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Additional Depreciation ,goodwill impairment and NCI

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Additional Depreciation ,goodwill impairment and NCI

  • This topic has 3 replies, 3 voices, and was last updated 3 years ago by P2-D2.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 18, 2021 at 11:07 pm #638376
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Hello Sir,

    Where should the following go to the subsidiary account or parent accounts:

    Impairment of goodwill
    Additional Depreciation due to fare value difference

    as in the following question it is asking for calculation of group retained earnings so they deducted these two from subsidiary

    but shouldn’t them be included in consolidated P&L and consequently affecting the profit for the year,

    Please clarify Sir,

    Thanks

    _________________________________________________________________________________

    Q

    301 Plastik Co (Dec14 amended) 36 mins
    On 1 January 20X4, Plastik Co acquired 80% of the equity share capital of Subtrak Co. The consideration was
    satisfied by a share exchange of two shares in Plastik Co for every three acquired shares in Subtrak Co. At the date
    of acquisition, shares in Plastik Co and Subtrak Co had a market value of $3 and $2.50 each respectively. Plastik Co
    will also pay cash consideration of 27.5 cents on 1 January 20X5 for each acquired share in Subtrak Co. Plastik Co
    has a cost of capital of 10% per annum. None of the consideration has been recorded by Plastik Co.
    Below are the summarised draft financial statements of both companies.
    STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30
    SEPTEMBER 20X4
    Plastik Co Subtrak Co
    $’000 $’000
    Revenue 62,600 30,000
    Cost of sales (45,800) (24,000)
    Gross profit 16,800 6,000
    Distribution costs (2,000) (1,200)
    Administrative expenses (3,500) (1,800)
    Finance costs (200) –
    Profit before tax 11,100 3,000
    Income tax expense (3,100) (1,000)
    Profit for the year 8,000 2,000

    Plastik Co Subtrak Co
    Other comprehensive income:
    Gain on revaluation of property 1,500 –
    Total comprehensive income 9,500 2,000
    STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X4
    Plastik Co Subtrak Co
    $’000 $’000
    ASSETS
    Non-current assets
    Property, plant and equipment 18,700 13,900
    Current assets
    Inventories (note(ii)) 4,300 1,200
    Trade receivables 5,700 2,500
    Cash and cash equivalents – 300
    10,000 4,000
    Total assets 28,700 17,900
    EQUITY AND LIABILITIES
    Equity
    Equity shares of $1 each 10,000 9,000
    Revaluation surplus (note(i)) 2,000 –
    Retained earnings 6,300 3,500
    18,300 12,500
    Non-current liabilities
    10% loan notes (note(ii)) 2,500 1,000
    Current liabilities
    Trade payables (note(iv)) 3,400 3,600
    Bank 1,700 –
    Current tax payable 2,800 800
    7,900 4,400
    Total equity and liabilities 28,700 17,900
    The following information is relevant:
    (i) At the date of acquisition, the fair values of Subtrak Co’s assets and liabilities were equal to their carrying
    amounts with the exception of Subtrak Co’s property which had a fair value of $4 million above its carrying
    amount. For consolidation purposes, this led to an increase in depreciation charges (in cost of sales) of
    $100,000 in the post-acquisition period to 30 September 20X4. Subtrak Co has not incorporated the fair
    value property increase into its entity financial statements.
    The policy of the Plastik Co group is to revalue all properties to fair value at each year end. On 30 September
    20X4, the increase in Plastik Co’s property has already been recorded, however, a further increase of $600,000 in
    the value of Subtrak Co’s property since its value at acquisition and 30 September 20X4 has not been recorded.
    (ii) Sales from Plastik Co to Subtrak Co throughout the year ended 30 September 20X4 had consistently been
    $300,000 per month. Plastik Co made a mark-up on cost of 25% on all these sales. $600,000 (at cost to
    Subtrak Co) of Subtrak Co’s inventory at 30 September 20X4 had been supplied by Plastik Co in the
    post-acquisition period.
    (iii) Plastik Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this
    purpose Subtrak Co’s share price at that date can be deemed to be representative of the fair value of the
    shares held by the non-controlling interest.
    (iv) Due to recent adverse publicity concerning one of Subtrak Co’s major product lines, the goodwill which
    arose on the acquisition of Subtrak Co has been impaired by $500,000 as at 30 September 20X4. Goodwill
    impairment should be treated as an administrative expense.
    (v) Assume, except where indicated otherwise, that all items of income and expenditure accrue evenly
    throughout the year.

    Required
    (a) Calculate the goodwill arising on the acquisition of Subtrak Co on 1 January 20X4. (4 marks)
    (b) Calculate the following amounts for presentation in the consolidated statement of financial position:
    (i) Group retained earnings
    (ii) Non-controlling interest (6 marks)
    (c) Prepare the consolidated statement of profit or loss and other comprehensive income for Plastik Co for the
    year ended 30 September 20X4.

    _______________________________________________________________________________

    Answer
    (a) Goodwill
    $’000 $’000
    Consideration transferred – 4.8m shares @ $3 14,400
    Deferred consideration (7.2m × $0.275 × 1/1.1) 1,800
    16,200
    Fair value of NCI (1.8m shares @ $2.50) 4,500
    20,700
    Fair value of net assets:
    Shares 9,000
    Retained earnings (3,500 – (2,000 × 9/12)) 2,000
    Fair value adjustment – property 4,000
    (15,000)
    Goodwill at acquisition 5,700
    (b) Retained earnings
    Plastik Subtrak
    $’000 $’000
    Per question 6,300 3,500
    Less pre-acquisition (1,500 + (2,000 × 3/12)) (2,000)
    Goodwill impairment (500)
    Unwinding of discount on deferred consideration (1,800
    (a) × 10% × 9/12) (135)
    Depreciation on FVA (100)
    PURP (600,000 × 25/125) (120)
    6,045 900
    Share of Subtrak Co (900 × 80%) 720
    6,765

    Non-controlling interest
    $’000
    NCI at acquisition (see goodwill) 4,500
    Share of post-acquisition retained earnings (900 × 20%) 180
    Share of property revaluation gain (600 × 20%) 120
    4,800
    (c) CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
    ENDED 30 SEPTEMBER 20X4
    $’000
    Revenue (62,600 + (30,000 × 9/12) – 2,700 (W2)) 82,400
    Cost of sales (45,800 + (24,000 × 9/12) – 2,580 (W2) + 100 (b)) 61,320
    Gross profit 21,080
    Distribution costs (2,000 + (1,200 × 9/12)) (2,900)
    Administrative expenses (3,500 + (1,800 × 9/12) + 500 (goodwill)) (5,350)
    Finance costs (200 + 135 (see retained earnings)) (335)
    Profit before tax 12,495
    Income tax (3,100 + (1,000 × 9/12)) (3,850)
    8,645
    Other comprehensive income
    Gain on revaluation of property (1,500 + 600) 2,100
    Total comprehensive income 10,745
    Profit for the year attributable to:
    Owners of the parent (?) 8,465
    Non-controlling interest (W1) 180
    8,645
    Total comprehensive income attributable to:
    Owners of the parent (?) 10,445
    Non-controlling interest (W1) 300
    10,745
    Workings
    1 Non-controlling interests
    Profit for year Total comprehensive income
    $’000 $’000
    Per (b) above 900 900
    Gain on property revaluation 600
    900 1,500
    NCI 20% 180 300
    2 Intragroup trading
    $’000 $’000
    (1) Cancel intragroup sales/purchases
    DEBIT Group revenue (300,000 × 9) 2,700
    CREDIT Group cost of sales 2,700
    (2) Eliminate unrealised profit
    DEBIT Cost of sales (600,000 × 25/125) 120
    CREDIT Group inventories 12

    October 20, 2021 at 8:04 pm #638647
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    Additional depreciation is usually recongised through cost of sales.

    Goodwill impairment is recognsied as an administrative expense.

    Thanks

    November 12, 2021 at 2:33 am #640451
    Nikitagarwal
    Participant
    • Topics: 154
    • Replies: 147
    • ☆☆☆

    Hi Sir,
    To add on the above question , for goodwill calculation while calculating Retained earning we have deducted 2000*6/12 -3000 , however a question above to it “Prodigal Co” – in BPP revision kit , we have added the profit , Can you please help me understand what changes in the CY question here?

    November 13, 2021 at 9:00 am #640542
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    This is similar to your earlier question. It all depends on the information given in the question as to what you are adjusting. Is it the opening retained earnings to which you will add on the profit to the date of acquisition? Or, is it the closing retained earning to which you will deduct the post-acquisition profit.

    Thanks

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