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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
Well 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?
The 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!
Well, 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!
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