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Hello Mike,
I am having difficulties with the 2 additional information as below
How was the accounting treatment for that 2 addtional information?Highveldt, a public listed company, acquired 75% of Samson’s ordinary shares on 1 April 20X4. Highveldt paid an
immediate Rs.3·50 per share in cash and agreed to pay a further amount of Rs.108 million on 1 April 20X5.
Highveldt’s cost of capital is 8% per annum. Highveldt has only recorded the cash consideration of Rs.3·50 per
share.
The summarised statements of financial position of the two companies at 31 March 20X5 are shown below:
Highveldt Samson
$million $millionTangible non-current assets (note (i)) 420 320
Development costs (note (iv)) Nil 40
Investments (note (ii)) 300 20
Total NCA 720 380
Current assets 133 91
Total assets 853 471
Equity and liabilities
Ordinary shares of Rs.1 each 270 80
Share premium 80 40
Revaluation surplus 45 nil
Retained earnings – 1 April 20X4 160 134
-year to 31 March 20X5 190 76
Total equity 745 330Non-current liabilities
10% inter company loan (note (ii)) Nil 60
Current liabilities 108 81
Total equity and liabilities 853 471(ii) Included in Highveldt’s investments is a loan of Rs.60 million made to Samson at the date of acquisition.
Interest is payable annually in arrears. Samson paid the interest due for the year on 31 March 20X5, but
Highveldt did not receive this until after the year end. Highveldt has not accounted for the accrued
interest from Samson.(iv) Samson’s development project was completed on 30 September 20X4 at a cost of Rs.50 million. Rs.10
million of this had been amortised by 31 March 20X5. Development costs capitalised by Samson at the
date of acquisition were Rs.18 million. Highveldt’s directors are of the opinion that Samson’s
development costs do not meet the criteria in IAS 38 ‘Intangible Assets’ for recognition as an asset.“Included in Highveldt’s investments is a loan of Rs.60 million made to Samson at the date of acquisition. Interest is payable annually in arrears.
Samson paid the interest due for the year on 31 March 20X5, but
Highveldt did not receive this until after the year end.Highveldt has not accounted for the accrued interest from Samson.”
H should have accounted for the interest and needs to make an adjustment now for the cash in transit as follows:
Dr Cash $6 million
Cr Loan interest income $6 millionThe loan interest income in Highveldt and the loan interest expense in Samson are now ignored when preparing the consolidated statement of profit or loss
“Samson’s development project was completed on 30 September 20X4 at a cost of Rs.50 million. Rs.10 million of this had been amortised by 31 March 20X5.
Development costs capitalised by Samson at the date of acquisition were Rs.18 million.
Highveldt’s directors are of the opinion that Samson’s development costs do not meet the criteria in IAS 38 ‘Intangible Assets’ for recognition as an asset.”
The intangible asset in samson recorded as Development Expenditure need to be written off as it fails to satisfy the definition
The value as at date of acquisition needs to be adjusted in the goodwill calculation down to $zero
You can calculate the amount that has been capitalised post-acquisition net of the amount amortised already this year and charge that to post acquisition earnings
Is that ok for you?
H should have accounted for the interest and needs to make an adjustment now for the cash in transit as follows:
Dr Cash $6 million
Cr Loan interest income $6 millionFor the credit side loan interest income, do we need to add the post acquisition earning for the samson’s profit 6 million?
okay I got it I have another difficulties with regards to preference share capital
if the p co buy over s co 80% of the preference share capital
is it we just treat it like intercompany debt? same treatment with like the p co buy the s co loan note?Will affect the goodwill and fair value of net asset of s co calculation?
On the statement of financial position, the preference share figure will be just the 20% that is owned by the nci and there will be zero shown as the parent’s investment in the subsidiary preference shares
Same with the finance cost in the subsidiary and the investment income in the parent – cancel one against the other and leave just the preference dividend paid / payable to the nci as the consolidated finance cost
Is that means we CR Investment 80% of preference share figure
DR Preference share capital for the 80% of the share figure
so it will automatically cancelled each other and the balance 20% go to nci
I would also like to ask if the preference dividend is accrued (have not been paid) and it shows as current liabilities in the sofp of s ltd and current asset in the p ltd
so we need to minus preference dividend payable XXX at s ltd and minus at p ltd dividend receivable?
and how was the consolidated income statement part
if the preference dividend has not been paid when the question given does it will show the preference dividend paid in the finance cost of s co and investment income of p ltd?If the preference dividend/loan interest/ ordinary share dividend is already paid so it will not affect balance sheet? Am I correct?
Unless its have not been paid?
Sorry for keep asking a lot of questionsThat’s six separate questions in there!
I now have to try to pick the bones out of this post – not easy!
The cost of acquisition related to the preference shares is an additional element within the cost of acquisition section of working W2 Goodwill
The NCI part of the preference share capital that is still owned by the nci is added on to the value of their investment in the equity shares and the preference shares themselves are part of the fair valued net assets as at date of acquisition
“Is that means we CR Investment 80% of preference share figure
DR Preference share capital for the 80% of the share figure
so it will automatically cancelled each other and the balance 20% go to nci”If I have understood your understanding then, yes, correct
“I would also like to ask if the preference dividend is accrued (have not been paid) and it shows as current liabilities in the sofp of s ltd and current asset in the p ltd
so we need to minus preference dividend payable XXX at s ltd and minus at p ltd dividend receivable?”Agreed … and that would just leave the preference dividend payable to the nci as a current liability
“and how was the consolidated income statement part if the preference dividend has not been paid when the question given does it will show the preference dividend paid in the finance cost of s co and investment income of p ltd?”
Yes, but on consolidation we have to cancel the investment income (preference dividend received by the parent) against 80% of the preference dividend paid (in the finance costs of the subsidiary)
“If the preference dividend/loan interest/ ordinary share dividend is already paid so it will not affect balance sheet? Am I correct?”
Yes, correct
“Unless its have not been paid?”
Yes, correct
I not really understand about this 2 part that you reply just now
1) The cost of acquisition related to the preference shares is an additional element within the cost of acquisition section of working W2 GoodwillDo you mean
Example:
p ltd co has acquired 60% of the ordinary shares in s co with an immediate cash payment of $1000,000
Addtional information
the p co also purchase 80% of the preference share capital
SOFP
S Co
Equity and Liabilities
Equity share $1 800,000
Preference share capital $1 100,000
retained earning pre 50,000
post 40,000Cost of Investment (COI) 1000,000
60% of fair value of net asset of s co at doa
{60% X ($800,000 share capital+$50,000 retained earning)} (510,000)
Goodwill 490,000
OR
COI 1000,000
60% of fair value of net asset of s co at doa (same as above) (510,000)
PREFERENCE SHARE CAPITAL (80%X$100,000) (80,000)
Goodwill 410,000
OR
do you mean the preference share capital that the p co bought is also part of the fair value of net asset of s co at doa?
OR
it is part of the cost of investment in acquiring the s co?2)The NCI part of the preference share capital that is still owned by the nci is added on to the value of their investment in the equity shares and the preference shares themselves are part of the fair valued net assets as at date of acquisition
For this part that you mentioned preference shares themselves are part of the fair value net assets at doa . The word themselves means nci or parent?
“do you mean the preference share capital that the p co bought is also part of the fair value of net asset of s co at doa?
OR
it is part of the cost of investment in acquiring the s co?”The preference shares are part of the fair value of the net assets and …
… the cost of those preference shares is part of the cost of acquisition
“For this part that you mentioned preference shares themselves are part of the fair value net assets at doa . The word themselves means nci or parent?”
No – the word ‘themselves’ refers to the preference shares!
Do you mean do it in this ways? because the company group control % is different with with purchase the preference share % so have to separately write
It means that when we wanted to calculate the
Question: p ltd co has acquired 60% of the ordinary shares in s co with an immediate cash payment of $1000,000. The fair value of nci is $600,000
Addtional information
the p co also purchase 80% of the preference share capital
SOFP
S Co
Equity and Liabilities
Equity share $1 800,000
Preference share capital $1 100,000
retained earning pre 50,000
post 40,000fair value of net asset of co at
DOA Year End
share capital 800,000 800,000
retained earning 50,000 90,000
preference share capital 100,000 (whole figure include parent and nci) 100,000Goodwill
cost of investment (1000,000+80,000 p/shares) 1080,000
group % fair value of net asset of s co at doa (510,000)
(800,000+50000) X60%
preference share capital (80% X 100,000) (80,000)
Goodwill-parent 490,000Fair value of nci at doa (600,000+20,000 preference share) 620,000
nci % of fair value of net asset of s co at doa
(800,000+50,000)X40% (340,000)
preference share capital (20% X100,000) (20,000)
goodwill- NCI 260,000Yes, but I wouldn’t show it that way …
In working W2 I would have:
Cost of equity investment 1,000,000
Cost of preference investment 80,000
Value of NCI 620,000
Total 1,700,000Fair value of net assets
800,000 + 100,000 + 50,000
Total 950,000Goodwill 1,700,000 – 950,000 = 750,000
I wouldn’t show the 490,000 / 260,000 figures because they have no importance
The only figure of importance after the goodwill calculation is 750,000
on the fact no matter preference share put into calculation of goodwill or not it will still get back the 750000?
so is that means does not put in also can?
or it must put in?You must do for the reason that the %age holdings for the preference shares are different than the %age holdings for the equity shares
okay I got it thanks mike so much
I would also like to ask
how about p co sold plant with a carrying value of 7000 to s co of 10000 depreciation has been provided by s co at 10% on the cost of 10,000 (with a full year charge in the year if acquisition and non in the year of sale) in line with group policy
May I know what is the accounting treatment for its in the consolidated income statement and csofp?We need to eliminate the pup, net of depreciation, from the P retained earnings
Dr P Retained earnings 2,700 (that’s 3,000 – 10% depreciation)
Cr TNCA 2,700That adjustment in retained earnings is fully against P
Does that do it for you?
the answer given for the cis part is add 3000 for unrealised profit on sales of inventory which I understood
but I not understood is y need to minus 300 for depreciation in cogs?Because the subsidiary is charging depreciation on the false, inflated figure and, for the purposes of the consolidation, we need to know what the TNCA figure should be for the group
We need to eliminate the $3,000 profit on the transfer but, after 1 year, 10% depreciation has been ‘realised’ so we need only eliminate $2,700 net unrealised profit
Is that any better?
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