MiF Financial Accounting and Analysis Class 2 Problems

Question 1:

At 1 January, 2021, Pisces Ltd acquired all the shares of Ursa Ltd for £283,000. At this date,
the equity of Ursa Ltd consisted of:

Share capital — 100,000 shares £200,000

Share premium 30,000
Retained earnings 20,000

All the identifiable assets and liabilities of Ursa Ltd were recorded at amounts equal to fair
value except for the following items:
CARRYING FAIR
AMOUNT VALUE

Inventory £ 60,000 £ 65,000

PPE (cost £280,000) 200,000 210,000
Contingent liability 0 20,000

The inventory was all sold by 30 November, 2021. The plant has a further 5-year life, and
depreciation is calculated on a straight-line basis with an assumption of a zero residual value.
During 2021, Ursa borrowed £10,000 from Pisces interest free. This is still outstanding as of
31 December, 2021. The contingent liability (relating to a lawsuit brought by a customer) was
settled in cash during 2021.

Required:

Prepare the consolidation worksheet provided below dated 31 December, 2021.

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 Pisces Ursa Total
PPE 100,000 160,000 260,000
Investment in Ursa 283,000 283,000
Goodwill
Inventory 20,000 40,000 60,000
Receivables 15,000 10,000 25,000
Loan to Ursa 10,000 10,000
Cash 120,000 117,000 237,000
Total assets 548,000 327,000 875,000

Payables 35,000 16,000 51,000

Loan from Pisces 10,000 10,000
Borrowing 13,000 11,000 24,000
Contingent liability
Total liabilities 48,000 37,000 85,000

Share capital 300,000 200,000 500,000

Share premium 77,000 30,000 107,000
Retained earnings 123,000 60,000 183,000
Total liabilities & equity 548,000 327,000 875,000

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Question 2:

Assume that company A acquired 100% of the outstanding voting shares of company B on
January 1, 2021. To acquire these shares, company A paid £420,000 in cash and issued
20,000 shares of common stock with £10 par value. On this day of issuance, company A’s
stock has a fair value of £18 per share, and company B’s book value of equity is £560,000.
Company A believes that the balance sheet of company B is understated by £140,000 because
its PP&E is undervalued by £50,000 and it has unrecorded patents of £90,000 value.

Required:

Did company A pay more than company B’s book value of equity?
Did company A expect to gain any synergies or other unidentifiable intangible assets through
this acquisition?
What is the increase in company A’s assets as a result of the acquisition? What is the
corresponding increase in equity?
Fill in the adjustments and consolidated balance sheet below:

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 Consolidated
Accounts Company A Company B Consolidation Adjustments
Balance Sheet

Cash 168,000 80,000

Receivables, net 320,000 180,000
Inventory 440,000 260,000
Investment in
company B 780,000 0
Land 200,000 120,000
PP&E, net 1,040,000 320,000
Patent 0 0
Goodwill 0 0

Total £ 2,948,000 £ 960,000

Accounts payable 320,000 60,000

Long-term liabilities 760,000 340,000

Contributed capital 1,148,000 80,000

Retained earnings 720,000 480,000

Total £ 2,948,000 £ 960,000

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Question 3:
On 31 December 2009, Panther plc purchased 75% of the ordinary shares of Snake plc. The
purchase price paid was £1,750,000. Inspection of Snake’s balance sheet on that date
revealed the following information:

Book value Fair Value

(£) (£)

Property plant and equipment (PPE) 1,300,000 1,500,000

Intangible assets 100,000 160,000

Inventory 200,000 250,000

Receivables 320,000 300,000

Cash 100,000 100,000

Total assets 2,020,000

=======

Bonds payable 400,000 400,000

Payables 200,000 200,000

Provision for legal dispute 20,000 50,000

Shareholders’ equity 1,400,000

Total liabilities and equity 2,020,000

=======

Further information:
1. The excess of FV over book value for PPE is with respect to an asset with remaining
useful life of five years.

2. The excess of FV over book value of intangible assets is with respect to licenses
which expire on 31 December 2012.

3. The legal dispute is expected to be settled in 2010.

Required
1. Calculate goodwill and minority (non-controlling) interest to be included in the
consolidated balance sheet as at 31 December 2009. [8%]
2. Snake’s standalone 2010 income is £120,000. Assume that all inventory items on
Snake’s balance sheet are sold during 2020. What will the income from Snake in the
2010 consolidated income statement be? [8%]
3. How would you answer to 2 above change if the fair value of PPE is £1,550,000?
[4%]

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Ignore taxes.