balance of $7,500.
(iii) During the year X Ltd, sold goods amounting to $20,000 to Y Ltd, earning a profit of $8,000. 25% of these goods remained unsold at the balance sheet date.
QUESTION 2
Matis bought 40,000 of the $1 Equity shares in Dimitrys on 1 September, 2005 for $95,000. On that date, the retained earnings in Dimitrys were $60,000. One year earlier Dimitrys had bought 60% of the $1 Equity shares of Vitalis for $80,000 when Vitalis’ retained earnings were $40,000.
Vitalis’ profits for the year ended 31 August 2005 were $8,000.The directors of Matis felt that goodwill in the year to 31 August, 2009 should be impaired by 10%. This was the first impairment of goodwill since the acquisitions.
The directors of Matis estimated the fair value of the non-controlling interest investment in Dimitrys at $23,000 and in Vitalis, the fair value of the 52% non-controlling investment was estimated at $61,360 inclusive of their share of investment in Vitalis by Dimitrys
The three Statements of Financial Position as at 31 August, 2009 are set out below:
Matis Dimitrys Vitalis
Investment 95,000 80,000 -
Tangible Noncurrent assets 100,000 70,000 120,000
Current assets 45,000 30,000 30,000
240,000 180,000 150,000
$1 Equity shares 150,000 50,000 70,000
Retained earnings 80,000 110,000 64,000
230,000 160,000 134,000
Current liabilities 10,000 20,000 16,000
240,000 180,000 150,000
Prepare the Consolidated Statement of Financial Position as at 31 August, 2009.
QUESTION 3
O Ltd is a listed company and has been in the distribution industry since its incorporation in 1995. The company has diversified its activities to include the import and distribution of fruit juice through the acquisition of shares in M Ltd. and K Ltd, both listed on the Zimbabwe Stock Exchange.
The draft statements of profit or loss for the members of the group for the year ended 31 December 2012 are as follows:
O Ltd. M Ltd. K Ltd.
$000 $000 $000
Revenue 136,800 74,100 68,400
Cost of sales (54,150) (16,389) (15,960)
Gross profit 82,650 57,711 52,440
Distribution costs (9,975) (6,411) (5,700)
Administrative expenses (10,425) (2,850) (5,700)
Profit from operations 62,250 48,450 41,040
Finance costs (975) - -
Profit before tax 61,275 48,450 41,040
Tax (24,900) (16,170) (12,723)
Profit for the period 36,375 32,280 28,317
Retained Earnings Account for the year ended 31 December 2012:
O Ltd Mandela Ltd K Ltd
$000 $000 $000
Balance b/fwd 60,039 39,945 31,377
Profit for the period 36,375 32,280 28,317
Dividend paid (28,500) - -
67,914 72,225 59,694
The draft statements of financial position as at 31/12/2012
O Ltd M Ltd. K Ltd.
$000 $000 $000
Assets
Property, Plant & Equipment 106.449 72.819 39,189
Investments
Shares in M Ltd. 19,950 - -
Shares in K Ltd. - 11,400 -
Current assets 4,704 27,075 26,649
Total assets 131,103 111,294 65,838
Equity and Liabilities
Share Capital 24,000 9,000 6,000
Retained Earnings 67,914 72,225 59,694
Total Equity 91,914 81,225 65,694
Sundry Liabilities 39,189 30,069 144
Total Equity and Liabilities 131,103 111,294 65,838