On 1 October 2019, Kim Ltd acquired 90 million of Sabox Ltd.’s 150 million $1 equity shares.

The acquisition was achieved through:

1. A share exchange of one share in Kim Ltd for every three shares in Sabox Ltd.
2. A luxury car with carrying amount of $5 million was accepted at $7.5 million.
3. Kim Ltd will pay $1.54 cash on 30 September 2020 for each share acquired.
4. In addition, Kim Ltd will pay a further amount in cash on 30 September 2020 if Sabox
Ltd achieve a margin of 20% by that date. The value of this contingent consideration at
the date of acquisition was estimated to be $1·8 million, but at 31 March 2020 its value
was estimated at $1.5 million
5. At that date the stock market prices of Kim Ltd.’s and Sabox Ltd.’s shares were $4 and
$2.50 per share respectively.
6. Kim Ltd.’s finance cost is 10% per annum.

The retained earnings of Sabox Ltd brought forward at 1 April 2019 were $120 million.

The extracts of profit or loss and other comprehensive income for the companies for the year
ended 31 March 2020 are: Kim Ltd Sabox Ltd

$000 $000

Profit for the year 102,000 100,000

Other comprehensive income

Gain/(loss) on revaluation of land (notes (i) and (ii)) (2,200) 1,000

Total comprehensive income for the year 99,800 101,000

The following information is relevant:

i. A fair value exercise conducted on 1 October 2013 concluded that the carrying amounts of
Sabox Ltd’s net assets were equal to their fair values with the following exceptions:
a. The fair value of Sabox Ltd’s land was $2 million in excess of its carrying amount
b. Equipment had a fair value of $6 million in excess of its carrying amount. The plant had a
remaining life of two years at the date of acquisition.
c. Kim Ltd placed a value of $5 million on Sabox Ltd.’s good trading relationships with its
customers. It is expected that, on average, a customer relationship to last for a further five
years.
ii. Kim Ltd.’s group policy is to revalue land to market value at the end of each accounting
period. Prior to its acquisition, Sabox Ltd.’s land had been valued at historical cost, but it
has adopted the group policy since its acquisition. In addition to the fair value increase in
Sabox Ltd.’s land of $2 million (see note (i)), it had increased by a further $1 million since
the acquisition.
iii. Sabox Ltd paid $1 million dividends in the year ended 31 March 2020.
iv. After the acquisition Kim Ltd sold goods to Sabox Ltd for $20 million. Sphere had one
fifth of these goods still in inventory at 31 March 2020.
v. Kim Ltd.’s policy is to value the non-controlling interest at the date of acquisition at its fair
value.

Required:

a. Calculate goodwill or Bargain on purchase as at 31 October 2019. 10 marks

b. Prepare pro-forma journals for consolidation as at 31 March 2020. 15 marks

Question on IAS 12 tax 10 marks

The Income Statement of Xolani Ltd for the most recent year was as follows:

$000

Operating profit 3 063.7

Operating expenses:

Depreciation on non-current assets (437)

Entertainment expense (104.5)

Interest expenses (72.2)

Rent and Rates (450)

Profit for the year 2 000

The entertainment expense above was of a private nature. ZIMRA granted the company capital
allowances of $617 500 on non-current assets. The actual amount of interest paid by the
company was $55 100.

Required:
Calculate the taxable income, tax payable and the current year tax charge to profit or loss if tax
due on previous period was agreed in this current year with the tax authorities to be $40 000
when at first it had been estimated to be $33 000 in that previous year. 10 marks

Borrowing costs question