On 1 January 2014, Bolo purchased 45% of the ordinary shares of Kata. Consideration
paid was $3 million. The carrying amounts of the net assets of Kata at that date were
$2.4 million and approximated their fair values. The statement of financial position
for Kata as at 31 December 2014 was as follows:
$m
Property, plant & equipment 14
Inventories 1
–––––
Total assets 15
–––––
Share capital 1
Retained earnings 2
Loans 12
–––––
Equity and liabilities 15
–––––
The directors of Bolo are unsure whether to treat Kata as an associate or a subsidiary
in the consolidated financial statements. They believe that this decision will have a
minimal impact on the consolidated financial statements and is therefore
unimportant.
When relevant, Bolo measures non-controlling interests using the proportion of net
assets method.
Required:
Discuss and compare the impact on the consolidated financial statements of Bolo if
the investment in Kata is accounted for as:
• a subsidiary, or
• an associate.
Given the scenario above given to me from a tutor as a mock question, i am struggling with what types of calculations i could include? could i get some guidance on this please
Ask the Tutor ACCA SBR
Accounting for subsidiary & Associates
10y ago#1Well surely the interesting thing about Kata is that it has virtually no trading assets, no receivables, no (little) inventory, no payables - it's presumable non-trading (what's it doing with 1,000 inventory?)
It would be interesting to know who owns the other 55% - it would be a strange investment for "the man in the street"
You could see how the inclusion of Kata as a subsidiary would affect group borrowing / gearing ratios
Do we know why Bolo paid $3 million for a non-controlling interest in a company that was only worth $2.4 million - that's $3 million out for the acquisition of $1,08 million assets. One hell of a premium on acquisition.
Also interesting to see how Kata has moved from having a worth of $2.4 million to net assets of $3 million if it's not a trading entity
Nothing else is leaping out of the page at me - for future reference, I'm not inclined to do your homework for you - it's not me that should be trying to impress your tutor!
If Kata's business was to provide a service, for which immediate payment from the customer is required upon completion, is it conceivable that the balance sheet would show no trading assets, even though they are trading?
10y ago#3The word "trade" implies buying and selling
If it were a service provider, the more correct expression would be "operating" rather than "trading"
But I suppose you're right - it it is a service provider, that could fit the scenario.
But no cash? No bank? Still looks very fishy to me
Thanks for explaining that, I hadn't appreciated the distinction between trading and operating. I agree, it looks very fishy to me with no cash or bank. I wouldn't buy it.... well, I don't have the money to!
10y ago#5Well, there's certainly something going on when Bolo pays $3 million for a 45% holding of $2.4 million.
Money laundering?
Yes, I'd be on the phone to trading standards straight away, if it wasn't all just hypothetical!
10y ago#7Too late - they already know - I told them!
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