Inventory cost and fare value difference

Hello Sir ,

If there is a difference at acquisition of some inventory cost and fare value of that inventory. what will be the effect on the profit at acquisition and at the post acquisition ,

for the calculation of net asset at acquisition and for NCI at the reporting date

as in the following exam question

Q
The following are the draft statements of financial position of Party Co and Streamer Co as at 30 September 20X5:
Party Co Streamer Co
$’000 $’000
ASSETS
Non-current assets
Property, plant and equipment 392,000 84,000
Investments 120,000 Nil –––––––– ––––––––
512,000 84,000
Current assets 94,700 44,650 –––––––– ––––––––
Total assets 606,700 128,650 –––––––– ––––––––
EQUITY AND LIABILITIES
Equity
Equity shares 190,000 60,000
Retained earnings 210,000 36,500
Revaluation surplus 41,400 4,000 –––––––– ––––––––
441,400 100,500
Non-current liabilities
Deferred consideration 28,000 Nil
Current liabilities 137,300 28,150 –––––––– ––––––––
Total equity and liabilities 606,700 128,650 –––––––– ––––––––
The following information is relevant:
(i) On 1 October 20X4, Party Co acquired 80% of the share capital of Streamer Co. At this date the retained earnings
of Streamer Co were $34m and the revaluation surplus stood at $4m. Party Co paid an initial cash amount of
$92m and agreed to pay the owners of Streamer Co a further $28m on 1 October 20X6. The accountant has
recorded the full amounts of both elements of the consideration in investments. Party Co has a cost of capital of
8%. The appropriate discount rate is 0·857.
(ii) On 1 October 20X4, the fair values of Streamer Co’s net assets were equal to their carrying amounts with the
exception of some inventory which had cost $3m but had a fair value of $3·6m. On 30 September 20X5, 10%
of these goods remained in the inventories of Streamer Co.
(iii) During the year, Party Co sold goods totalling $8m to Streamer Co at a gross profit margin of 25%. At 30 September
20X5, Streamer Co still held $1m of these goods in inventory. Party Co’s normal margin (to third party customers)
is 45%.
(iv) The Party group uses the fair value method to value the non-controlling interest. At acquisition the non-controlling
interest was valued at $15m.
Required:
(a) Prepare the consolidated statement of financial position of the Party group as at 30 September 20X5.
(15 marks)
(b) Party Co has a strategy of buying struggling businesses, reversing their decline and then selling them on at a profit
within a short period of time. Party Co is hoping to do this with Streamer Co.
As an adviser to a prospective purchaser of Streamer Co, explain any concerns you would raise about making an
investment decision based on the information available in the Party Group’s consolidated financial statements
in comparison to that available in the individual financial statements of Streamer Co. (5 marks)
(20 marks

Answer

32 (a) Consolidated statement of financial position for Party Co as at 30 September 20X5
$’000
Assets
Non-current assets:
Property, plant and equipment (392,000 + 84,000) 476,000
Investments (120,000 – 92,000 – 28,000) 0
Goodwill (w3) 32,396 ––––––––
508,396
Current assets: (94,700 + 44,650 + 60 FV – 250 URP) 139,160 ––––––––
Total assets 647,556 ––––––––
Equity and liabilities
Equity:
Share capital 190,000
Retained earnings (w5) 209,398
Revaluation surplus 41,400 ––––––––
440,798
Non-controlling interest (w4) 15,392 ––––––––
Total equity 456,190
Non-current liabilities:
Deferred consideration (23,996 + 1,920) 25,916
Current liabilities: (137,300 + 28,150) 165,450 ––––––––
Total equity and liabilities 647,556 ––––––––
Working 1 – Group structure
Party Co owns 80% of Streamer Co.
Party Co has owned Streamer Co for one year.
Working 2 – Net assets
Acquisition SOFP date Post acq
$’000 $’000 $’000
Share capital 60,000 60,000 0
Retained earnings 34,000 36,500 2,500
Revaluation surplus 4,000 4,000 0
Fair value adj inventory 600 60 (540) ––––––– –––––––– ––––––
98,600 100,560 1,960 ––––––– –––––––– ––––––
Working 3 – Goodwill
$’000
Cash 92,000
Deferred cash (28m x 0·857) 23,996
NCI at acquisition 15,000
Less: Net assets at acquisition (98,600) –––––––– Goodwill at acquisition 32,396
––––––––
9
Working 4 – Non-controlling interest
$’000
NCI at acquisition 15,000
NCI % of Streamer post acquisition (1,960 x 20%) 392 –––––––
15,392
–––––––
Working 5 – Retained earnings
$’000
Party Co 210,000
P’s % of Streamer post acquisition RE (1,960 x 80%) 1,568
Unwinding discount on deferred consideration (23,996 x 8%) (1,920)
Unrealised profit (1,000 x 25%) (250) ––––––––
209,398
–––––––