Additional Depreciation ,goodwill impairment and NCI

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

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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.

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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