Negative goodwill adjustment

Hello Mr Chris ,

How are you,

Regarding the adjustment of the negative good to the final profit, it should usually be adjusted in the profit & loss i.e to increase the profit of the year

but the reason we adjusted it in the parent final retained earnings was because the figure of the retained earnings was before adjustment.

So usually it should go to the profit and loss only , am I right ??

Likewise to the faire value of the consideration being revalued ,

Thanks,

Q
397 POLESTAR
Note that the level of work required to answer this question is beyond that to be expected
within the exam However, it provides a useful revision exercise as it tests both statements
of profit or loss and financial position.
On 1 April 20X3, Polestar acquired 75% of Southstar. Southstar had been experiencing
difficult trading conditions and making significant losses. In allowing for Southstar’s
difficulties, Polestar made an immediate cash payment of only $1.50 per share. In addition,
Polestar will pay a further amount in cash on 30 September 20X4 if Southstar returns to
profitability by that date. The fair value of this contingent consideration at the date of
acquisition was estimated to be $1.8 million, but at 30 September 20X3 in the light of
continuing losses, its value was estimated at only $1.5 million. The contingent consideration
has not been recorded by Polestar. Overall, the directors of Polestar expect the acquisition
to be a bargain purchase leading to negative goodwill.
Below are the summarised draft financial statements of both entities.
Statements of profit or loss for the year ended 30 September 20X3
Polestar Southstar
$000 $000
Revenue 110,000 66,000
Cost of sales (88,000) (67,200)
––––––– –––––––
Gross profit (loss) 22,000 (1,200)
Operating expenses (8,500) (4,400)
––––––– –––––––
Profit (loss) before tax 13,500 (5,600)
Income tax (expense)/relief (3,500) 1,000
––––––– –––––––
Profit (loss) for the year 10,000 (4,600)
––––––– –––––––

Statements of financial position as at 30 September 20X3
Polestar Southstar
Assets $000 $000
Non?current assets
Property, plant and equipment 41,000 21,000
Investments 13,500

Current assets 19,000 4,800
––––––– –––––––
Total assets 73,500 25,800
––––––– –––––––
Equity and liabilities
Equity shares of 50 cents each 30,000 6,000
Retained earnings 28,500 12,000
––––––– –––––––
58,500 18,000
Current liabilities 15,000 7,800
––––––– –––––––
Total equity and liabilities 73,500 25,800
––––––– –––––––
The following information is relevant:
(i) At the date of acquisition, the fair values of Southstar’s assets were equal to their
carrying amounts with the exception of a property. This had a fair value of $2 million
above its carrying amount and a remaining useful life of 10 years at that date. All
depreciation is included in cost of sales.
(ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 20X3.
Southstar processed all of these materials incurring additional direct costs of $1.4
million and sold them back to Polestar in August 20X3 for $9 million. At 30 September
20X3 Polestar had $1.5 million of these goods still in inventory. There were no other
intra?group sales.
(iii) Polestar’s policy is to value the non?controlling interest at fair value at the date of
acquisition. This was deemed to be $3.6 million.
(iv) All items in the above statements of profit or loss are deemed to accrue evenly over
the year unless otherwise indicated.
Required:

(a) Prepare the consolidated statement of profit or loss for Polestar for the year ended
30 September 20X3.
(b) Prepare the consolidated statement of financial position for Polestar as at 30 September
20X3.
There is no mark allocation for this question because the level of work required to answer
this question is beyond that to be expected within the exam.
However, it provides a useful revision exercise as it tests both statements of profit or loss
and financial position.

Answer

(W5) Group retained earnings
$000
Polestar’s retained earnings 28,500
Southstar’s post?acquisition losses((3,000) (W2) × 75%) (2,250)
Change in contingent consideration 300
Gain on bargain purchase (W3) 3,400
––––––
29,950