Mid-year acquisition

If a parent company acquires a subsidiary mid-year, the net assets at the date of
acquisition must be calculated based on the net assets at the start of the subsidiary's
financial year plus the profits of up to the date of acquisition. To calculate this, it is
normally assumed that the subsidiary’s profit after tax accrues evenly over time.

Practical questions

Question1
On May 1, 2007, Karl bought 60% of Susan paying $76,000. The summarized
statements of financial position for the two companies as at 30 November 2007 are:
Karl Susan
$ $
Non-current assets;
PPE 138,000 115,000
Investments 98,000 --
Current assets;
Inventory
15,000 17,000
Receivables 19,000 20,000
Cash 2,000 ---
272,000 152,000
Equity
Share capital ($1) 50,000 40,000
Retained earnings 189,000 69,000
Non-current liabilities:
8% loan notes -- 20,000
Current liabilities 33,000 23,000
272,000 152,000
The following information is relevant:
1. The inventory of Susan includes $8,000 of goods purchased from Karl at cost
plus 25%
2. On 1 June 2007 Susan transferred an item of plant to Karl for $15,000. Its
carrying amount at that date was $10,000. The asset had a remaining useful
economic life of 5 years.
3. The Karl group values the non-controlling interest using the fair value method.
4. At the date of acquisition, the fair value of the 40% non-controlling interest was
$50,000.
5. An impairment loss of $1000 is to be charged against the goodwill at the year end.
6. Susan earned a profit of $9,000 in the year ended 30 November 2007.
7. The loan note in Susan’s books represents monies borrowed from Karl during the
year. All the loan note interest has been accounted for.
8. Included in Karl’s receivables is $4,000 relating to inventory sold to Susan during
the year. Susan raised a cheque for $2,500 and sent it to Karl on 29 November
2007. Karl did not receive this cheque until 4 December 2007.

Required; prepare the consolidated statement of financial position as at 30 November

2007
Question 2
The following statements of profit or loss were prepared for the year ended 31 March
20X9.
Rodeo Pathos
$000 $000
Revenue 303,600 217,700
Cost of sales (143,800) (102,200)
Gross profit 159,800 115,500
Operating expenses (71,200) (51,300)
Profit from operations 88,600 64,200
Investment income 2,800 1,200
Profit before tax 91,400 65,400
Taxation (46,200) (32,600)
Profit for the year 45,200 32,800

On 30 November 20X8 Rodeo acquired 75% of the issued ordinary capital of Pathos.
No dividends were paid by either company during the year. The investment income is
from quoted investments and has been correctly accounted for.
The profits of both companies are deemed to accrue evenly over the year.

Required; Prepare the consolidated statement of profit or loss for the year ended 31
March 20X9.

Question 3
Pepper bought 70% of Salt on 1 July 20X6. The following are the statements of profit
or loss of Pepper and Salt for the year ended 31 March 20X7:
Pepper Salt
$ $
Revenue 31,200 10,400
Cost of sales (17,800) (5,600)
Gross profit 13,400 4,800
Operating expenses (8,500) (3,200)
Profit from operations 4,900 1,600
Investment Income 2,000 –
Profit before tax 6,900 1,600
Tax (2,100) (500)
Profit for the year 4,800 1,100

The following information is available:

 On 1 July 20X6, an item of plant in the books of Salt had a fair value of $5,000 in
excess of its carrying amount. At this time, the plant had a remaining life of 10
years. Depreciation is charged to cost of sales.
 During the post-acquisition period Salt sold goods to Pepper for $4,400. Of this
amount, $500 was included in the inventory of Pepper at the year-end. Salt earns
a 35% margin on its sales.
 Goodwill amounting to $800 arose on the acquisition of Salt, which had been
measured using the fair value method. Goodwill is to be impaired by 10% at the
year-end. Impairment losses should be charged to operating expenses.
 Salt paid a dividend of $500 on 1 January 20X7.
Required: Prepare the consolidated statement of profit or loss for the year ended 31
March
20X7.

Question 4
On 1 January 20X8, Bolanle acquired 80% of the equity share capital of Sweet co.
Part of the consideration was settled by a share exchange of two shares in Bolanle for
every five acquired shares in Sweet co. At the date of acquisition, shares in Bolanle
and Sweet co had a market value of $3 and $2.50 each respectively. Bolanle will also
pay cash consideration of 27.5 cents for each acquired share in Sweet co on 1 January
20X9. Bolanle has a cost of capital of 10% per annum. None of the consideration has
been recorded by Bolanle.
Below are the financial statements of both companies:
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE
YEAR ENDED 30 SEPTEMBER 20X8
Bolanle Sweet co
$000 $000
Revenue 62,600 30,000
Cost of sales (45,800) (24,000)
Gross profit 16,800 6,000
Distribution cost (2,000) (1,200)
Administrative expenses (3,500) (1,800)
Finance costs (200) __
Profit before tax 11,100 3,000
Income tax expense (3,100) (1,000)
Profit for the year 8,000 2,000
Other comprehensive income;
Gain on revaluation 1,500 __
Total comprehensive income 6,500 2,000

STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

Bolanle Sweet co
$000 $000
Non-current assets
Property, plant and equipment 18,700 13,900
Investments; 10% loan notes to Sweet co (ii) 1,000
19,700 13,900
Current assets
Inventory (iii) 4,300 1,200
Trade receivables (iv) 4,700 2,500
Bank nil 300
Total assets 28,700 17,900
Equity and liabilities
Equity
Equity shares of $1 each 10,000 9,000
Revaluation surplus (i) 2,000 nil
Retained earnings 6,300 3,500
18,300 12,500
Non-current liabilities
10% loan notes (ii) 2,500 1,000
Current liabilities
Trade payables (iv) 3,400 3,600
Bank 1,700 nil
Current tax payable 2,800 800
28,700 17,900

The following information is relevant:

i. At the date of acquisition, the values of Sweet co’s assets and liabilities were
equal to their carrying amounts with the exception of Sweet co’s property which
had a fair value of $2.5 million above its carrying amount. For consolidation
purposes, this lead to an increase in depreciation charge (in cost of sales) of
$100,000 in the postacquisition period to 30 September 20X8. Sweet co has not
incorporated the fair value property increase into its entry financial statements.

ii. The policy of Bolanle group is to revalue all properties to fair value at each year
end. On 30 September 20X8, the increase in Bolanle’s property has already been
recorded; however, a further increase of $600,000 in the value of Sweet co’s
property since its value at acquisition has not been recorded.

iii. On 30 September 20X8, Sweet co accepted a $1 million 10% loan note from
Bolanle.

iv. Sales from Bolanle to Sweet co throughout the year ended 30 September 20X8
had consistently been $300,000 per month. Bolanle made a mark-up on cost of
25% on these sales. $600,000(at cost to Sweet co) of Sweet co’s inventory at
September 20X8 had been supplied by Bolanle in the post-acquisition period.

v. Bolanle had a trade receivable balance owing from Sweet co of $1.2 million as at
30 September 20X8. This differed to the equivalent trade payable of Sweet co
due to a payment by Sweet co of $400,000 made in September 20X8, which did
not clear Bolanle’s bank account until 4 October 20X8.

vi. Bolanle’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Sweet co’s share price at that date can be deemed to
be representative of the fair value of the shares held by the non-controlling
interest.
vii. Due to recent adverse publicity concerning on of Sweet co’s major product lines,
the goodwill which arose on the acquisition of Sweet co has been impaired by
$500,000 as at 30 September 20X8. Goodwill impairment should be treated as an
administrative expense.

viii. Assume, except where indicated otherwise that all items of income and
expenditure accrue evenly throughout the year.

Required: prepare the consolidated statement of financial position and the

consolidated statement of profit or loss and other comprehensive income