- 12 Marks
FR – L2 – Q85 – Business Combinations
Question
On 1 January 20X1, Greetings Ltd acquired 60% of the ordinary share capital of Farewell Ltd for GH₵110,000. At that date Farewell Ltd had a retained earnings balance of GH₵60,000.
The following statements of financial position have been prepared as at 31 December 20X4.
| Assets | Greetings Ltd | Farewell Ltd |
|---|---|---|
| Non-current assets | GH₵ | GH₵ |
| Property, plant and equipment | 225,000 | 175,000 |
| Investments in Farewell Ltd | 110,000 | – |
| Current assets | 271,000 | 157,000 |
| Total assets | 606,000 | 332,000 |
| Equity and liabilities | ||
| Capital and reserves | ||
| Share capital | 100,000 | 100,000 |
| Retained earnings | 275,000 | 90,000 |
| 375,000 | 190,000 | |
| Current liabilities | 231,000 | 142,000 |
| Total equity and liabilities | 606,000 | 332,000 |
The fair value of Farewell Ltd’s net assets at the date of acquisition was determined to be GH₵170,000.
The difference between the book value and the fair value of the net assets at the date of acquisition was due to an item of plant which had a useful life of 10 years from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Greetings Ltd and its subsidiary as at 31 December 20X4.
Answer
Greetings Ltd
Consolidated statement of financial position as at 31 December 20X4
| Assets | GH₵ |
|---|---|
| Non-current assets | |
| Property, plant and equipment (225 + 175 + 10 – 2) | 408,000 |
| Goodwill (W3) | 8,000 |
| Current assets (271 + 157) | 428,000 |
| Total assets | 844,000 |
| Equity and liabilities | |
| Shareholders’ equity | |
| Called up share capital | 100,000 |
| Retained earnings (W5) | 291,800 |
| 391,800 | |
| Non-controlling interest (W4) | 79,200 |
| Current liabilities (231 + 142) | 373,000 |
| Total equity and liabilities | 844,000 |
Workings
(1) Group structure
Greetings
60%
Farewell
(2) Net assets of Farewell Inc
| Reporting date | Date of acquisition | Post acquisition | |
|---|---|---|---|
| GH₵ | GH₵ | GH₵ | |
| Share capital | 100,000 | 100,000 | |
| Retained earnings | |||
| Per the question | 90,000 | ||
| Less: Fair value adjustment for depreciation (2/10 × 10,000) | (2,000) | ||
| 88,000 | 60,000 | ||
| Fair value adjustment | 10,000 | 10,000 | |
| 198,000 | 170,000 |
(3) Goodwill
Cost | GH₵110,000
Net assets acquired 60% × 170,000 (W2) | (102,000)
| GH₵8,000
(4) Non-controlling interest
40% × 198,000 (W2) | GH₵79,200
(5) Retained earnings
Greetings | GH₵275,000
Farewell (60% × (88,000 – 60,000 (W2))) | 16,800
| GH₵291,800
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