Question 1

On 1 July 2010, Rexel Ltd acquired 60% of the ordinary shares in Safetext Ltd. Below are the
summarized draft financial statements of both companies.

Statement of comprehensive income for the year ended 30 June 2012

Rexel Ltd Safetext Ltd
Rs ‘000 Rs ‘000
Revenue 82,300 43,800
Cost of Sales (51,200) (24,500)

Gross Profit 31,100 19,300

Distribution Costs (7,150) (4,200)
Administrative Expenses (5,240) (3,100)
Finance Costs (250) (180)

Profit before tax 18,460 11,820

Income Tax Expense (2,920) (1,850)

Profit for the year 15,540 9,970

Statement of financial position as at 30 June 2012

Assets
Non-Current Assets
Property, plant and equipment 101,500 73,625
Investment in Safetext Ltd 42,600 nil

Current Assets 31,950 14,260

Total Assets 176,050 87,885

Equity and Liabilities

Rs 2.50 Ordinary Shares 95,000 42,500
General Reserves 14,100 5,325
Retained Earnings 45,750 30,560
154,850 78,385

Non Current Liabilities

7% Loan Notes nil 4,000

Current Liabilities 21,200 5,500

Total equity and liabilities 176,050 87,885

The following relevant information is also available:
(i) Retained earnings and general reserves of Safetext Ltd were Rs 15,550,000 and
Rs5,325,000 respectively at 1 July 2010.
(ii) At the date of acquisition, the fair values of Safetext’s assets were equal to their
carrying amount with the exception of Plant. It had a fair value of Rs6,000,000 above
its carrying amount and its remaining useful economic life was 15 years.
(iii) Rexel Ltd had a trade payable balance of Rs260,000 owing to Safetext Ltd as at 30
June 2012.
(iv) During the current year, Rexel Ltd sold goods to Safetext Ltd amounting to
Rs2,500,000. Rexel made a mark-up of 25%. One quarter of these goods were still
unsold and remained in the inventory of Safetext Ltd at 30 June 2012.
(v) Sales from Safetext Ltd to Rexel Ltd during the current year amounted to Rs250,000
per month. Safetext made a mark-up of 20%. Rexel Ltd had Rs1,200,000 of these
goods in inventory at 30 June 2012.
(vi) There has been no impairment of goodwill.
(vii) Non controlling interests are valued at their proportionate share of the identifiable net
assets.

Required
(a) Calculate the goodwill arising on the acquisition of Safetext Ltd.
(b) Prepare the consolidated statement of comprehensive income for Rexel Ltd for the year
ended 30 June 2012.
(c) Prepare the consolidated statement of financial position for Rexel Ltd as at 30 June 2012.
QUESTION 2
You are provided with the following financial statements for Megha Ltd and its subsidiary
Ashton Ltd for the year ended 31 December 2010.
Statement of Comprehensive Income for the year ended 31 December 2010
Megha Ltd Ashton Ltd
Rs ‘000 Rs ‘000
Sales Revenue 14,000 9,750
Cost of Sales (8,400) (5,850)
Gross Profit 5,600 3,900
Operating Expenses (1,970) (1,100)
Interest payable (350) (180)
Profit before tax 3,280 2,620
Income Tax Expense (1,350) (1,050)
Profit for the year 1,930 1,570

Statement of Financial Position as at 31 December 2010

Megha Ltd Ashton Ltd
Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
ASSETS
Non-current Assets
Tangible Assets 103,500 95,200
Investments in Ashton Ltd 54,850 -
158,350 95,200
Current Assets
Inventory 16,000 10,200
Trade Receivables 9,700 6,000
Bank 60,310 86,010 1,700 17,900
Total Assets 244,360 113,100

EQUITY AND LIABILITIES

 Capital and Reserves
Rs 1 Ordinary Shares 145,000 40,000
Share Premium 10,000 8,000
Retained Earnings 76,460 53,850
231,460 101,850
Current Liabilities
Trade Payables 12,900 11,250
Total Equity and Liabilities 244,360 113,100

The following information is also available:

i. Megha Ltd purchased 70% of the Rs1 Ordinary Shares in Ashton Ltd on 1st January
2009. At that date, Ashton Ltd retained earnings were Rs 24,000,000 and share premium
were Rs 8,000,000.
ii. At 1st January 2009, the tangible non-current assets of Ashton Ltd exceeded their book
value by Rs 3,000,000. This surplus has not been reflected in the financial statements of
Ashton Ltd. At that date, the average remaining useful life of non-current assets was 10
years.
iii. During the current year, Ashton Ltd sold goods to Megha Ltd at invoice value of
3,600,000, on which Ashton Ltd made a mark-up of 20%. One half of these goods
remained in the inventory of Megha Ltd at 31 December 2010.
iv. Goodwill was impaired by Rs 940,000 during 2009. There was no further impairment in
2010.
v. Non-controlling interests are valued at their proportionate share of the identifiable net
assets.
Required:
a. Why are groups required to prepare consolidated accounts.
b. Explain the accounting treatment of intra-group trading in consolidated accounts.
c. Calculate the goodwill arising on the acquisition of Ashton Ltd.
d. Prepare the consolidated income statement for the year ended 31st December 2010.
e. Prepare the consolidated balance sheet as at 31st December 2010.
Question 3

On 1 January 2012, Parent Ltd acquired 3 million Rs1 shares in Subsidiary Ltd for Rs5 million
when the profit and loss account of Subsidiary Ltd showed a balance of Rs2 million. At the time of
acquisition, an item of plant, with a remaining useful life of 5 years, was undervalued by Rs500,000
The statements of financial position of both companies at 31 December 2013 are as follows:

Parent Ltd Subsidiary Ltd

Rs’000 Rs’000 Rs’000 Rs’000
Non-current assets
Property, plant and equipment 20,745 13,710
Equity Investments 5,000 -
25,745 13,710

Current assets
Stock 14,000 5,000
Trade debtors 9,000 4,500
Other debtors 1,125 -
Cash in hand 500 200
24,625 9,700
Total Assets 50,370 23,410

Capital and reserves

Ordinary share capital of Rs1 10,000 4,000
Accumulated profits 13,920 3,460
23,920 7,460

Non-current liabilities
10% Debentures 10,000 8,000
Provision for liabilities and charges 2,500 1,000
12,500 9,000

Current Liabilities
Trade creditors 4,600 1,700
Interest payable 350 250
Corporation tax 3,000 2,000
Proposed dividend 2,000 1,500
Bank overdraft 4,000 1,500
13,950 6,950

Total Equity & Liabilities 50,370 23,410

Additional information:
 (a) For its financial year ended 31 December 2013, Subsidiary Ltd pays an interim
dividend of Rs500,000 and proposes a final dividend of Rs1,500,000 (declared on
30 December 2013). Parent Ltd has recorded its share of all dividends in its books.

(b) Parent Ltd provides Subsidiary Ltd with a component which Subsidiary Ltd uses
in its production process. Parent Ltd adds 25% to its cost to arrive at the intra-
group selling price. Sales of the product for the year ended 31 December 2013
totalled Rs5,000,000. The amount of the product included in the stocks of
Subsidiary Ltd at 31 December 2013 was Rs1,000,000.

(c) At 31 December 2013, the debtors of Parent Ltd showed Rs1,500,000 receivable
from Subsidiary Ltd, whilst the creditors of Subsidiary Ltd showed Rs1,050,000
payable to Parent Ltd. These figures do not include any accrued interest and
proposed dividends.

Further investigation revealed the following:

(i) On 30 December 2013, Parent Ltd dispatched a consignment of goods to

Subsidiary Ltd having an invoice value of Rs250,000. The consignment
was received and recorded by Subsidiary Ltd on 3 January 2014.

(ii) On 31 December 2013, Subsidiary Ltd sent Parent Ltd a cash payment of
Rs200,000. This payment was received and recorded by Parent Ltd on 4
January 2014.

(d) There was no impairment of goodwill. It is the policy of the group to value non-
controlling interest at full fair value. At the time of acquisition (1 January 2012),
the share price of Subsidiary Ltd was Rs1.65. Equity investments have a fair value
of Rs6.5m at 31 December 2013 and this value has not yet been incorporated in
the books.

Required:

Prepare the consolidated statement of financial position of Parent Ltd and its subsidiary as
at 31 December 2013 in line with relevant international accounting standards.

Question 4
On 1 July 2010, P Ltd acquired 11.9 million ordinary shares in S Ltd for Rs52.6 million. Below
is the summarized draft financial statements of both companies.
Statement of financial position as at 30 June 2012
P Ltd S Ltd
Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Assets
Non-Current Assets
Property, plant and equipment 91,500 73,625
Investment in S Ltd 52,600 nil

Current Assets
Stock 9,000 2,500
Trade debtors 11,500 6.100
Other debtors 5,500 3,000
Cash in hand 5,950 31,950 2,660 14,260

Total Assets 176,050 87,885

Equity and Liabilities

Rs 2.50 Ordinary Shares 95,000 42,500
Accumulated profits 59,850 25,885
154,850 68,385

Non-Current Liabilities
7% Loan Notes 2,000 14,000

Current Liabilities
Trade creditors 12,100 1,500
Proposed dividend 5,500 2,000
Bank overdraft 1,600 2,000

19,200 5,500

Total equity and liabilities 176,050 87,885

The following relevant information is also available:

(viii) Accumulated profits of S Ltd on 1 July 2010 were Rs20,875,000.
(ix) At the date of acquisition an item of Plant was undervalued by Rs6,000,000 and its
remaining useful economic life was 10 years.
 (x) S Ltd paid an interim dividend of Rs300,000 and proposes a final dividend of
Rs2,000,000 (declared on 15 June 2012). P Ltd has recorded its share of all dividends
in its books.
(xi) During the current year, P Ltd sold goods to S Ltd amounting to Rs2,500,000. P Ltd
made a mark-up of 25%. One quarter of these goods were still unsold and remained in
the inventory of S Ltd at 30 June 2012.
(xii) At 30 June 2012, debtors of P Ltd showed Rs300,000 receivable from S Ltd, whilst
the creditors of S Ltd showed Rs210,000 payable to P Ltd. These figures do not
include the proposed dividends. Investigations revealed the following:
1. On 30 June 2012, P Ltd dispatched a consignment of goods to S Ltd with an
invoice value of Rs50,000. The consignment was received and recorded by S Ltd
on 7 July 2012.
2. On 30 June 2012, S Ltd sent P Ltd a cash payment of Rs40,000. This payment
was received and recorded by P Ltd on 8 July 2012.
(xiii) There has been no impairment of goodwill.
(xiv) At the time of acquisition (1 July 2010), the share price of S Ltd was Rs4.15. Equity
investments have a fair value of Rs72m at 30 June 2012 and this value has not yet
been incorporated in the books.

Required
Prepare the consolidated statement of financial position for P Ltd as at 30 June 2012.