- 12 Marks
FR – L2 – Q83 – Business Combinations
Question
On 31 December 20X0, Tough Ltd acquired 60% of the ordinary share capital of Gentle Ltd for GH¢110 million. The following statements of financial position have been prepared as at 31 December 20X4. Statements of Financial Position as at 31 December 20X4
| Tough Ltd | Gentle Ltd | |
|---|---|---|
| GH¢’000 | GH¢’000 | |
| Assets | ||
| Non-current assets | ||
| Property, plant and equipment | 225,000 | 175,000 |
| Investments in Gentle Ltd | 110,000 | — |
| Current assets | 271,000 | 157,000 |
| 606,000 | 332,000 | |
| Equity and liabilities | ||
| Capital and reserves | ||
| Share capital | 115,000 | 110,000 |
| Retained earnings | 260,000 | 80,000 |
| 375,000 | 190,000 | |
| Current liabilities | 231,000 | 142,000 |
| 606,000 | 332,000 |
During the year to 31 December 20X4, Tough Ltd sold a tangible asset to Gentle Ltd for GH¢50 million. The asset was originally purchased in the year to 31 December 20X1 at a cost of GH¢100 million and had a useful economic life of five years. Gentle Ltd’s depreciation policy is 25% per annum based on cost. Both companies charge a full year’s depreciation in the year of acquisition and none in the year of disposal. Required Prepare the consolidated statement of financial position of Tough Ltd and its subsidiary as at 31 December 20X4.
Answer
Consolidated statement of financial position as at 31 December 20X4
| Assets | GH¢’000 |
|---|---|
| Non-current assets | |
| Property, plant and equipment (225 + 175 – 17.5 (W6)) | 382,500 |
| Goodwill (W3) | 14,000 |
| Current assets (271 + 157) | 428,000 |
| 824,500 | |
| Equity and liabilities | |
| Shareholders’ equity | |
| Share capital | 115,000 |
| Retained earnings (W5) | 260,500 |
| 375,500 | |
| Non-controlling interest (W4) | 76,000 |
| Current liabilities (231 + 142) | 373,000 |
| 824,500 |
Workings (1) Group structure Tough Ltd 60% Gentle Ltd (2) Net assets of Gentle Ltd
| 31 Dec 20X4 | 31 Dec 20X0 | Post acquisition | |
|---|---|---|---|
| GH¢’000 | GH¢’000 | GH¢’000 | |
| Share capital | 110,000 | 110,000 | — |
| Retained earnings | 80,000 | 50,000 | 30,000 |
| 190,000 | 160,000 | 30,000 |
(3) Goodwill
| GH¢’000 | |
| Cost | 110,000 |
| Net assets acquired (60% × 160,000 (W2)) | (96,000) |
| 14,000 |
(4) Non-controlling interest
| GH¢’000 | |
| 40% × 190,000 (W2) | 76,000 |
(5) Retained earnings
| GH¢’000 | |
| Tough | 260,000 |
| Less: Adjustment re intra-group transfer | (17,500) |
| Gentle (60% × (80,000 – 50,000 (W2))) | 18,000 |
| 260,500 |
(6) PURP on non-current assets
| IS | GH¢’000 | SHOULD BE | GH¢’000 |
|---|---|---|---|
| Cost | 50,000 | Cost | 100,000 |
| Accumulated depreciation | (12,500) | Accumulated depreciation | (80,000) |
| 37,500 | 20,000 | ||
| Dr Retained earnings | 17,500 | Cr Non-current assets | 17,500 |
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