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)?

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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
––––––