QUESTION 1: (10 MARKS)
A school friend you have not seen for a number of years is attempting a financial reporting exam paper and has asked for guidance on the business combinations achieved in stages (piecemeal acquisition).
Situation 1 Jeremy acquired 40% of the equity interest of David MUR 40 million several years ago. On 1 January 2018, Jeremy acquired an additional 35% for MUR 45 million when the fair value of identifiable net assets were MUR 105 million. The fair value of the non-controlling interest on 1 January 2018 was MUR 32 million and the fair value of the original 40% holding was MUR 52 million.
Situation 2 On 31 December 2018, Jeremy acquired a further 5% of David for MUR 8 million. David had made profits since being acquired by Jeremy of MUR 10 million. There has been no impairment of goodwill.
REQUIRED: Write a report to your friend explaining:
(i) the goodwill on the acquisition of David that will appear in the consolidated statement of financial position at 31 December 2018. (5 marks)
(ii) the profit on the de-recognition of any previously held investment in David to be reported in group profit or loss for the year 31 December 2018. (5 marks)
QUESTION 2: (35 MARKS)
Topwood Ltd is a 40-year-old company producing furniture. 22 years ago, it acquired a 100% interest in Fleetwood Ltd. In 2011, it acquired a 40% interest in Landscapes Ltd and on 1 April 2013, it acquired a 75% interest in Garden Furniture Ltd. The draft consolidated accounts for the Topwood Group are as follows:
Income statement for the year ended 31 March 2014
Rs’000
Sales 10,000
Cost of sales (3,000)
Gross profit 7,000
Other income (income from long term investments) 600
Selling and distribution expenses (1,000)
Administration expenses (1,545)
Finance cost (450)
Share of profits from associates net of tax 1,050
Profit before tax 5,655
Income tax expense (1,620)
Profit for year 4,035
Attributable to Minority interest 300
Attributable to owners of the parent 3,735
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Consolidated statement of financial position as at 31 March 2014
ASSETS 2014 2013
Non-current assets Rs’000 Rs’000
Property, plant and equipment 11,625 7,500
Goodwill 300 –
Investment in associates 3,300 3,000
Other investments 1,230 1,230
Total non-current assets 16,455 11,730
Current assets
Inventories 5,925 3,000
Trade receivables 5,550 3,825
Cash at bank and in hand 13,545 5,460
Total current assets 25,020 12,285
Total assets 41,475 24,015
EQUITY AND LIABILITIES
Equity attributable to owners of the Parent
Issued share capital (Rs25) 11,820 6,000
Share premium 8,649 6,285
Retained profit 10,335 7,500
30,804 19,785
Non controlling interest 345 –
Total equity 31,149 19,785
Non-current liabilities
Loans 4,380 1,500
Finance lease obligations 2,130 510
Total non-current liabilities 6,510 2,010
Current liabilities
Trade payables 1,500 840
Finance lease obligations 720 600
Taxation payable 1,476 690
Accrued interest and finance charges 120 90
Total current liabilities 3,816 2,220
Total equity and liabilities 41,475 24,015
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Notes to the accounts:
1. The consideration relating to the 75% interest acquired in Garden Furniture Ltd was settled by an issue of 10,560 shares in Topwood deemed to be worth Rs 825,000 with the balance paid in cash.
Fair value of net assets acquired Rs’000
PPE (Machinery) 495
Stocks 96
Trade debtors 84
Cash in hand 336
Trade creditors (204)
Income tax (51)
756
Minority Interest (189)
567
Goodwill 300
Cost of investment 867
2. Notes on Property, Plant and Equipment
Cost
Buildings Machinery Total
Rs’000 Rs’000 Rs’000
At 1 April 2013 18,750 4,200 22,950
Additions – 6,300* 6,300
Disposals – (1,500) (1,500)
At 31 March 2014 18,750 9,000 27,750
Depreciation
At 1 April 2013 12,150 3,300 15,450
Charge for year 375 600 975
Disposals – (300) (300)
12,525 3,600 16,125
Carrying Amount
At 1 April 2013 6,600 900 7,500
At 31 March 2014 6,225 5,400 11,625
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* Inclusive of Rs2,550,000 acquired under finance leases.
3. An item of machinery was sold during the year ended 31 March 2014 for Rsl,500,000.
Required:
(1) Prepare the consolidated statement of cash flows for the year ended 31 March 2014. (30 marks)
(2) Analyse the consolidated statement of cash flows in (1), highlighting the key features of each category of cash flows. (5 marks)
QUESTION 3: (25 MARKS)
The year-end trial balance of Omnibus pic, a retail trader, has been extracted from its books as follows:
Trial balance as at 31st March 2017 £’000 £’000
Furniture and fittings at cost 420 –
Motor vehicles at cost 360 –
Brand name at written down value 100 –
Accumulated depreciation as at 31st March 2016:
Furniture and fittings – 180
Motor vehicles – 144
Inventory as at 31st March 2016 312 –
Trade receivables and payables 454 228
Rent account 34 –
Salaries account 316 –
Other administrative expenses 478 –
Allowance for doubtful debts – 21
8% Loan notes – 200
6% Redeemable Preference shares – 300
Ordinary shares of £1 each – 500
Share premium account – 50
Investments held at fair value 376 –
Advertising 29 –
Cash and bank balance 55 –
Sales revenue – 3,800
Purchases 2,616 –
Retained earnings b/f – 124
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Interest paid on Loan Notes 8 –
Interim dividend paid 50 –
Deferred tax – 59
Return inwards 16 –
Dividend received – 18
Total 5,624 5,624
You are informed as follows:
i) The cost of inventory in hand was identified on 5th April 2017 as £348,000. During the five days after 31st March 2017 purchases and sales amounted to £28,000 and £45,000 respectively. Omnibus effects its sales at cost plus 25%.
ii) Rent account includes £18,000 paid on 1st December 2016 as rent for six months commencing on that date; while salaries amounting to £74,000 and advertising amounting to £7,000 remain unpaid as at the year-end. Omnibus pic treats rent and salary as administrative expenses.
iii) A trade debt of £4,000 should be written off and the Allowance adjusted to cover 4% of remaining trade receivables.
iv) The only movement of non-current assets during the year was acquisition of a new set of boardroom furniture on 1st July 2016 for £120,000. Company’s policy is to depreciate its furniture as well as motor vehicles at 20% per annum, using the reducing balance method for furniture and straight-line method for vehicles. Brand names, acquired on 1st April 2015, are expected to have a useful life of five years and are depreciated using the sum of the digits method. Omnibus regards the amortisation of brand name as part of its cost of sales. All motor cars are used by the company salesmen.
v) Reported as investments are the cost of shares acquired in Enterprise pic, a listed company. At acquisition these shares were irrevocably designated as held at fair value through profit and loss. The market value of these shares on 31st March 2017 was £418,000.
vi)Tax on current year’s profit, at 20%, is estimated at £34,000.
REQUIRED:
Prepare for publication:
(a) the Statement of income for the year ended 31st March 2017; (12 marks)
(b) the Statement of changes in equity; and (1 mark)
(c) the Statement of financial position as at 31st March 2017. (12 marks)
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