You're reporting an error for "AA – L2 – SA – Q2.8 – Financial Statement Assertions"
25 Marks
FR – L2 – Q97 – Business Combinations
Prepare Peak Plc's consolidated statement of financial position as at 31 March 20X4, incorporating acquisitions of Flare Plc and Crest Ltd, with adjustments for intra-group transactions and fair value.
Peak Plc acquired the following non-current investments on 1 April 20X3:
(1) 4 million of Flare Plc’s 5 million equity shares, by means of an exchange of one share in Peak for every one share in Flare Plc, plus GH¢6.05 million in cash for each Flare Plc share acquired. The professional fees associated with the acquisition amounted to GH¢1 million. The market price of shares in Peak Plc at the date of the acquisition was GH¢9 per share. The market price of Flare Plc shares just before the acquisition was GH¢7. The cash part of the consideration is deferred and will not be paid until two years after the acquisition.
(2) 25% of Crest Ltd’s 6 million equity shares, at a cost of GH¢6 per share. The money to make this payment was obtained by issuing one million new shares in Peak Plc at GH¢9 per share.
None of these transactions has yet been recorded in the summary statements of financial position that are shown below.
The summarised draft statements of financial position of the three companies at 31 March 20X4 are as follows:
Statement of financial position
Peak Plc
Flare Plc
Crest Ltd
GH¢ million
GH¢ million
GH¢ million
Assets
Non-current assets
Property, plant and equipment
60.0
31.0
16.0
Other equity investments
0.8
nil
nil
60.8
31.0
16.0
Current assets
18.2
8.0
9.0
Total assets
79.0
39.0
25.0
Equity and liabilities
Equity shares
18.0
9.0
10.0
Retained earnings: at 1 April 20X3
36.0
16.0
8.0
– for year ended 31 March 20X4
8.0
3.0
2.0
62.0
28.0
20.0
Non-current liabilities
6% loan notes
10.0
–
–
7% loan notes
–
6.0
3.0
Current liabilities
7.0
5.0
2.0
Total equity and liabilities
79.0
39.0
25.0
The following information is relevant:
(1) Peak Plc has chosen to value the non-controlling interest in Flare Plc using the fair value method permitted by IFRS 3 (revised). The fair value of the non-controlling interests at the acquisition date is estimated to be the market value of the shares before the acquisition.
(2) At the date of acquisition of Flare Plc, the fair values of its assets were equal to their carrying amounts.
(3) The cost of capital of Peak Plc is 10% per year.
(4) During the year ended 31 March 20X4, Flare Plc sold goods to Peak Plc for GH¢3.6 million, at a mark-up of 50% on cost. Peak Plc had 75% of the goods in its inventory at 31 March 20X4.
(5) There were no intra-group receivables and payables at 31 March 20X4.
(6) On 1 April 20X3, Peak Plc sold a group of machines to Flare Plc at their agreed fair value of GH¢3 million. At the time of the sale, the carrying amount of the machines was GH¢2 million. The estimated remaining useful life of the plant at the date of the sale was four years. Plant and machinery is depreciated to a residual value of nil using straight-line depreciation and at 1 April 20X3 the machines had an estimated remaining life of five years.
(7) “Other equity investments” are included in the summary statement of financial position of Peak Plc at their fair value on 1 April 20X3. Their fair value at 31 March 20X4 is GH¢0.65 million.
(8) Impairment tests were carried out on 31 March 20X4. These show that there is no impairment of the value of the investment in Crest Ltd or in the consolidated goodwill.
(9) No dividends were paid during the year by any of the three companies.
Required
Prepare the consolidated statement of financial position for Peak Plc as at 31 March 20X4.
You're reporting an error for "FR – L2 – Q97 – Business Combinations"
10 Marks
FR – L2 – Q94 – Associates and Joint Ventures
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.
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.
You're reporting an error for "FR – L2 – Q92 – Consolidated Financial Statements"
25 Marks
FR – L2 – Q86 – Business Combinations
Prepare Drobo Ltd's consolidated statement of financial position as at 31 March 20X4, incorporating fair value adjustments, intra-group transactions, and goodwill impairment.
On 1 April 20X3, Draco Limited acquired 90% of the equity shares in Aboro Limited. On the same day Draco Limited accepted a 10% loan note from Aboro Limited for GH₵200,000 which was repayable at GH₵40,000 per annum (on 31 March each year) over the next five years. Aboro Limited’s retained earnings at the date of acquisition were GH₵2,200,000.
Statements of financial position as at 31 March 20X4
Draco Limited
Aboro Limited
GH₵000
GH₵000
GH₵000
GH₵000
Non-current assets
Property, plant and equipment
2,120
1,990
Intangible – software
–
1,800
Investments – equity in Aboro Limited
4,110
–
Investments – 10% loan note Aboro Limited
200
Investments – others
65
210
6,495
4,000
Current assets
Inventories
719
560
Trade receivables
524
328
Aboro Limited current account
75
Cash
20
1,338
888
Total assets
7,833
4,888
Equity and liabilities:
Capital and reserves
Equity shares of GH₵1 each
4,000
2,000
Retained earnings
2,900
1,955
6,900
3,955
Non-current liabilities
10% Loan note from Draco Limited
160
Government grant
230
390
Current liabilities
Trade payables
475
472
Draco Limited current account
60
Income taxes payable
228
174
Operating overdraft
27
730
706
Total equity and liabilities
7,833
4,888
The following information is relevant
(i) Included in Aboro Limited’s property at the date of acquisition was a leased property recorded at its depreciated historical cost of GH₵400,000. The property had been sub-let for its remaining life of only four years at an annual rental of GH₵80,000 payable in advance on 1 April each year. The directors of Draco Limited are of the opinion that the fair value of this property is best reflected by the present value of its future cash flows. An appropriate cost of capital for the group is 10% per annum.
The present value of a GH₵1 annuity received at the end of each year where interest rates are 10% can be taken as:
3 year annuity GH₵2.50
4 year annuity GH₵3.20
(ii) The software of Aboro Limited represents the depreciated cost of the development of an integrated business accounting package. It was completed at a capitalised cost of GH₵2,400,000 and went on sale on 1 April 20X2. Aboro Limited’s directors are depreciating the software on a straight-line basis over an eight-year life (i.e. GH₵300,000 per annum). However, the directors of Draco Limited are of the opinion that a five-year life would be more appropriate as sales of business software rarely exceed this period.
(iii) The inventory of Draco Limited on 31 March 20X4 contains goods at a transfer price of GH₵25,000 that were supplied by Aboro Limited who had marked them up with a profit of 25% on cost. Unrealised profits are adjusted for against the profit of the company that made them.
(iv) On 31 March 20X4 Aboro Limited remitted to Draco Limited a cash payment of GH₵55,000. This was not received by Draco Limited until early April. It was made up of an annual repayment of the 10% loan note of GH₵40,000 (the interest had already been paid) and GH₵15,000 of the current account balance.
(v) The accounting policy of Draco Limited for non-controlling interests (NCI) in a subsidiary is to value NCI at a proportionate share of the net assets.
(vi) An impairment test at 31 March 20X4 on the consolidated goodwill concluded that it should be written down by GH₵120,000. No other assets were impaired.
Required
Prepare the consolidated statement of financial position of Draco Limited as at 31 March 20X4.
ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations arising in the books of various companies. The year end in each case can be taken as 31 December 20X4 and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company for GH¢15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 20X5, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that GH¢18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost GH¢400,000 in 20W8 and was expected to last for ten years. At the beginning of the 20X4 financial year the book value was GH¢280,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only GH¢80,000 at 31 December 20X4.
(c) On 30 November, a company entered into a legal action defending a claim for supplying faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim will succeed. The amount of the claim is GH¢500,000.
(d) An item has been produced at a manufacturing cost of GH¢1,800 against a customer’s order at an agreed price of GH¢2,300. The item was in inventory at the year-end awaiting delivery instructions. In January 20X5 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately GH¢300, which is expected to make it marketable with other customers at a price of about GH¢1,900.
(e) At 31 December, a company has a total potential liability of GH¢1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30% may be incurred but that the remaining 60% is highly unlikely to be incurred.
Required
For each of the above situations outline the accounting treatment you would recommend and give the reasoning of principles involved. The accounting treatment should refer to entries in the books and/or the year-end financial statements as appropriate.
You're reporting an error for "FR – L2 – Q47 – Provisions and Contingencies"
13 Marks
FR – L2 – Q46 – Events After the Reporting Period
Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.
Earley Enterprises is finalising its accounts for the year ended 31 December 20X3. The following events have arisen since the year end and the financial director has asked you to comment on the final accounts.
(a) At 31 December 20X3 trade receivables included a figure of GH¢250,000 in respect of NedenCorp. On 8 March 20X4, when the current debt was GH¢200,000, NedenCorp went into receivership. Recent correspondence with the receiver indicates that no dividend will be paid to unsecured creditors.
(b) On 15 March 20X4 Earley Enterprises sold its former head office building, Whiteley Grove, for GH¢2.7 million. At the year end the building was unoccupied and carried at a value of GH¢3.1 million.
(c) Inventories at the year-end included GH¢650,000 of a new electric tricycle the Oparis. In January 20X4 the European Union declared the tricycle to be unsafe and prohibited it from sale. An alternative market, in Bongaria, is being investigated, although the current price is expected to be cost less 30%.
(d) Stingray Ltd, a subsidiary in Outer Sarnia, was nationalised in February 20X4. The Outer Sarnia authorities have refused to pay any compensation. The net assets of Stingray Ltd have been valued at GH¢200,000 at the year end.
(e) Freak floods caused GH¢150,000 damage to the Southridge branch of Earley Enterprises in January 20X4. The branch was fully insured.
(f) On 1 April 20X4 Earley Enterprises announced a 1 for 1 rights issue aiming to raise GH¢15 million.
Required
Explain how you would respond to the matters listed above.
Kofi Plc operates its business through a number of divisions. It has a year end of 31 December. Set out below are extracts from the draft financial statements of Kofi Plc for the year ended 31 December Year 1.
Statement of profit or loss for the year ended 31 December Year 1
GH₵000
Revenue
3,900
Cost of sales
(2,500)
Gross profit
1,400
Distribution costs
(300)
Administrative expenses
(800)
Profit before tax
300
Income tax expense
(90)
Profit for the period
210
Statement of financial position at 31 December Year 1
Assets
GH₵000
GH₵000
Non-current assets
Property, plant and equipment
1,900
Intangible assets
40
1,940
Current assets
Inventories
350
Trade and other receivables
190
Cash
90
630
Total assets
2,570
Equity and liabilities
GH₵000
GH₵000
Equity
Share capital
600
Retained earnings
1,700
2,300
Current liabilities
Trade and other payables
195
Current tax payable
75
270
Total equity and liabilities
2,570
On 30 November Year 1 Kofi Plc made the decision to close Division B, which is located in a different part of the country and covers a separate major line of business. This decision was immediately announced to the press and to the workforce and, by the end of Year 1, a buyer had been found.
The directors of Kofi Plc have calculated the following:
15% of the entity’s income and expenses for the year was attributable to Division B.
No tax is attributable to Division B.
Property, plant and equipment of GH₵510,000 and payables of GH₵10,000 in the above statement of financial position relate to Division B. The fair value minus costs to sell of the property, plant and equipment is GH₵450,000.
Required
Redraft the above financial statements to meet the provisions of IFRS 5: Non-current assets held for sale and discontinued operations. Work to the nearest GH₵000.
Ashanti-Co Group
The assistant financial controller of the Ashanti-Co Group, a public listed company, has identified the matters below which she believes may indicate an impairment to one or more assets:
(a) Ashanti-Co owns and operates an item of plant that cost GH¢640,000 and had accumulated depreciation of GH¢400,000 at 1 October 20X3. It is being depreciated at 12½% on cost. On 1 April 20X4 (exactly half way through the year) the plant was damaged when a factory vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity. Also it is expected that as a result of the damage the remaining life of the plant from the date of the damage will be only two years. Based on its reduced capacity, the estimated present value of the plant in use is GH¢150,000. The plant has a current disposal value of GH¢20,000 (which will be nil in two years’ time), but Ashanti-Co has been offered a trade-in value of GH¢180,000 against a replacement machine which has a cost of GH¢1 million (there would be no disposal costs for the replaced plant). Ashanti-Co is reluctant to replace the plant as it is worried about the long-term demand for the product produced by the plant. The trade-in value is only available if the plant is replaced.
Required
(a). Prepare extracts from the statement of financial position and statement of profit or loss of Ashanti-Co in respect of the plant for the year ended 30 September 20X4. Your answer should explain how you arrived at your figures.
(b). On 1 April 20X3 Ashanti-Co acquired 100% of the share capital of Asamankese Limited, whose only activity is the extraction and sale of spa water.
Asamankese Limited had been profitable since its acquisition, but bad publicity resulting from several consumers becoming ill due to a contamination of the spa water supply in April 20X4 has led to unexpected losses in the last six months. The carrying amounts of Asamankese Limited’s assets at 30 September 20X4 are:
GH¢’000
Brand (Vita-Cola – see below)
7,000
Land containing spa
12,000
Purifying and bottling plant
8,000
Inventories
5,000
32,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Vita-Cola’, but because of the contamination it has re-branded its bottled water as ‘PureSpring’. After a large advertising campaign, sales are now starting to recover and are approaching previous levels. The carrying amount of the brand in the statement of financial position is the depreciated amount of the original brand name of ‘Vita-Cola’.
The directors have acknowledged that GH¢1.5 million will have to be spent in the first three months of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old ‘Vita-Cola’ bottled water at a cost of GH¢2 million; the remaining inventories are labelled with the new brand ‘PureSpring’. Samples of all the bottled water have been tested by the health authority and have been passed as fit to sell. The old bottled water will have to be relabelled at a cost of GH¢250,000, but is then expected to be sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of Asamankese Limited at 30 September 20X4, calculated according to the guidance in IAS 36, is GH¢20 million. There is no reliable estimate of the fair value less costs to sell of Asamankese Limited.
Required
Calculate the amounts at which the assets of Asamankese Limited should appear in the consolidated statement of financial position of Ashanti-Co at 30 September 20X4. Your answer should explain how you arrived at your figures.
