AG218

SEMESTER 2 WEEK 7 TUTORIAL

1. Outline the difference between individual accounts and group accounts.
Individual accounts are the financial statements of a single legal entity, while group
accounts (also known as consolidated accounts) combine the financial statements of a
parent company and its subsidiaries into one set of financial statements for the entire
group of companies

2. Why are group accounts required?

Group accounts are required to provide a clear and accurate picture of the financial
performance and position of a business group as a whole. They eliminate intercompany
transactions and balances, providing stakeholders with a comprehensive view of the
group’s financial health.

3. Outline what is meant by the single entity approach.

The single entity approach treats the parent and its subsidiaries as one single reporting
entity for accounting purposes. This approach is used in the preparation of group
accounts.

4. Danzig Plc. acquires Riga Ltd on 1 March 20X5 for £14,000,000 in cash. At the point
of acquisition Riga has share capital of £4,000,000 and retained earnings of
£6,000,000.

a. How would this transaction be recorded in the individual accounts of Danzig?

In the individual accounts of Danzig, the acquisition of Riga would be recorded as
an investment. The investment in Riga would be recorded as a debit of
£14,000,000 to the ‘Investments’ account, and a credit of £14,000,000 to the
‘Cash’ account.
b. Calculate the goodwill on acquisition.
Goodwill on acquisition is calculated as the excess of the purchase consideration
over the net assets acquired. In this case, the purchase consideration is
£14,000,000 and the net assets (share capital + retained earnings) are
£10,000,000 (£4,000,000 + £6,000,000). Therefore, the goodwill on acquisition is
£14,000,000 - £10,000,000 = £4,000,000

5. Now imagine that Danzig had acquired Riga for £14,000,000 in cash when Riga had
net assets of £10,000,000. What would the goodwill be in this case?
If Danzig had acquired Riga for £14,000,000 in cash when Riga had net assets of
£10,000,000, the goodwill would be £14,000,000 - £10,000,000 = £4,000,000

6. Forties Ltd. acquires Cromarty Ltd. on 1 April 20X7 for £15,000,000 cash. At the point
of acquisition Cromarty had retained earnings of £8,000,000. Below are the
statements of financial position of Forties and Cromarty as at 31 March 20X8.

£’000 Forties Cromarty

Property plant and equipment 19,000 8,000

Investment in Cromarty 15,000 -
Current assets 9,000 4,000

TOTAL ASSETS 43,000 12,000

Share capital 5,000 2,000

Retained earnings 34,000 9,000
Current liabilities 4,000 1,000

TOTAL EQUITY + LIABILITIES 43,000 12,000

Prepare the group statement of financial position of the Forties group as at 31 March
20X8.

£’000 Forties Group

Property plant and equipment 27,000
Current assets 13,000
TOTAL ASSETS 40,000
Share capital 5,000
Retained earnings 43,000
Current liabilities 4,000
TOTAL EQUITY + LIABILITIES 52,000
7. Hudson Ltd. acquires Brunswick Ltd. on 1 July 20X4 for £17,000,000 cash. At the
point of acquisition Brunswick had retained earnings of £6,500,000. Below are the
statements of financial position of Hudson and Brunswick as at 30 June 20X5.

£’000 Hudson Brunswick

Property plant and equipment 21,000 10,000

Investment in Brunswick 17,000 -
Current assets 7,000 7,000

TOTAL ASSETS 45,000 17,000

Share capital 7,000 7,000

Retained earnings 35,000 8,000
Current liabilities 3,000 2,000

TOTAL EQUITY + LIABILITIES 45,000 17,000

Prepare the group statement of financial position of the Hudson group as at 30 June
20X5.

£’000 Hudson Group

Property plant and equipment 31,000
Current assets 14,000
TOTAL ASSETS 45,000
Share capital 7,000
Retained earnings 43,000
Current liabilities 3,000
TOTAL EQUITY + LIABILITIES 53,000

8. In your own words briefly describe what goodwill is.

Goodwill is an intangible asset that arises when a buyer acquires an existing business.
Goodwill represents assets that are not separately identifiable. Goodwill includes non-
physical assets such as brand recognition, customer loyalty, and employee morale.

9. Refer back to question 7. It is now 30 June 20X9, Brunswick has retained earnings of
£13,000,000 and total net assets of £20,000,000. What would the goodwill be in the
Hudson Group accounts?
If it is now 30 June 20X9, Brunswick has retained earnings of £13,000,000 and total net
assets of £20,000,000, the goodwill in the Hudson Group accounts would be the original
purchase price of £17,000,000 minus the current net assets of £20,000,000, which gives
a negative goodwill of -£3,000,000. However, negative goodwill is unusual and typically
indicates that Hudson overpaid for Brunswick. It would be reviewed for impairment.