PUP

Hello Sir,

For the calculation of NCI adjusted profit why we didn’t consider the PUP of $800000 since the inventory of the subsidiary was credited for the same amount so why it had not been added to the profit of the subsidiary, for calculating the attributable share of the profit,

Thanks,
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Qusetion

PENKETH
On 1 October 20X3, Penketh acquired 90 million of Sphere’s 150 million $0.50 equity shares.
Penketh willpay $1.54 cash on 30 September 20X4 for each share acquired. Penketh’sfinance
cost is 10% per annum. Sphere’s share price as at 1 October 20X3 was $1.25. The statements
of profit or loss and other comprehensive income for the year ended 31 March 20X4 are:
Penketh Sphere
$000 $000
Revenue 620,000 310,000
Cost of sales (400,000) (150,000)
–––––––– ––––––––
Gross profit 220,000 160,000
Distribution costs (40,000) (20,000)
Administrative expenses (36,000) (25,000)
Investment income 5,000 1,600
Finance costs (2,000) (5,600)
–––––––– ––––––––
Profit before tax 147,000 111,000
Income tax expense (45,000) (31,000)
–––––––– ––––––––
Profit for the year 102,000 80,000
Other comprehensive income
Gain/(loss) on revaluation of land (note (ii)) (2,200) 1,000
–––––––– ––––––––
Total comprehensive income for the year 99,800 81,000
–––––––– ––––––––
The following information is relevant:
(i) A fair value exercise on 1 October 20X3 concluded that the carrying amounts of
Sphere’s net assetswere equal to their fair values with the following exceptions:
– Plant with a remaining life of two years had a fair value of $6 million in excess of
its carrying amount. Plant depreciation is charged to cost of sales.
– Penketh placed a value of $5 million on Sphere’s good relationships with its
customers. Penketh expected, on average, a customer relationship to last for a
further five years. Amortisation is charged to administrative expenses.
(ii) Sphere’s land, valued using the revaluation model, increased by $1 million since the
acquisition.
(iii) After the acquisition Penketh sold goods to Sphere for $20 million at a 25% mark?up.
Sphere had one fifth of these goods still in inventory at 31 March 20X4.
(iv) All items accrue evenlyover the year unless otherwise indicated. Sphere had retained
earnings of $70 million at 1 April 20X3. There were no other components of equity at
this date.
(v) Penketh measures the non?controlling interest at fair value at the date of acquisition.
To calculate fair value, the share price of Sphere should be used.

Required:
(a) Calculate goodwill arising on the acquisition of Sphere as at 1 October 20X3.
(5 marks)
(b) Prepare the consolidated statement of profit or loss and other comprehensive
income of Penketh for the year ended 31 March 20X4. (15 marks

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Answer

PENKETH
(a) Goodwill
$000
Deferred consideration (1.54 × 90,000 × 1
/1.1) 126,000
Non?controlling interest (1.25 × 60,000) 75,000
Less: Fair value of net assets at acquisition (W1) (196,000)
–––––––
Goodwill on acquisition 5,000
–––––––
(b) Penketh – Consolidated statement of profit or loss and other comprehensive income
for the year ended 31 March 20X4
$000
Revenue (620,000 + (310,000 × 6
/12) – 20,000 intra?group sales) 755,000
Cost of sales (W2) (457,300)
–––––––
Gross profit 297,700
Distribution costs (40,000 + (20,000 × 6
/12)) (50,000)
Administrative expenses (36,000 + (25,000 × 6
/12) + (5,000/5 × 6
/12 re
customer list))
(49,000)
Investment income (5,000 + (1,600 × 6
/12)) 5,800
Finance costs (2,000 + (5,600 × 6/12) + (126,000 × 10% × 6
/12 re
deferred consideration)) (11,100)
–––––––
Profit before tax 193,400
Income tax expense (45,000 + (31,000 × 6
/12)) (60,500)
–––––––
Profit for the year 132,900
Other comprehensive income
Loss on revaluation of land (2,200 – 1,000 gain for Sphere) (1,200)
–––––––
Total comprehensive income for the year 131,700
–––––––
Profit attributable to:
Owners of the parent (balance) 117,700
Non?controlling interest (W2) 15,200
–––––––
132,900
–––––––
Total comprehensive income attributable to:
Owners of the parent (balance) 116,100
Non?controlling interest (W3) 15,600
–––––––
131,700
–––––––

Workings
(W1) Net assets of Sphere at acquisition
$000
Share capital 75,000
Retained earnings (70,000 b/f + 40,000 pre?acquisition) 110,000
Fair value adjustment – plant 6,000
Fair value adjustment – customer relationships 5,000
–––––––
196,000
–––––––
(W2) Cost of sales
$000
Penketh 400,000
Sphere (150,000 × 6
/12) 75,000
Intra?group purchases (20,000)
Additional depreciation of plant (6,000/2 years × 6
/12) 1,500
Unrealised profit in inventory (20,000 × 1
/5 × 25/125) 800
–––––––
457,300
–––––––
(W3) Non?controlling interest in profit for the year
$000
Sphere’s profit (80,000 × 6
/12 ) 40,000
Fair value depreciation – plant (1,500)
Fair value amortisation – customer list (500)
–––––––
Sphere adjusted profit 38,000
–––––––
Non?controlling interest at 40% 15,200
–––––––
Non?controlling interest in total comprehensive income
$000
Non?controlling interest in statement of profit or loss (above) 15,200
Other comprehensive income (1,000 × 40%) 400
–––––––
15,600
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