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,

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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