Accounting for associate

Good day Sir,

Kindly help in the question below from BPP pg179. I understand figures are omitted from the stated SOFP, this is because my question is on note 5 and there will be no need for figures.

Question- The statements of financial position of J Co and its investee companies, P Co and 20X5 are shown below.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
Non-current assets
Freehold property Plant and machinery Investments
Current assets
Inventory
Trade receivables Cash
Total assets
Equity and liabilities Equity
Share capital – $1 shares Retained earnings
Non-current liabilities
12% loan stock
Current liabilities
Trade payables Bank overdraft
Total equity and liabilities

NOTE:
J Co acquired ordinary shares in P Co on 1 January 20X0 for $1,000,000 when the retained earnings of P Co were $200,000.
2 At the date of acquisition of P Co, the fair value of its freehold property was considered to be $400,000 greater than its value in P Co’s statement of financial position. P Co had acquired the property in January 20W0 and the buildings element (comprising 50% of the total value) is depreciated on cost over 50 years.
3 J Co acquired 225,000 ordinary shares in S Co on 1 January 20X4 for $500,000 when the retained earnings of S Co were $150,000.
4 P Co manufactures a component used by both J Co and S Co. Transfers are made by P Co at cost plus 25%. J Co held $100,000 inventory of these components at 31 December 20X5. In the same period J Co sold goods to S Co of which S Co had $80,000 in inventory at 31 December 20X5. J Co had marked these goods up by 25%.
5 THE GOODWiLL IN P Co is impaired and should be fully written off. An impairment loss of $92,000 is to be recognised on the investment in S Co.
6 Non-controlling interest is valued at full fair value. P Co shares were trading at $1.60 just prior to the acquisition by J Co.

Sir, the question says the goodwill in PCo is impaired. This I translated as impairment loss to be CR to goodwill in consolidated SOFP and Dr to retained earning of the group and NCI according to their shares. However, the solution from BPP Dr PCo retained earning with impairment loss and CR consolidated SOFP. Having looked at the question again, I thought if it is PCo goodwill, could it be the reason it was CR to its R.E. Then why is the other entry on consolidated goodwill if it is for PCo
Kindly shed more light on the entry please and explain the logic behind BPP entries.
Thank you for your time on this.

Hello Sir,

Thank you for your prompt response to my question.

Regarding the thread title, the question posted is taken from BPP study test, chapter 10 ‘accounting for associate,. It is the last question solved on page 179. The requirement is to account for both associate and subsidiary. Although, the challenging part for me is on the impairment loss posted on the subsidiary retained earning.

I m sorry, I could not find the exam reference from the study test.

Thank you once again for your time.

Good day Sir,
I understand regarding the post thread, especially given my incomplete question. It looks like group account question.
Also, I do apologise for my assumption that you have the BPP study test with you. For more clarification, please find the full question is posted now.

Question
The statements of financial position of J Co and its investee companies, P Co and SCo at 31 December 20X5 are shown below.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
Non current assets. J $’000. P $’000. S $’000
Freehold property 1950. 1250. 500
Plant and machinery 795. 375. 285
Investments. 1500. – –

________. _______. _______
4245. 1625. 785

Inventory 575. 300. 26
Trade receivable 330. 290. 370
Cash 50. 120. 20
______. ______. ______
Total assets. 955. 710. 655

Equity and liabilities

Share capital – $1 shares 20000. 1000 750
Retained earnings. 1460. 885. 390
_______. ______. ______
3460 1885. 1140

Non current liab
12% loan stock. 500. 100. .
Current liabilities
Trade payables 680. 350. 300
Bank overdraft. 560. – –
________. _______. ______
1240. 350. 300
_________. ________. ________
Total equity/ liab. 5200. 2335. 1440

1) J Co acquired 600,000 ordinary shares in PCo on 1 Jan 20×0 for $1M when the rest earning of P Co were $200,000.
2 At the date of acquisition of P Co, the fair value of its freehold property was considered to be $400,000 greater than its value in P Co’s statement of financial position. P Co had acquired the property in January 20W0 and the buildings element (comprising 50% of the total value) is depreciated on cost over 50 years.
3 J Co acquired 225,000 ordinary shares in S Co on 1 January 20X4 for $500,000 when the retained earnings of S Co were $150,000.
4 P Co manufactures a component used by both J Co and S Co. Transfers are made by P Co at cost plus 25%. J Co held $100,000 inventory of these components at 31 December 20X5. In the same period J Co sold goods to S Co of which S Co had $80,000 in inventory at 31 December 20X5. J Co had marked these goods up by 25%.
5 The goodwill in P Co is impaired and should be fully written off. An impairment loss of $92,000 is to be recognised on the investment in S Co.
6 Non-controlling interest is valued at full fair value. P Co shares were trading at $1.60 just prior to the acquisition by J Co.

Required
Prepare, in a format suitable for inclusion in the annual report of the J Group, the consolidated statement of financial position at 31 December 20X5.

My workings

After all the adjustment, the goodwill was Calt as follows:
$’000. $’000
Consideration transfer 1000
NCI. (1.60*400,000). 640

Sub FV @ acqsn
Share. 1000
R.ear. 200
Asset adjust 400. 1600
________ ___________
40
Impairment loss. (40)

–
NOTE 5 says, the goodwill in PCo is impaired and should be fully written off. I’m I right in imparing group goodwill ? Or is it referring to another goodwill in PCo.

According to BPP, it was that goodwill impairment loss (40,000)that was deducted from PCo R.earning while I Dr it to group and NCI according to their percentage share.
That affected the post acquisition Ret earning for consolidated SOFP

Thank you.

Thank you ever so much sir. Having read through your explanation, I realised that it shouldn’t have make any difference to post acqsn R.E so I went back to my calculation. There was a mistake on my part while adding up my figures. That was the cause of difference between my answer and BPP answer, not the fact that impairment loss was deducted from subsidiary RE.

My sincere gratitude for your time and effort, it is much appreciated. And do have a good evening.