PUP on transfer of asset

Hi Sir, How are you. Sir, can clarify this Pup adjustment as a result of transfer of plant and netted of depreciation for the following question. In their working #3 ,why they adjusted the depreciation .It must had been calculated within the subsidiary accounts. also their amounts in the entry. Thanks, _________________________________________________________________________________ Q 301 Plastik Co (Dec14 amended) 36 mins On 1 January 20X4, Plastik Co acquired 80% of the equity share capital of Subtrak Co. The consideration was satisfied by a share exchange of two shares in Plastik Co for every three acquired shares in Subtrak Co. At the date of acquisition, shares in Plastik Co and Subtrak Co had a market value of $3 and $2.50 each respectively. Plastik Co will also pay cash consideration of 27.5 cents on 1 January 20X5 for each acquired share in Subtrak Co. Plastik Co has a cost of capital of 10% per annum. None of the consideration has been recorded by Plastik Co. Below are the summarised draft financial statements of both companies. STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X4 Plastik Co Subtrak Co $'000 $'000 Revenue 62,600 30,000 Cost of sales (45,800) (24,000) Gross profit 16,800 6,000 Distribution costs (2,000) (1,200) Administrative expenses (3,500) (1,800) Finance costs (200) – Profit before tax 11,100 3,000 Income tax expense (3,100) (1,000) Profit for the year 8,000 2,000 Plastik Co Subtrak Co Other comprehensive income: Gain on revaluation of property 1,500 – Total comprehensive income 9,500 2,000 STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X4 Plastik Co Subtrak Co $'000 $'000 ASSETS Non-current assets Property, plant and equipment 18,700 13,900 Current assets Inventories (note(ii)) 4,300 1,200 Trade receivables 5,700 2,500 Cash and cash equivalents – 300 10,000 4,000 Total assets 28,700 17,900 EQUITY AND LIABILITIES Equity Equity shares of $1 each 10,000 9,000 Revaluation surplus (note(i)) 2,000 – Retained earnings 6,300 3,500 18,300 12,500 Non-current liabilities 10% loan notes (note(ii)) 2,500 1,000 Current liabilities Trade payables (note(iv)) 3,400 3,600 Bank 1,700 – Current tax payable 2,800 800 7,900 4,400 Total equity and liabilities 28,700 17,900 The following information is relevant: (i) At the date of acquisition, the fair values of Subtrak Co's assets and liabilities were equal to their carrying amounts with the exception of Subtrak Co's property which had a fair value of $4 million above its carrying amount. For consolidation purposes, this led to an increase in depreciation charges (in cost of sales) of $100,000 in the post-acquisition period to 30 September 20X4. Subtrak Co has not incorporated the fair value property increase into its entity financial statements. The policy of the Plastik Co group is to revalue all properties to fair value at each year end. On 30 September 20X4, the increase in Plastik Co's property has already been recorded, however, a further increase of $600,000 in the value of Subtrak Co's property since its value at acquisition and 30 September 20X4 has not been recorded. (ii) Sales from Plastik Co to Subtrak Co throughout the year ended 30 September 20X4 had consistently been $300,000 per month. Plastik Co made a mark-up on cost of 25% on all these sales. $600,000 (at cost to Subtrak Co) of Subtrak Co's inventory at 30 September 20X4 had been supplied by Plastik Co in the post-acquisition period. (iii) Plastik Co's policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Subtrak 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. (iv) Due to recent adverse publicity concerning one of Subtrak Co's major product lines, the goodwill which arose on the acquisition of Subtrak Co has been impaired by $500,000 as at 30 September 20X4. Goodwill impairment should be treated as an administrative expense. (v) Assume, except where indicated otherwise, that all items of income and expenditure accrue evenly throughout the year. Required (a) Calculate the goodwill arising on the acquisition of Subtrak Co on 1 January 20X4. (4 marks) (b) Calculate the following amounts for presentation in the consolidated statement of financial position: (i) Group retained earnings (ii) Non-controlling interest (6 marks) (c) Prepare the consolidated statement of profit or loss and other comprehensive income for Plastik Co for the year ended 30 September 20X4. ------------------------------------------------------------------------------------------------------------------------------------- Answer (a) Goodwill on acquisition of Sentinel Co $'000 $'000 Consideration (((160,000 × 75%) × 2/3) × $4) 320,000 Fair value of non-controlling interest 100,000 420,000 Fair value of net assets: Shares 160,000 Other equity reserve (2,200-(400 × 6/12)*) 2,000 Retained earnings (125,000 + (66,000 × 6/12)) 191,000 (353,000) Goodwill 67,000 *Note. Of the $400,000 loss on the investment in equity instruments, half (6/12) is pre-acquisition and goes to the goodwill calculation. The remainder is post-acquisition and goes to the consolidated statement of profit or loss. (b) CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 20X1 $'000 Revenue (450,00 + (240,000 × 6/12) – (W4) 40,000) 530,000 Cost of sales (260,000 + (110,000 × 6/12) + (W3) 800 – (W4) 40,000 + 3,000) (278,800) Gross profit 251,200 Distribution costs (23,600 + (12,000 × 6/12)) (29,600) Administrative expenses (27,000 + (23,000 × 6/12)) (38,500) Finance costs (1,500 + (1,200 × 6/12)) (2,100) Profit before tax 181,000 Income tax expense (48,000 + (27,800 × 6/12)) (61,900) Profit for the year 119,100 Other comprehensive income: Gain on land revaluation (2,500 + 1,000)* 3,500 Investments in equity instruments (700 + (400 × 6/12)) (900) Other comprehensive income, net of tax 2,600 Total comprehensive income for the year 121,700 Profit attributable to: Owners of the parent (bal) 111,550 Non-controlling interests (W2) 7,550 119,100 Total comprehensive income attributable to: Owners of the parent (bal) 113,950 Non-controlling interests (W2) 7,750 121,700 *All post-acquisition Workings 1 Group structure and timeline Prodigal Co Sentinel Co 1.10.20X0 75% 1.4.20X0 1.10.20X0 31.3.20X1 Prodigal Co > Sentinel Co × 6/12 2 Non-controlling interests Profit for year Total comprehensive income $'000 $'000 Per question (66,000 × 6/12) ((66,000 – 400) × 6/12 + 1,000)) 33,000 33,800 Non-current asset PURP (W3) excess depreciation 200 200 PUP (W4) (3,000) (3,000) 30,200 31,000 × 25% 25% 7,550 7,750 3 Transfer of plant $'000 1.10.20X0 Profit on transfer (5,000 – 4,000) 1,000 Proportion depreciated (½ / 2½) (200) Adjustment to plant 800 Required adjustment: Dr Cost of sales (and retained earnings) 850 Cr Plant 800 Cr NCI (200 × 25%) 50 Note that the excess depreciation is credited to the subsidiary. This is netted off against the unrealised profit in group cost of sales, but 25% must be credited to the NCI. 4 Intragroup trading Cancel intragroup sales/purchases: $'000 $'000 Dr Group revenue 40,000 Cr Group cost of sales 40,000 ((40,000 – 30,000) × 12,000 / 40,000) = 3,000 DR Cost of sales (Sentinel Co) (NCI) 3,000 CR Group inventories 3,000