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BPP Revision Kit F7 Mock 2 2016-2017 has the following question:
On 1 December 20X4 Scaffold acquired 80% of the 3,000,000 issued ordinary shares of Plank. The consideration for each share acquired comprised a cash payment of $1.20 and two ordinary shares in Scaffold. The market value of a $1 ordinary share in Scaffold on 1 December 20X4 was $1.50, rising to $1.60 by the entity’s year end on 31 December 20X4. Professional fees paid to Scaffold’s external accountants and legal advisors in respect of the acquisition were $400,000.
At what amount would the investment in Plank be recorded in the entity financial statements of Scaffold for the year ended 31 December 20X4?The solution given in the book is:
$10,080,000
$’000
Cash (80% × 3 million × $1.20) 2,880
Shares (80% × 3 million × 2 × $1.50) 7,200
10,080
The answer is $10,08m
I think share should be valued at 31.12.20X4, which is $1.6 rather than $1.5 per share (as the solution given above), and should add $0,4m of professional fees to arrive at the answer $10,96m as it should be measured at FVTOCI because it’s not held for trading.
Please help me verify this!
Thank you!“I think share should be valued at 31.12.20X4”
No, the answer is correct. The market value of a share has nothing at all to do with the company itself
It is a figure that is determined by the forces of supply and demand – I want to buy shares in British Telecom – I need to find someone that is willing to sell. So I make an offer 2 cents higher than the market price and the owner of those shares accepts my offer.
How has this got anything at all to do with British Telecom the company?
And how would the company know?
The company has no control over the market price of a share and the value of the shares as at date of acquisition is there simply to measure the value of the consideration paid for the acquisition of the subsidiary
OK?
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