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Question
On 1 January 2012, VM Ltd acquired 18 million of the equity shares of GR Ltd in a share exchange in which VM Ltd issued two new shares for every three shares it acquired in GR Ltd. This gave VM Ltd a holding of 90%. Additionally, on 31 December 2012, VM Ltd will pay the shareholders of GR Ltd GHS 1.76 per share acquired. VM Ltd’s cost of capital is 10% per annum.
At the date of acquisition, shares in VM Ltd and GR Ltd had market prices of GHS 6.50 and GHS 2.50 each, respectively.
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2012
| Description | VM (GHS ‘000) | GR (GHS ‘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 2011
| Description | VM (GHS ‘000) | GR (GHS ‘000) |
|---|---|---|
| Stated capital | 120,000 | 30,000 |
| Income surplus | 108,000 | 70,000 |
The following information is relevant:
(i) At the date of acquisition, the fair values of GR 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 GHS 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.
- GR Ltd had a contingent liability which VM Ltd estimated to have a fair value of GHS 900,000. This has not changed as at 30 September 2012.
GR Ltd has not incorporated these fair value changes into its financial statements.
(ii) VM Ltd’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, GR 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 VM Ltd to GR Ltd throughout the year ended 30 September 2012 had consistently been GHS 1.6 million per month. VM Ltd made a mark-up of 25% on these sales. GR Ltd had GHS 3 million of these goods in inventory as at 30 September 2012.
(iv) VM 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 2012 were GHS 4 million.
(v) Although GR Ltd has been profitable since its acquisition by VM Ltd, the market for GR Ltd’s product has been badly hit in recent months, and VM Ltd had calculated that the goodwill has been impaired by GHS 4 million as at 30 September 2012.
Required:
(a) Calculate the goodwill on acquisition of GR Ltd.
(5 marks)
(b) Prepare the consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012.
(15 marks)
(Total: 20 marks)
Answer
(a) Goodwill at acquisition
| Description | GHS ‘000 |
|---|---|
| Consideration transferred | |
| – Stated capital (12m x GHS 6.50) | 78,000 |
| – Deferred consideration (18m x GHS 1.76 x 1/1.1) | 28,800 |
| Total consideration transferred | 106,800 |
| Fair value of non-controlling interest (NCI) | 5,000 |
| Total consideration plus NCI | 111,800 |
| Fair value of GR Ltd’s net assets at acquisition | |
| – Stated capital | (30,000) |
| – Income surplus (70,000 + (12,400 x 3/12)) | (73,100) |
| – Fair value adjustment to plant | (3,600) |
| – Contingent liability | 900 |
| Net assets | (105,800) |
| Goodwill | 6,000 |
(b) VM LTD GROUP – CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 30 SEPTEMBER 2012
| Description | GHS ‘000 |
|---|---|
| Revenue (129,200 + (76,000 x 9/12) – 14,400 (W2)) | 171,800 |
| Cost of sales (102,400 + (52,000 x 9/12) – 14,400 + 600 (W2) + 900 (W3)) | (128,500) |
| Gross profit | 43,300 |
| Distribution costs (3,200 + (3,600 x 9/12)) | (5,900) |
| Administrative expenses (7,600 + (4,800 x 9/12) + 4,000 goodwill impairment) | (15,200) |
| Finance costs (W4) | (3,000) |
| Share of profit of associate (4,000 x 40%) | 1,600 |
| Profit before tax | 20,800 |
| Income tax expense (5,600 + (3,200 x 9/12)) | (8,000) |
| Profit for the year | 12,800 |
| Attributable to: | |
| Owners of the parent | 12,360 |
| Non-controlling interest (W5) | 440 |
| Total profit for the year | 12,800 |
Workings
1) Group structure
VM Ltd holds 90% of GR Ltd.
2) Intragroup trading
| Description | GHS ‘000 |
|---|---|
| Intragroup sales (1,600 x 9 months) | 14,400 |
| Unrealized profit (GHS 3,000 x 25/125) | 600 |
3) Fair value adjustment on plant
| Description | GHS ‘000 |
|---|---|
| Fair value adjustment | 3,600 |
| Depreciation on adjustment (GHS 3,600 / 3 years x 9/12) | (900) |
4) Finance costs
| Description | GHS ‘000 |
|---|---|
| VM Ltd finance costs | 840 |
| Unwinding of discount on deferred consideration ((28,800 x 10%) x 9/12) | 2,160 |
| Total finance costs | 3,000 |
5) Non-controlling interest
| Description | GHS ‘000 |
|---|---|
| Profit for the year (12,400 x 9/12) | 9,300 |
| Depreciation on fair value adjustment | (900) |
| Goodwill impairment | (4,000) |
| Total | 4,400 |
| NCI share (10%) | 440 |
(b) VM LTD GROUP – CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 30 SEPTEMBER 2012
| Description | GHS ‘000 |
|---|---|
| Revenue (129,200 + (76,000 x 9/12) – 14,400 (W2)) | 171,800 |
| Cost of sales (102,400 + (52,000 x 9/12) – 14,400 + 600 (W2) + 900 (W3)) | (128,500) |
| Gross profit | 43,300 |
| Distribution costs (3,200 + (3,600 x 9/12)) | (5,900) |
| Administrative expenses (7,600 + (4,800 x 9/12) + 4,000 goodwill impairment) | (15,200) |
| Finance costs (W4) | (3,000) |
| Share of profit of associate (4,000 x 40%) | 1,600 |
| Profit before tax | 20,800 |
| Income tax expense (5,600 + (3,200 x 9/12)) | (8,000) |
| Profit for the year | 12,800 |
| Attributable to: | |
| Owners of the parent | 12,360 |
| Non-controlling interest (W5) | 440 |
| Total profit for the year | 12,800 |
- Topic: Group Financial Statements and Consolidation
- Series: NOV 2015
- Uploader: Dotse