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This scenario relates to four requirements.
Venus Co acquired 70% of the equity share capital of Luto Co, its only subsidiary, on 1 January 20X8.
On reviewing the consolidated financial statements, the managing director of Venus Co was disappointed, commenting that he had expected to see higher gross profit for 20X8 due to the receipt of discounted purchases from Luto Co in the post-acquisition period. He has remarked that the acquisition of Luto Co has not had the positive impact he expected.
Extracts from the draft financial statements of the Venus Group and Venus Co (single entity) for the years ended 30 June 20X7 and 20X8 are:
Venus Group (consolidated)
30 June 20X8
$’000
Venus Co
(single entity)
30 June 20X7
$’000
Statement of profit or loss:
Revenue
39,000
32,000
Cost of sales
(26,500)
(21,000)
Gross profit
12,500
11,000
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Net profit for the year
9,800
8,900
Profit attributable to:
Owners of Venus Co
9,200
Non-controlling interest
600
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Statement of financial position:
Equity
Share capital
30,000
20,000
Other Components of Equity (Share premium)
35,000
5,000
Retained earnings
21,000
17,000
Non-controlling interest (NCI)
1,500
87,500
42,000
The acquisition of Luto Co has been accounted for correctly in the above financial statement extracts and the following notes are relevant:
(1)
Luto Co recognised revenue of $5m in the post-acquisition period which resulted in a profit of $2m.
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(2)
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Since the acquisition, Venus Co is able to acquire goods from Luto Co at a discount. This has resulted in a saving of $500,000 for Venus Co in the post-acquisition period. At 30 June 20X8 Venus Co had no inventory that had been purchased from Luto Co.
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(3)
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The consideration for the acquisition consisted of a share exchange and an additional $5m to be paid on 1 January 20X9. Venus Co has a cost of capital of 8% which is equivalent to a discount factor of 0.926.
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(4)
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The fair values of Luto Co’s assets at acquisition were equal to their carrying amounts, except for an item of plant. This plant had a remaining life of three years at the date of acquisition. Its fair value was $900,000 above its carrying amount. Venus Co’s assets are held at historical cost.
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(5)
All revenue and expenses are deemed to accrue evenly throughout the year.
Sir in this question one of the part asked for calculating net of profit venus co as if no acquisition took place. The first deducted the 2000 profit from $9800 and then also added back depreciation of fair value adjustment . But is don’t understand why they did that.
As if we see the nci is 600 so the total profit would have been 2000 for the six months( 600*100/30) so this would have already included the depreciation adjustment, then why the did it second timeHi,
This was slightly strange question when it appeared as it required us to work backwards from having the consolidated accounts and remove the subsidiary results effectively.
The $2m is for the post-acquisition period, so for the six months since acquisition, and so no adjustment is required regarding pro-rating the figure.
Similarly, the additional depreciation on the fair value would have been deducted when we made the consolidation adjustments, so to get back to the original figures before the consolidation then we will need to reverse this and so add it back.
You do not need to look at adjusting anything related to the NCI profit as you’ve mentioned in your post above.
Hope that clears it up a bit for you.
Thanks
Sir i also thought the same that we do not need to adjust depreciation as it will already have been done to calculate 2000
But sir in the official answer of ACCA they have calculated the single entity net profit venus co by adding depreciation??Sir are you saying we should add back the depreciation??
Or not to add back depreciation as the nci profit already takes account of it and we need single entity net profit of parent?Sorry sir i am not able to understand what to do
Add back depreciation or not
In my opinion we should NOT add back depreciation as the NCI profit would have been arrived after deducting depreciation so when we deduct nci profit from total consolidated profit it will already take accounting of the excess depreciation
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