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Hello OT,
I’m confused over the answer to the following question.
(The question comes from revision kit for f7 – Apologies for the messy paste – I’ve tried to make it as clear as possible):
105 Pedantic (12/08 amended) 39 mins
On 1 April 20X8, Pedantic acquired 60% of the equity share capital of Sophistic in a share exchange of two shares in Pedantic for three shares in Sophistic. At that date the retained earnings of Sophistic were $5 million. The issue of shares has not yet been recorded by Pedantic. At the date of acquisition shares in Pedantic had a market value of $6 each. Below are the summarised draft statements of financial position of both companies.
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8
Pedantic Sophistic
Assets $’000 $’000
Non-current assets
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
Total assets 56,600 19,200Equity and liabilities
Equity shares of $1 each 10,000 4,000
Retained earnings 35,400 6,500
45,400 10,500Non-current liabilities
10% loan notes 3,000 4,000
Current liabilities 8,200 4,700Total equity and liabilities 56,600 19,200
The following information is relevant.
(i) At the date of acquisition, the fair values of Sophistic’s assets were equal to their carrying amounts with the
exception of an item of plant, which had a fair value of $2 million in excess of its carrying amount. It had a remaining life of five years at that date (straight-line depreciation is used). Sophistic has not adjusted the
carrying amount of its plant as a result of the fair value exercise.
(ii) Sales from Sophistic to Pedantic in the post acquisition period were $8 million. Sophistic made a mark up on cost of 40% on these sales. Pedantic had sold $5.2 million (at cost to Pedantic) of these goods by
30 September 20X8.
(iii) Sophistic’s trade receivables at 30 September 20X8 include $600,000 due from Pedantic which did not agree with Pedantic’s corresponding trade payable. This was due to cash in transit of $200,000 from Pedantic to Sophistic. Both companies have positive bank balances.
(iv) Pedantic has a policy of accounting for any non-controlling interest at full fair value. The fair value of the noncontrolling interest in Sophistic at the date of acquisition was estimated to be $5.9 million. Consolidated goodwill was not impaired at 30 September 20X8.The answer is saying that the consolidated current assets are as follows:
Current assets (16,000 + 6,600 – 800 – 600 + 200)
16’000 + 6’600 > this part is v. clear
-600 > this comes from removing the receivables
+200 > this comes from accounting the cash in transit– 800 > where does that comes from??? I can only think of the inventory that is being reduced in point ii – but nevertheless that doesnt make sense to me and I’m very confused.
Many thanks in advance for your support.
Piotr
Hi,
Yes, it is the adjustment for the PURP from part (ii). We would normally reduce the inventory line but because we are only given the current assets figure then we reduce that instead.
If you are curious where the PURP comes from then it is applying the 40% mark-up to the good remaining at the reporting date, which are $2.8 million ($8m – $5.2m).
Hope that clears it up.
Thanks
On 1 April 2008 Pedantic acquired 60% of the capital of Sophistic in a share enhange of two shares in Pedantic for three shares in sophistic At that date the retained earnings of were SSmillionJhe issue of shares has not yet been by Pedantic. nt the date of shares in Pedantic had a market value of $6 each’ the surnrnarised draft statement’. of financial position of both companies.
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2008.
Assets pedantic
$ ‘000 Sophistic
‘000
Non-Current Assets
Property Plant & Equipment 40,600
Current Assets 16’000 6’600
Total Assets 56,600 19,200Equity & Liabilities
Equity shares of $1 each 10,000 4,000
Retained Earnings 35,400 6,500
45,400 10,500
Non-Current Liabilities
10% loans notes 3,000 4,000Current Liabilities 8,200 4, 700
Total equity and liabilities 56,600 19,200
The following information is relevant
i) At the date of acquisition, the fair value of Sophistic’s assets were equal to their carrying amounts with the exception of an item of plant, which has a fair value of $2million in excess of its carrying amount. It had a remaining life of five years at that date (straight line depreciation is used). Sophistic has not adjusted the carrying amount of its plant as a result of the fair value exercise.
ii) Sales from Sophistic to Pedantic in the post-acquisition period were $8 million Sophistic made a mark-up on cost of 40% on these sales>Pedantic had sold $5.2million (at cost to Pedantic) of these goods by 30 September 2008.
iii) Sophistic s trade receivables at 30 September 2008 include $600,000 due from Pedantic which did not agree with Pedantic s corresponding trade payable. This was due to the cash in transit of$200,000 from pedantic to Sophistic. Both companies have positive bank balances
iv) Pedantic has a policy of accounting for any non-controlling interest at full fair value .the fair value Of the non-controlling interest in Sophistics at the date of acquisition was estimated to be $5.9 million consolidated goodwill was not impaired at 30 September 2008.
Required
Prepare the consolidated statement of financial position for Pedantic as at 30 September 2008. (40)
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