acca f7 questions

acca f7 dec 2005
Hedra, a public listed company, acquired the following investments:
(i) On 1 October 2004, 72 million shares in Salvador for an immediate cash payment of $195 million. Hedra agreed to pay further consideration on 30 September 2005 of $49 million if the post acquisition profits of Salvador
exceeded an agreed figure at that date. Hedra has not accounted for this deferred payment as it did not believe it would be payable, however Salvador’s profits have now exceeded the agreed amount (ignore discounting).Salvador also accepted a $50 million 8% loan from Hedra at the date of its acquisition.

(ii) On 1 April 2005, 40 million shares in Aragon by way of a share exchange of two shares in Hedra for each
acquired share in Aragon. The stock market value of Hedra’s shares at the date of this share exchange was $2·50. Hedra has not yet recorded the acquisition of the investment in Aragon.

The summarised balance sheets of the three companies as at 30 September 2005 are:
Hedra Salvador Aragon
Non-current Assets $m $m $m $m $m $m
Property, plant and equipment 358 240 270
Investments – in Salvador 245 nil nil
– other 45 nil nil
–––– –––– ––––
648 240 270
Current Assets
Inventories 130 80 110
Trade receivables 142 97 70
Cash and bank nil 272 4 181 20 200
–––– –––– –––– –––– –––– ––––
Total assets 920 421 470
–––– –––– ––––
Equity and liabilities
Ordinary share capital ($1 each) 400 120 100
Reserves:
Share premium 40 50 nil
Revaluation 15 nil nil
Retained earnings 240 295 60 110 300 300
–––– –––– –––– –––– –––– ––––
695 230 400
Non-current liabilities
8% loan note nil 50 nil
Deferred tax 45 45 nil 50 nil nil
–––– –––– ––––
Current liabilities
Trade payables 118 141 40
Bank overdraft 12 nil nil
Current tax payable 50 180 nil 141 30 70
–––– –––– –––– –––– –––– ––––
Total equity and liabilities 920 421 470
–––– –––– ––––
The following information is relevant:
(a) Fair value adjustments and revaluations:
(i) Hedra’s accounting policy for land and buildings is that they should be carried at their fair values. The fair
value of Salvador’s land at the date of acquisition was $20 million in excess of its carrying value. By
30 September 2005 this excess had increased by a further $5 million. Salvador’s buildings did not require
any fair value adjustments. The fair value of Hedra’s own land and buildings at 30 September 2005 was
$12 million in excess of its carrying value in the above balance sheet.
(ii) The fair value of some of Salvador’s plant at the date of acquisition was $20 million in excess of its carrying
value and had a remaining life of four years (straight-line depreciation is used).
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(iii) At the date of acquisition Salvador had unrelieved tax losses of $40 million from previous years. Salvador
had not accounted for these as a deferred tax asset as its directors did not believe the company would be
sufficiently profitable in the near future. However, the directors of Hedra were confident that these losses
would be utilised and accordingly they should be recognised as a deferred tax asset. By 30 September 2005
the group had not yet utilised any of these losses. The income tax rate is 25%.
(b) The retained earnings of Salvador and Aragon at 1 October 2004, as reported in their separate financial
statements, were $20 million and $200 million respectively. All profits are deemed to accrue evenly throughout
the year.
(c) An impairment test on 30 September 2005 showed that consolidated goodwill should be written down by
$20 million. Hedra has applied IFRS 3 Business combinations since the acquisition of Salvador.
(d) The investment in Aragon has not suffered any impairment.
Required:
Prepare the consolidated balance sheet of Hedra as at 30 September 2005.
(25 marks)

May i know how to get the cost of investment of 245million in the hedra book’s ?
This is because I try to use
the
cash payment of 195million + the deferred payment of 49million plus it together will only got 244million
and for the sentence of salvador also accepted a 50million 8% loan from hedra at doa << is this means it is part of the cost of investment or it is a intercompany loan note?
thanks