BNN Co is considering acquiring an interest in its competitor JB Co Ltd. The managing director of BNN Co has obtained the three most recent statements of financial position of JB Co Ltd as shown below.
JB Co Ltd – Statement of Financial Position at 31st December
20X7 GH$’000
20X8 GH$’000
20X9 GH$’000
Non-current assets
Land and buildings
11,460
12,121
11,081
Plant and equipment
8,896
9,020
9,130
20,356
21,141
20,211
Current assets
Inventories
1,775
2,663
3,995
Trade receivables
1,440
2,260
3,164
Cash
50
53
55
3,265
4,976
7,214
Total assets
23,621
26,117
27,425
Equity
Share capital
8,000
8,000
8,000
Retained earnings
6,434
7,313
7,584
14,434
15,313
15,584
Non-current liabilities
12% debentures 20X9–20Y2
5,000
5,000
5,000
Current liabilities
Trade payable
390
388
446
Bank
1,300
2,300
3,400
Income taxes payable
897
1,420
1,195
Dividend payable
1,600
1,696
1,800
4,187
5,804
6,841
Total equity and liabilities
23,621
26,117
27,425
Required:
Prepare a report for the managing director of BNN Co. commenting on the financial position of JB Co Ltd. and highlight any areas that require further investigation (using gearing and liquidity ratios only).
Jeck Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Jeck Ltd’s management was disappointed in the company’s results for the year ended 31 March 20X8. In an attempt to improve performance the following measures were taken early in the year ended 31 March 20X9:
A national advertising campaign was undertaken,
Rebates to all wholesale customers purchasing goods above set quantity levels were introduced,
The assembly of certain lines ceased and was replaced by bought-in completed products. This allowed Jeck Ltd to dispose of surplus plant.
Jeck Ltd’s summarised financial statements for the year ended 31 March 20X9 are set out below:
Statement of Financial Position as at 31 March 20X9
GH$’000
GH$’000
Non-current assets
Property, plant and equipment (note (ii))
550
Current assets
Inventory
250
Trade receivables
360
Bank
Nil
610
Total assets
Equity and liabilities
Stated capital (400m shares)
100
Income surplus
380
480
Non-current liabilities
8% loan notes
200
Current liabilities
Bank overdraft
10
Trade payables
430
Current tax payables
40
480
Total equity and liabilities
Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 March 20X9
GH$’000
Revenue (25% cash sales)
Cost of sales
Gross profit
Operating expenses
Operating profit
Profit on disposal of plant (note (i))
Financial charges
Profit before tax
Income tax expense
Profit for the year
Below are ratios calculated for the year ended 31 March 20X8:
Return on year-end capital employed (profit before interest and tax over total assets less current liabilities): 17%
Net assets (equal to capital employed) turnover: 4 times
Gross profit margin: 6.3%
Net profit (before tax) margin: Not provided
Current ratio: 1.6:1
Closing inventory holding period: 46 days
Trade receivables’ collection period: 45 days
Trade payables’ payment period: 55 days
Dividend yield: 3.75%
Dividend cover: 2 times
Notes:
(i) Jeck Ltd received GH$120m from the sale of plant that had a carrying amount of GH$80m at the date of its sale.
(ii) The market price of Jeck Ltd’s share throughout the year averaged GH$3.75 each. There were no issues or redemption of shares or loans during the year.
(iii) Dividends paid during the year ended 31 March 20Y0 amounted to GH$90m, maintaining the same dividend paid in the year ended 31 March 20X9.
Required:
(a) Calculate ratios for the year ended 31 March 20X9 (showing your workings) for Jeck Ltd, equivalent to those provided above.
(b) Analyse the financial performance and position of Jeck Ltd for the year ended 31 March 20X9 compared to the previous year.
Kari Plc acquired 90% of Kane Ltd’s GH$1 ordinary shares on 1 April 20X2 paying GH$3.00 per share. The balance on Kane Ltd’s retained earnings at this date was GH$800,000. On 1 October 20X3, Kari Plc acquired 30% of Kora Ltd’s GH$1 ordinary shares for GH$3.50 per share. The statements of financial position of the three companies at 31 March 20X4 are shown below:
Kari Plc
Kane Ltd
Kora Ltd
GH$000
GH$000
GH$000
GH$000
GH$000
GH$000
Non-current assets
Property, plant and equipment
8,050
3,600
1,650
Investments
4,000
910
nil
12,050
4,510
1,650
Current assets
Inventory
830
340
250
Accounts receivable
520
290
350
Bank
240
nil
100
1,590
630
700
Total assets
13,640
5,140
2,350
Equity and liabilities
Equity:
Ordinary shares of GH$1 each
5,000
1,200
600
Reserves:
Retained earnings b/f
6,000
1,400
900
Profit year to 31 March 20X4
1,400
600
300
7,400
2,000
1,200
12,400
3,200
1,800
Non-current liabilities
10% Loan notes
500
240
nil
Current liabilities
Accounts payable
420
960
350
Taxation
220
250
100
Overdraft
nil
490
nil
640
1,700
450
Total equity and liabilities
13,640
5,140
2,350
The following information is relevant:
(i) The fair value of the non-controlling interest in Kane Ltd at the date of acquisition was GH$2.50 per share.
(ii) In January 20X4 Kari Plc sold goods to Kora Ltd for GH$65,000. These were transferred at a mark-up of 30% on cost. Two thirds of these goods were still in the inventory of Kora Ltd at 31 March 20X4.
(iii) To facilitate the consolidation procedures the group insists that all inter-company current account balances are settled prior to the year-end. However a cheque of GH$40,000 from Kane Ltd to Kari Plc was not received until early April 20X4. Inter-company balances are included in accounts receivable and payable as appropriate.
(iv) Kora Ltd is to be treated as an associated company of Kari Plc.
(v) An impairment test at 31 March 20X4 on the consolidated goodwill of Kane Ltd and Kora Ltd concluded that it should be written down by GH$468,000 and GH$12,000 respectively. No other assets were impaired.
Required
(a) Prepare the consolidated statement of financial position of Kari Plc as at 31 March 20X4.
(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.
Shade Ltd holds 80% of the ordinary share capital of Find Ltd (acquired on 1 February 20X4) and 30% of the ordinary share capital of Reach Ltd (acquired on 1 July 20X3).
Shade Ltd had no other investments.
The draft statements of profit or loss for the year ended 30 June 20X4, are set out below.
Shade Ltd GH¢000
Find Ltd GH¢000
Reach Ltd GH¢000
Revenue
12,614
6,160
8,640
Operating expenses
(11,318)
(5,524)
(7,614)
Dividends receivable
150
–
–
1,446
636
1,026
Taxation
(621)
(275)
(432)
Profit after taxation
825
361
594
Included in the inventory of Find Ltd at 30 June 20X4 was GH¢50,000 for goods purchased from Shade Ltd in May 20X4 which the latter company had invoiced at cost plus 25%. These were the only goods sold by Shade Ltd to Find Ltd but it did make sales of GH¢180,000 to Reach Ltd during the year. None of these goods remained in Reach Ltd’s inventory at the year end.
Required
Prepare a consolidated statement of profit or loss for Shade Ltd for the year ended 30 June 20X4.
On 31 December Year 5, an associate, Anita Healthcare Ltd, holds inventory which is valued at GH¢32,000 purchased during the year from its investor Pamela Wellness Ltd. At the same date, Pamela Wellness Ltd holds inventory purchased from a subsidiary, Sophie Pharmaceuticals Ltd, which is valued at GH¢80,000.
Sales from Pamela Wellness Ltd to Anita Healthcare Ltd and from Sophie Pharmaceuticals Ltd to Pamela Wellness Ltd are priced at a mark-up of one-quarter on cost.
Pamela Wellness Ltd owns 30% of Anita Healthcare Ltd and 60% of Sophie Pharmaceuticals Ltd.
Required
Set out the adjustments necessary to reflect any unrealised profit in the above in the consolidated statement of financial position.
Prepare entries for Portico Ltd's 30% holding in Armand Ltd in the Year 5 consolidated financial statements, including financial position and profit or loss.
Portico Ltd acquired 30% of the equity shares in Armand Ltd (which satisfies the definition of associate) during Year 1 at a cost of GH₵350,000 when the fair value of the net assets of Armand Ltd was GH₵250,000. Since that time, the investment in Armand Ltd has been impaired by GH₵4,000.
On 31 December Year 5, the net assets of Armand Ltd were GH₵400,000. Since the date of acquisition, there have been no changes in the share capital of Armand Ltd or in any reserves other than retained earnings.
In the year to 31 December Year 5, the profits of Armand Ltd after tax were GH₵50,000.
Required
Show how the holding in Armand Ltd would be reflected in the Year 5 consolidated statement of financial position and consolidated statement of profit or loss.
APEX LTD
The draft statements of financial position as at 31 December 20X4 of three companies are set out below.
Apex Ltd GHS’000
Nexus Ltd GHS’000
Zephyr Ltd GHS’000
Assets
Non-current assets
Property, plant and equipment
400
100
160
Investments:
– shares in Nexus Ltd (60%)
75
– shares in Zephyr Ltd (30%)
30
Current assets
445
160
80
Total assets
950
260
240
Equity and liabilities
Share capital
100
30
60
Retained earnings
650
180
100
Non-current loans
200
50
80
Total equity and liabilities
950
260
240
The reserves of Nexus Ltd and Zephyr Ltd when the investments were acquired were GHS’000 70 and GHS’000 30 respectively. Required
Prepare the consolidated statement of financial position as at 31 December 20X4.
Statements of financial position as at 31 December 20X4
Henks Plc GH₵000
Streen Ltd GH₵000
Scote Ltd GH₵000
Non-current assets
Property, plant and equipment
32,000
25,000
20,000
Investments
33,500
–
–
65,500
25,000
20,000
Current assets
Cash at bank and in hand
9,500
2,000
4,000
Trade receivables
20,000
8,000
17,000
Inventory
30,000
18,000
18,000
59,500
28,000
39,000
125,000
53,000
59,000
Share capital
46,500
10,000
15,000
Retained earnings
55,000
37,000
27,000
101,500
47,000
42,000
Current liabilities
23,500
6,000
17,000
125,000
53,000
59,000
Statement of profit or loss for the year ended 31 December 20X4
Henks Plc GH₵000
Streen Ltd GH₵000
Scote Ltd GH₵000
Revenue
125,000
117,000
82,000
Cost of sales
(65,000)
(64,000)
(42,000)
Gross profit
60,000
53,000
40,000
Distribution and administrative costs
(35,000)
(22,000)
(23,000)
Profit before taxation
25,000
31,000
17,000
Income tax expense
(10,000)
(9,000)
(5,000)
Profit after tax
15,000
22,000
12,000
Statement of changes in equity (extract) for the year ending 31 December 20X4
Henks Plc GH₵000
Streen Ltd GH₵000
Scote Ltd GH₵000
Retained earnings brought forward
40,000
15,000
15,000
Retained profit for the financial year
15,000
22,000
12,000
Dividends
–
–
–
Retained earnings carried forward
55,000
37,000
27,000
You are given the following additional information.
(1) Henks Plc owns 80% of Streen Ltd’s shares. These were purchased in 20X1 for GH₵20.5 million cash, when the balance on Streen Ltd’s retained earnings stood at GH₵7 million.
(2) Five years ago, Henks Plc purchased 60% of the shares of Scote Ltd by the issue of shares with a market value of GH₵13 million. At that date, the retained earnings of Scote Ltd stood at GH₵3 million and the fair value of the net assets of Scote Ltd was GH₵24 million. It was agreed that any undervaluation of the net assets should be attributed to land. This land was still held at 31 December 20X4.
(3) Included in the inventory of Scote Ltd and Streen Ltd at 31 December 20X4 are goods purchased from Henks Plc for GH₵5.2 million and GH₵3.9 million, respectively. Henks Plc aims to earn a profit of 30% on cost. Total sales from Henks Plc to Scote Ltd and to Streen Ltd were GH₵8 million and GH₵6 million, respectively.
(4) Henks Plc and Streen Ltd each proposed a dividend before the year end of GH₵2 million and GH₵2.5 million, respectively. No accounting entries have yet been made for these.
(5) Henks Plc has conducted annual impairment tests on goodwill in accordance with IFRS 3 and IAS 36. The estimated recoverable amount of goodwill at 31 December 20X1 was GH₵5 million and at 31 December 20X4 was GH₵4.5 million.
Required
Prepare the consolidated statement of profit or loss and consolidated statement of changes in equity for the year ended 31 December 20X4 and the consolidated statement of financial position at that date.
Statement of changes in equity for the year ended 30 June 20X4 (extract)
Falcon Ltd GH¢000
Crane Ltd GH¢000
Retained earnings brought forward
8,000
10,500
Profit for the financial year
12,000
8,000
Retained earnings carried forward
20,000
18,500
Required
Prepare Falcon Ltd’s consolidated statement of profit or loss, consolidated statement of financial position and a working showing the movement on consolidated retained profit for Falcon Ltd for the year ended 30 June 20X4.
Below is the formatted response for Question 90 from the provided documents, adhering to the specified structure and requirements. The question has two parts (90a and 90b), which are treated as separate questions since they can stand alone. The tables, financial statements, and answers are rendered exactly as in the attachment, with only the names of the companies and dates altered for copyright purposes. A summary report of changes is included at the end.
====================================================================== Question Title: FR – L2 – Q90a – Business Combinations
Level: LEVEL 2
Professional Bodies: Institute of Chartered Accountants, Ghana (ICAG)
Programs: PROFESSIONAL PROGRAM
Subjects: Financial Reporting
Topics: Business Combinations (IFRS 3)
Total Marks: 15
Question Tags: Consolidation, Goodwill, Non-controlling Interest, Fair Value, Intragroup Transactions, Associates
Question Short Summary: Prepare goodwill calc and consol. stmt of profit/loss for Vantage Ltd’s 90% acquisition of Green Ltd, incl. fair value adj and intragroup sales.
Question:
On 1 January 20X9, Vantage Ltd acquired 18m of the equity shares of Green Ltd in a share exchange in which Vantage Ltd issued two new shares for every three shares it acquired in Green Ltd. This gave Vantage Ltd a holding of 90%. Additionally, on 31 December 20X9, Vantage Ltd will pay the shareholders of Green Ltd GH¢1.76 per share acquired. Vantage Ltd’s cost of capital is 10% per annum.
At the date of acquisition, shares in Vantage Ltd and Green Ltd had market prices of GH¢6.50 and GH¢2.50 each respectively.
Statement of Profit or Loss for the year ended 30 September 20X9
Vantage
Green
GH¢’000
GH¢’000
Revenue
129,200
76,000
Cost of sales
(102,400)
(52,000)
Gross profit
26,800
24,000
Distribution costs
(3,200)
(3,600)
Administrative expenses
(7,600)
(4,800)
Investment income
1,000
–
Finance costs
(840)
–
Profit before tax
16,160
15,600
Income tax expense
(5,600)
(3,200)
Profit for the year
10,560
12,400
Equity as at 1 October 20X8
Vantage
Green
Stated capital
120,000
30,000
Income surplus
108,000
12,400
The following information is relevant:
(i) At the date of acquisition the fair values of Green Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:
An item of plant had a fair value of GH¢3.6 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
Green Ltd had a contingent liability which Vantage Ltd estimated to have a fair value of GH¢900,000. This has not changed as at 30 September 20X9. Green Ltd has not incorporated these fair value changes into its financial statements.
(ii) Vantage’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Green Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.
(iii) Sales from Vantage Ltd to Green Ltd throughout the year ended 30 September 20X9 had consistently been GH¢1.6 million per month. Vantage Ltd made a mark-up of 25% on these sales. Green Ltd had GH¢3 million of these goods in inventory as at 30 September 20X9.
(iv) Vantage Ltd’s investment income is a dividend received from its investment in a 40% owned associate which it has held for several years. The underlying earnings for the associate for the year ended 30 September 20X9 were GH¢4 million.
Required
(a) Calculate the goodwill arising on the acquisition of Green Ltd and prepare the consolidated statement of profit or loss for Vantage Ltd for the year ended 30 September 20X9.
(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.
