Intra-Group reconciliation

Hello Sir, regarding amount due from subsidiary and parents (payables and receivables) to each other I want to stand on a base and understand which amount I have to cancel out from both the parent and subsidiary should I say that whatever the difference between the two parties in payables and receivables then I should cancel out If you see the below question there was two amounts concerning this matter first $700,000 and the other 3m .In model answer only the 3m was cancelled out and the $700,000 was added to the payables Please clarify this sir specially this sentence as it is telling that the 3m difference between the parties is because of the goods in transit but the goods worth $700,000 only , please clarify sir, 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. Thanks, -------------------------------------------------------------------------------------------------------------------------- Question 305 from Bpp Kit 2020 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 $'000 $'000 Assets Non-current assets Property, plant and equipment (note (i)) 75,200 31,500 Investment in Amery Co at 1 April 20X5 (note (iv)) 4,500 – 79,700 31,500 Current assets Inventory (note (iii)) 19,400 18,800 Trade receivables (note (iii)) 14,700 12,500 Bank 1,200 600 35,300 31,900 Total assets 115,000 63,400 Equity and liabilities Equity 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 86,000 47,000 Non-current liabilities 8% loan notes 5,000 nil Current liabilities (note (iii)) 24,000 16,400 29,000 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 non-controlling interest. (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. Required: Prepare the consolidated statement of financial position for Dargent Co as at 31 March 20X6. (20 marks) Answer DARGENT CO – CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X6 $'000 $'000 ASSETS Non-current assets 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) 5,700 127,200 Current assets 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 64,100 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 59,390 119,390 Non-controlling interest (W4) 9,430 Total equity 128,820 Non-current liabilities 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 $'000 $'000 Controlling interest 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 56,000 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 profit. 2 Inventory 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 $'000 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) 37,390 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) 1,720 4 Non-controlling interest $'000 Fair value on acquisition (W1) 9,000 Post-acquisition profit (1,720 u 25% (W4) 430 9,430