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Good evening Prospective ACCA Students,
This is a consolidation SPL question from Kaplan kit page 172. I don’t understand why they calculated the Retained Earnings in the Goodwill like that (RE 1st Oct 20×7 + 1st Oct 20×7 – 1st January 20X8). Also, I don’t understand why the NCI in the Goodwill calculation and NCI for consolidated SPL is calculated differently. I have included the calculations for your explanation in the answer section.
CHANG CO
On 1 January 20X8 Chang Co acquired 80% of the 8 million $1 equity share capital of Sing Co.
Chang Co issued three new shares in exchange for every five shares it acquired in Sing Co.
Additionally Chang Co will pay further consideration on 31 December 20X8 of $2.20 per share
acquired. Chang Co’s cost of capital is 10% per annum and the discount factor at 10% for one
year is 0.9091. At the date of acquisition, the fair value of Chang Co’s shares was $9 each.
Statement of profit or loss for the year ended 30 September 20X8:
Chang Co Sing Co
$000 $000
Revenue 51,680 30,400
Cost of sales (30,960) (20,800)
––––––– –––––––
Gross profit 20,720 9,600
Distribution costs (1,280) (1,490)
Administrative expenses (3,040) (1,870)
Investment income 400 –
Finance costs (336) –
––––––– –––––––
Profit before tax 16,464 6,240
Income tax expense (2,240) (1,280)
––––––– –––––––
Profit for the year 14,224 4,960
––––––– –––––––
The following information is relevant:
(1) At 1 October 20X7, the retained earnings of Sing Co were $28m.
(2) At the date of acquisition, the fair value of Sing Co’s assets was equal to their carrying
amounts with the exception of two items:
An item of plant had a fair value of $1.8m above its carrying amount. The remaining
life of the plant at the date of acquisition was three years. Depreciation is charged to
cost of sales.
Sing Co had a contingent liability which Chang Co estimated to have a fair value of
$400,000. This has not changed as at 30 September 20X8.
Sing Co has not incorporated these fair value changes into its financial statements.
(3) Chang Co’s policy is to value the non controlling interest at acquisition as a proportion
of the subsidiary’s net assets.
(4) Sales from Sing Co to Chang Co in the post acquisition period had consistently been
$300,000 per month. Sing Co made a margin of 25% on these sales. Chang Co’s
inventory included $600,000 of these goods at 30 September 20X8.
(5) Chang Co’s investment income is a dividend received from its investment in a 30%
owned associate which it has held for several years. The associate made a profit after
tax of $1m for the year ended 30 September 20X8.
CONSTRUCTED RESPONSE QUESTIONS – SECTION C: SECTION 3
KAPLAN PUBLISHING 173
(6) On 1 October 20X7 Chang Co issued 50,000 $100 6% convertible loan notes at par
value, with interest payable annually in arrears over a five year term. The equivalent
rate for non convertible loan notes was 8%. Chang Co has recorded the loan notes as
a liability at par value and charged the annual 6% interest to finance costs.
Year 5 discount
factors
5 years annuity
factors
6% 0.747 4.212
8% 0.681 3.993
(7) At 30 September 20X8 goodwill is to be impaired by $1 million.
(8) Profits accrue evenly throughout the year unless otherwise stated.
Required:
(a) Calculate the goodwill arising on the acquisition of Sing Co. (5 marks)
(b) Prepare the consolidated statement of profit or loss for Chang Co for the year ended
30 September 20X8.Answers (a)
Goodwill
$000 $000
Consideration:
Deferred cash (80% × 8,000 × $2.20 × 0.9091) 12,800
Shares (80% × 8,000 × 3/5 × $9) 34,560
–––––––
47,360
Non controlling interest (NCI) (20% × $38,640) 7,728
–––––––
55,088
Less: fair value of net assets at acquisition
Equity shares 8,000
Retained earnings:
At 1 October 20X7 28,000
1 October 20X7–1 January 20X8 ($4,960 × 3/12) 1,240
Fair value adjustments:
Plant 1,800
Contingent liability (400)
––––––– (38,640)
–––––––
Goodwill 16,448(b) (W5) Non controlling interest
$000
Sing Co profit for the year ($4,960 × 9/12) 3,720
PUP (W1) (150)
Fair value depreciation (W2) (450)
––––––
Sing Co adjusted profit 3,120
––––––
NCI share 20% 624In terms of the goodwill calculation. All that has been done is to calculate the increase in the retained earnings from the end of the financial year to the date of the acquisition. For the three months between October to December inclusive.
For your second question, we are looking at the nci figure for the profit and loss statement not the figure for the statement of financial position.
This time (for profit and loss calculation) you are considering the flow of profit over the nine months since the acquisition. From January to September inclusive. Adjustments need to be made including unrealised profit from intra-group trading and from excess depreciation on the revalued plant.
following up to the goodwill question, I am not quite clear as to why they pro-rated the S.Co’s profit for the year $ 4,960 for 3 months (1 Oct,20×7 to 1 Jan, 20×8) why not include the full $4,960 profit since this amount was reported at the year-end 30 September, 20×8.
1 Jan 2008 is the date of acquisition. This is the key date for the calculatin of Goodwill. Goodwill is the difference between the full consideration given and the fair value of the net assets obtained. The profit for the three months before the date of acquisition was earned by Sing Co as an independent entity. This therefore contributed to the net assets of Sing Co at the date of acquisition and therefore should be included in the Goodwill calculation.
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