FR – L2 – Q89 – Business Combinations

Melody Ltd
Statement of profit or loss for the year ended 31 December 20X4.

Melody Ltd GH¢’000 Harmony Ltd GH¢’000
Revenue 304,900 195,300
Cost of sales (144,200) (98,550)
Gross profit 160,700 96,750
Operating costs (76,450) (52,100)
Operating profit 84,250 44,650
Investment income 10,500 2,600
Profit before tax 94,750 47,250
Income tax expense (42,900) (16,500)
Profit for the year 51,850 30,750

Statement of changes in equity (extracts) for the year ended 31 December 20X4

Melody Ltd GH¢’000 Harmony Ltd GH¢’000
Retained earnings brought forward 80,200 31,000
Profit for the year 51,850 30,750
Proposed ordinary dividend (20,000)
112,050 61,750

The following information is also available.
(1) Melody Ltd acquired 75% of the share capital of Harmony Ltd on 31 August 20X4.
(2) Negative goodwill of GH¢3.8 million arose on the acquisition.
(3) Profits of both companies are deemed to accrue evenly over the year except for the investment income of Harmony Ltd all of which was received in November 20X4.
(4) Melody Ltd has bought goods from Harmony Ltd throughout the year at GH¢2 million per month. At the year-end Melody Ltd does not hold any inventory purchased from Harmony Ltd.

Required
Prepare the consolidated statement of profit or loss and a working showing the movement on consolidated retained profit for the year ended 31 December 20X4.

Melody Ltd
Consolidated statement of profit or loss for the year-ended 31 December 20X4
GH¢’000

Revenue 362,000
Cost of sales (169,050)
Gross profit 192,950
Operating costs (93,817)
Operating profit 99,133
Investment income 13,100
Negative goodwill 3,800
Profit before tax 116,033
Income tax (48,400)
Profit after tax 67,633
Non-controlling interest (W3) (2,996)
Profit 64,637

Movement on consolidated retained earnings for the year-ended 31 December 20X4
GH¢’000

Retained earnings at 1 January 20X4 80,200
Retained profit for the year 64,637
Dividend (20,000)
Retained earnings at 31 December 20X4 124,837

Workings
(1) Group structure
Melody
75% (acq 31 August 2005)
Harmony

(2) Consolidation schedule

Melody Harmony (4/12) Adj Consolidated
Revenue 304,900 65,100 (195,300 × 4/12) (8,000) 362,000
Cost of sales (144,200) (32,850) 8,000 (169,050)
Operating costs (76,450) (17,367) (93,817)
Investment income 10,500 2,600 13,100
Tax (42,900) (5,500) (48,400)
PAT 11,983

(3) Non-controlling interest
25% × 11,983 = 2,996

(4) Consolidated retained earnings carried forward – proof
GH¢’000

Melody 112,050
Harmony (11,983 – 2,996) 8,987
Negative goodwill 3,800
124,837

Emile Woolf International
256
Institute of Chartered Accountants, Ghana