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 Sanford
$’000 $’000
Revenue 92,500 45,000
Cost of sales (70,500 ) (36,000 )
Gross profit 22,000 9,000
Other expenses (12,000 ) (5,100 )
Profit for the year 10,000 3,900
Other comprehensive income:
Gain on revaluation of land nil nil
Total comprehensive income 10,000 3,900

Statements of financial position as at 30 September 2010

Assets
Non-current assets
Property, plant and equipment 25,500 13,900
Investments 1,800 nil
27,300 13,900
Current assets 12,500 2,400
Total assets 39,800 16,300
Equity and liabilities
Equity
Equity shares of $1 each 12,000 5,000
Other equity reserve – 30 September 2009 (note (iv)) 500 nil
Retained earnings 12,300 4,500
24,800 9,500
Current liabilities 15,000 6,800
Total equity and liabilities 39,800 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 Adj. Group
$000 $000 $000
Sales revenue 92,500 15,000 – 4,000 J5 103,500
Cost of Sales (70,500) (12,000 – 50 J4 + 400 J6) 4,000 J5 (78,850)
Gross Profit 22,000 2,650 24,650
Other expenses (12,000) (1,700) (13,700)
Profit after tax 10,000 950 10,950
Other Comprehensive
income
Gain on revaluation 0 0 0
Gain on investments 300 J8
300 300
Total Comprehensive Income 10,300 950 11,250
NCI share profit $950 x 20% (190)
NCI share of OCI Nil x 20% 0
Total Comprehensive Income attributable to owners of Parent 11,060

Premier Group
Consolidated SFP as at 30 September 2010
Assets $000 $000
PPE $25,500+13,900 -1,200 J3 +50 J4 38,250
Goodwill W3 9,300
Other investments $1,800 – 800 J1 + 300 J8 1,300 48,850

Current assets $12,500+2,400 – 400 J6 + 130 J7– 480 J7 14,150

Total assets 63,000

Equity
Equity shares $12,000+2,400 J2 14,400
Share premium J2 9,600
Other reserves W6 800
Retained earnings W6 13,060
37,860
Non Controlling Interest W5 3,690 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 S

Equity share capital 5,000
Retained earnings (pre) ($4,500 – 3,900)+$3,900 x 8/12 months 3,200
J3 (1,200)
7,000

W3 GOODWILL S
Investment 800 J1 + 12,000 J2 12,800
Less: 7,000 W2 x 80% W1 (5,600)
7,200
Fair value of NCI 3,500
Less: 7,000 W2 x 20% W1 (1,400)
2,100
9,300

W4 POST ACQUISITION RESERVES (of subsidiary) RE

Balance [3,900 x 4/12] 1,300
J4 50
J6 (400)
950

W5 NON CONTROLLING INTEREST S

7,000 W2 x 20% W1 1,400
NCI goodwill W3 2,100
950 W4 x 20% W1 190
3,690

W6 GROUP RESERVES OR RE
Parent reserves 500 12,300
J8 300
800 12,300
0 & 950 W4 x 80% W1 0 760
800 13,060

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Basic Consolidation Question 71

$ 000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment in subsidiary 800

(-) 1
Other investments 800
Cash included in other investment $800

Investment in subsidiary 12,000

(-) 2 Share capital 2,400
Share premium 9,600
5,000 x 80% x 3/5 x $5 = $12,000

Reserve Pre (Sanford) 1,200

(i) 3
PPE 1,200
Fair value adjustment

PPE 50
(i) 4
COS / RE (Sanford) 50
Reduction in depreciation due to fair value adjustment 1,200 / 8 years x 4/12 = 50

Revenue 4,000
(ii) 5
COS 4,000
Cancellation of intra group trading $1,000 x 4 months = $4,000

COS / RE (Sanford) 400

(ii) 6
Current assets (inventory) 400
Unrealized profit $2,000 x 25/125 = $400

Current liabilities 350

(iii) 7 Cash in transit 130
Current assets 480
Cancellation of intra group balances

Other Investments 300

(iv) 8
OCI / OR (Premier) 300
Increase in fair value of investments through OCI recorded

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