- October 25, 2021 at 2:44 pm #639070
In the following question there were two additional adjustments. I don’t know why there were not adjusted from the group retained earnings figure ,
The mine depreciation for three months
and interest on the provision of decommissioning of mine for three months
since they were arisen during the year and were not included in years profit,so why not to include them as adjustments in the group profit,
305 Dargent Co (Mar/Jun17) 36 mins
On 1 January 20X6, Dargent Co acquired 75% of Latree Co’s equity shares by means of a share exchange of
two shares in Dargent Co for every three Latree Co shares acquired. On that date, further consideration was also
issued to the shareholders of Latree Co in the form of $100 8% loan notes for every 100 shares acquired in
Latree Co. None of the purchase consideration, nor the outstanding interest on the loan notes at 31 March 20X6,
has yet been recorded by Dargent Co. At the date of acquisition, the share price of Dargent Co and Latree Co is
$3·20 and $1·80 respectively.
The summarised statements of financial position of the two companies as at 31 March 20X6 are:
Dargent Co Latree Co
Property, plant and equipment (note (i)) 75,200 31,500
Investment in Amery Co at 1 April 20X5 (note (iv)) 4,500 –
Inventory (note (iii)) 19,400 18,800
Trade receivables (note (iii)) 14,700 12,500
Bank 1,200 600
Total assets 115,000 63,400
Equity and liabilities
Equity shares of $1 each 50,000 20,000
Retained earnings – at 1 April 20X5 20,000 19,000
– for year ended 31 March 20X6 16,000 8,000
8% loan notes 5,000 nil
Current liabilities (note (iii)) 24,000 16,400
Total equity and liabilities 115,000 63,400
The following information is relevant:
(i) At the date of acquisition, the fair values of Latree Co’s assets were equal to their carrying amounts.
However, Latree Co operates a mine which requires to be decommissioned in five years’ time. No provision
has been made for these decommissioning costs by Latree Co. The present value (discounted at 8%) of the
decommissioning is estimated at $4million and will be paid five years from the date of acquisition (the end
of the mine’s life).
(ii) Dargent Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. Latree Co’s
share price at that date can be deemed to be representative of the fair value of the shares held by the
(iii) The inventory of Latree Co includes goods bought from Dargent Co for $2·1million. Dargent Co applies a
consistent mark-up on cost of 40% when arriving at its selling prices.
On 28 March 20X6, Dargent Co despatched goods to Latree Co with a selling price of $700,000. These
were not received by Latree Co until after the year end and so have not been included in the above
inventory at 31 March 20X6.
At 31 March 20X6, Dargent Co’s records showed a receivable due from Latree Co of $3million, this
differed to the equivalent payable in Latree Co’s records due to the goods in transit.
The intra-group reconciliation should be achieved by assuming that Latree Co had received the goods in
transit before the year end.
(iv) The investment in Amery Co represents 30% of its voting share capital and Dargent Co uses equity
accounting to account for this investment. Amery Co’s profit for the year ended 31 March 20X6 was
$6million and Amery Co paid total dividends during the year ended 31 March 20X6 of $2million. Dargent
Co has recorded its share of the dividend received from Amery Co in investment income (and cash).
(v) All profits and losses accrued evenly throughout the year.
(vi) There were no impairment losses within the group for the year ended 31 March 20X6.
Prepare the consolidated statement of financial position for Dargent Co as at 31 March 20X6.
DARGENT CO – CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X6
Property, plant and equipment (75,200+31,500+4,000 re mine – 200 depreciation) 110,500
Goodwill (W1)) 11,000
Investment in associate (4,500+1,200 (W3) 5,700
Inventories (19,400+18,800+700 GIT – 800 URP (W2) 38,100
Trade receivables (14,700 + 12,500 – 3,000) 24,200
Cash and cash equivalents (1,200+600) 1,800
Total assets 191,300
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Equity shares of $1 each ( 50,000 + 10,000 (W1)) 60,000
Other equity reserves (share premium) (W1) 22,000
Retained earnings (W3) 37,390 59,390
Non-controlling interest (W4) 9,430
Total equity 128,820
8% loan notes (5,000 +15,000 consideration) 20,000
Accrued loan interest (W3) 300
Environmental provision (4,000 + 80 interest (W3)) 4,080 24,380
Current liabilities (24,000+16,400-(3,000-700 GIT) intra-group W2)) 38,100
Total equity and liabilities 191,300
Workings (figures in brackets are in $’000)
1 Goodwill in Latree Co
Share exchange (20,000 u 75% u 2/3 = 10,000 u $3.20) 32,000
8% loan notes (20,000 u 75% u $1,000/1,000) 15,000
Non-controlling interest (20,000 u 25% u $1.80) 9,000
Equity shares 20,000
Retained earnings at 1 April 20X5 19,000
Earnings 1 April 20X5 to acquisition (8,000 u 9/12) 6,000
Fair value adjustments – asset re mine 4,000
– Provision re mine (4,000) (45,000)
Goodwill arising on acquisition 11,000
The share exchange of $32 million would be recorded as share capital of $10 million (10,000 u $1) and
share premium of $22 million (10,000 u ($3.20 – $1.00)).
Applying the group policy to the environmental provision would mean adding $4 million to the carrying
amount of the mine and the amount recorded as a provision at the date of acquisition. This has no overall
effect on goodwill, but it does affect the consolidated statement of financial position and post-acquisition
The inventory of Latree Co includes unrealised profit (URP) of $600,000 (2,100 u 40/140). Similarly, the
goods in transit sale of $700,000 includes URP of $200,000 (700 u 40/140).
3 Consolidated retained earnings
Dargent Co’s retained earnings 36,000
Latree Co’s post-acquisition profit (1,720 x 75% see below) 1,290
Unrecorded share of Amery’s retained profit ((6,000 – 2,000) u 30%) 1,200
Outstanding loan interest at 31 March 20X6 (15,000 u 8% u 3/12) (300)
URP in inventory (W2) (800)
The adjusted post-acquisition profits of Latree Co are:
As reported and time apportioned (8,000 u 3/12) 2,000
Interest on environmental provision (4,000 u 8% u 3/12) (80)
Additional depreciation re.mine (4,000/5 years u 3/12) (200)
4 Non-controlling interest
Fair value on acquisition (W1) 9,000
Post-acquisition profit (1,720 u 25% (W4) 430
9,430October 30, 2021 at 9:43 am #639453
Are they not adjusted for in the number 3 working?November 18, 2021 at 10:00 am #640956
I have a confusion about those two expenses why they were not included in retained earnings of the group as direct deductions in the group retained earnings not only as adjustments in the NCI profit.
Since they were expenses arisen after acquisition then must be included in the year expenses in group P&L , am I right ?
Why in the model answer they were adjusted only in NCI profit ,in the time I think that they have to be adjusted in both NCI profit and group retained earnings,
Please clarify Sir,
Thank you very much Sir.November 20, 2021 at 8:43 am #641130
The mine is in the accounts of the subsidiary so any adjustment will be made in the subsidiary’s net assets working and the retained earnings within it.
ThanksNovember 20, 2021 at 5:07 pm #641183
Still it is not clear to me ,why for other expenses when we look to the accounts of both parent and subsidiary and we consolidate the expenses of both of them in group accounts ,so why these two expenses are not consolidated even though we know that they happened during the year.
I think I am missing some point,
Thanks,November 27, 2021 at 8:07 am #641756
They are included in the third working with the 1720 figure they have calculated for the post acquisition profit figure.
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