Retained earnings at acquisition

Hello Sir, I don't know how they got the retained earnings figure at Acquisition of the Subs. of $3900K for the following question, Can you please help, Thanks a lot Sir, ___________________________________________________________________________________ Q 398 PREMIER Walk in the footsteps of a top tutor On 1 June 20X0, Premier acquired 80% of the equity share capital of Sanford. The consideration consisted of two elements: a share exchange of three shares in Premier for every five acquired shares in Sanford and $800,000 cash. The share issue has not yet been recorded by Premier. At the date of acquisition shares in Premier had a market value of $5 each. Below are the summarised draft financial statements of both entities. Statements of financial position as at 30 September 20X0 Premier Sanford Assets Non?current assets Property, plant and equipment 25,500 13,900 Investments 1,800 nil ––––––– ––––––– 27,300 13,900 ––––––– ––––––– Current assets Inventory 5,300 500 Receivables 4,200 1,100 Bank 3,000 800 ––––––– ––––––– 12,500 2,400 ––––––– ––––––– Total assets 39,800 16,300 ––––––– ––––––– Equity and liabilities Equity shares of $1 each 12,000 5,000 Other equity reserve – 30 September 20W9 (note (iv)) 500 nil Retained earnings 12,300 4,500 ––––––– ––––––– 24,800 9,500 Liabilities Current liabilities 15,000 6,800 ––––––– ––––––– Total equity and liabilities 39,800 16,300 ––––––– ––––––– The following information is relevant: (i) At the date of acquisition, the fair values of Sanford’s assets were equal to their carrying amounts with the exception of its property. This had a fair value of $1.2 million below its carrying amount, and had a remaining useful life of 8 years at the date of acquisition. Sanford has not incorporated this in its financial statements. (ii) Premier had $2 million (at cost to Premier) of inventory that had been supplied in the post?acquisition period by Sanford as at 30 September 20X0 Sanford made a mark?up on cost of 25% on these sales. (iii) Premier had a trade payable balance owing to Sanford of $350,000 as at 30 September 20X0. This did not agree with the corresponding receivable in Sanford’s books due to a $130,000 payment made to Sanford, which Sanford has not yet recorded. (iv) Premier’s investments include investments in shares which at the date of acquisition were classified as fair value through other comprehensive income (FVTOCI) The investments have increased in value by $300,000 during the year. The other equity reserve relates to these investments and is based on their value as at 30 September 20W9. There were no acquisitions or disposals of any of these investments during the year ended 30 September 20X0. (v) Premier’s policy is to value the non?controlling interest at fair value at the date of acquisition, deemed to be $3.5 million. (vi) Consolidated goodwill was impaired by $1.5 million at 30 September 20X0. Required: Prepare the consolidated statement of financial position for Premier as at 30 September 20X0. (20 marks)? ___________________________________________________________________________________ Answer 398 PREMIER Walk in the footsteps of a top tutor Consolidated statement of financial position as at 30 September 20X0 $000 Non?current assets Property, plant and equipment (25,500 + 13,900 – 1,200 (FV adj) + 50 (FV adj)) 38,250 Goodwill (W3) 7,800 Investments (1,800 – 800 (consideration) + 300 (gain on FVOCI)) 1,300 ––––––– 47,350 Current assets Inventory (5,300 + 500 – 400 (W2)) 5,400 Receivables (4,200 + 1,100 – 130 (cash in transit) – 350 (intra?group)) 4,820 Bank (3,000 + 800 +130 (cash in transit)) 3,930 ––––––– 14,150 ––––––– 61,500 –––––– Equity Equity shares of $1 each ((12,000 + 2,400 (W3)) 14,400 Share premium (W3) 9,600 Other equity reserve (500 + 300 (gain on FVOCI)) 800 Retained earnings (W5) 11,860 ––––––– 36,660 Non?controlling interest (W4) 3,390 ––––––– 40,050 Current liabilities (15,000 + 6,800 – 350 intra group balance) 21,450 ––––––– 61,500 ––––––– Workings in $000 (W1) Group structure Premier 1 June 20X0 ( 4 /12) 80% Sanford (W2) Net assets At acquisition At reporting date Post? acquisition Share capital 5,000 5,000 – Retained earnings (4,500 – (3900 × 4 /12)) 3,200 4,500 1,300 Property fair value (1,200) (1,200) – Depreciation reduction (below) 50 50 PUP (below) (400) (400) –––––– –––––– –––––– 7,000 7,950 950 –––––– –––––– –––––– W3 W4/W5 The depreciation reduction is calculated as $1,200/8 years × 4 /12 = $50,000. The unrealised profit in inventory is calculated as $2m × 25/125 = $400,000. Tutorial note The fair value adjustment for property is a downwards fair value adjustment and therefore should be deducted from W2 and non?current assets. The reduction in depreciation should be added back in W2 and added back to non?current assets. (W3) Goodwill Parent holding (investment) at fair value: Shares ((5,000 × 80%) × 3 /5 × $5) 12,000 Cash 800 NCI value at acquisition 3,500 –––––– 16,300 Less: Fair value of net assets at acquisition (W2) (7,000) –––––– Goodwill on acquisition 9,300 Impairment (1,500) –––––– 7,800 –––––– Tutorial note The 2.4 million shares (5,000 × 80% × 3/5) issued by Premier at $5 each would be recorded as share capital of $2.4 million and share premium of $9.6 million. (W4) Non?controlling interest (SFP) NCI value at acquisition 3,500 NCI share of post?acquisition reserves (W2) (950 × 20%) 190 NCI share of impairment (W3) (1,500 × 20%) (300) –––––– 3,390 –––––– (W5) Consolidated retained earnings Premier 12,300 Share of Sanford post?acquisition reserves (W2) (950 × 80%) 760 Share of impairment (W3) (1,500 × 80%) (1,200) –––––– 11,860 ––––––