Question

HB ltd has been experiencing dwindling sales in its business operations due to competitions from other agents dealing in communication equipment. On 1 January 2006, HB Ltd decided to diversify its operations to the information technology (IT) industry by acquiring SL Ltd, a company dealing in the manufacture of IT equipment and software design.

The summarized financial statements of HB Ltd and SL Ltd were as follows:

Income statement for the year ended 30September 2006

	HB Ltd	SL LTd
	Sh"000"	Sh"000"
Revenue	60,000	24,000
Cost of sales	(42,000.0)	(20,000.0)
Gross profit	18,000	4,000
Other income:
Interest received	75	-
Dividend received	400	-
	(18,475)	(4000)
Expenses:
Distribution costs	(3,500.0)	(100.0)
Administrative expenses	(2,500.0)	(100.0)
Finance costs	-	(200.0)
Profit before tax	12,475	3,600.0
Income tax expense	(3,000.0)	(600.0)
Profit after tax	9,475.0	3,000.0

Statement of financial position as at 30 September 2006

	HB Ltd	SL LTd
	Sh"000"	Sh"000"
Non current assets:
Property, plant and equipment	19,320	8000
Investments	11,280	-
	30,600	8000
Current assets:
Inventories	5000	3000
Account receivables	4200	3400
Cash at bank	5800	1600
	15000	8000
Total assets	45,600	16,000
Equity and liabilities:
Ordinary shares of sh.10 each	10000	2000
Retained earnings	25600	8400
	35600	10400
Non current liability
10% debentures	-	2000
Current liabilities
Account payable	7,500	3,200
Current tax	2500	400

                                                       10,000        3,600

Total equity and liabilities            45,600        16,000

Additional information:

1. HB ltd acquired 80% of ordinary share capital of SL ltd for sh. 10,280,000 and also acquired half of the 10% debentures in the company.
2. The fair value of the assets of SL Ltd at the date of acquisition were the same as their book values except for plant whose fair value were more by sh. 3.2 million. As at 1 January 2006, the plant had a remaining useful life of four years. SL Ltd depreciates plant on straight line basis on cost.
3. During the post-acquisition period, HB Ltd sold goods to SL Ltd for sh 12 million. These goods had a cost HB Ltd sh 9 million. Subsequently, SL Ltd sold some of the goods purchased from HB at sh 10 million for 15 million.
4. On 30 June 2006, HB Ltd and SL Ltd paid dividends of sh 1000,000 and 500,000 respectively.
5. Included in the account receivables and payables is sh 750,000 being the amount SL Ltd owed HB Ltd.
6. Goodwill is considered to be impaired by 25% as at September 2006. Goodwill impairment is classified as an administrative expense by the group company.

Required

1. Group Income statement for the year ended 30 September 2006.
2. Group Statement of financial position as at 30 September 2006.

Answer 1

	Balance sheet Date	30th September 2006
	Shares Acquistion Date	1st January 2006
	Pre Acquistion Period	1st October 2005	to	31st December 2005	3 Months
	Post Acqusition Period	1st January 2006	to	30th September 2006	9 Months
Shareholding Pattern of SL Ltd
	Particulars	Number of Shares	% of Holding
a.	HB Ltd
	Purchased on 1st January, 2016	160	80%
b.	Minority Interest	40	20%
Retained Earnings of SL Ltd
	Balance as on 30th September 2006		8,400
Add:	Dividends Declared by SL ltd		500
	Retained Earnings as on 1st October 2015		8,900
	Pre-acquisition Portion of Retained Earnings	2,225		(8900/12Months)*3Months
	Post-acquisition Portion of Retained Earnings	6,675		(8900/12Months)*9Months
		8,900
		HB Ltd	Minority Interest	Total
	Distribution of Pre-acquisition Portion of Retained Earnings	1,780	445	2,225
	Distribution of Post-acquisition Portion of Retained Earnings	5,340	1,335	6,675
		7,120	1,780	8,900
	Cost of Control of HB Ltd
	Investment in SL Ltd		10,280
	Less: Face Value of Investment	1,600
	Capital Profits as above	1,780
	Dividend Received from SL Ltd ( 50,000 *80% *3/12)	10,000
			13,380
	Goodwill		(3,100)
	Minority Interest
	Share Capital	400
	Capital Profit	445
	Revenue Profit	1,335
	Dividend Received for Pre-acqusition period	2,500
	Dividend Received for Post-acqusition period	7,500
		12,180
	Consolidated Profit & Loss Account
	Distribution of Post Aquistion Profit	5,340
	Dividends Received for Post Aquisiton Period ( 50,000 *80% *9/12)	30,000
	Less: Impairment of Goodwill	(775)
	Less: Minority Interest	(12,180)
		22,385

Consolidated Balance Sheet of HB Ltd and its subsidiary SL Ltd
as at 30th September 2006
Particulars	Note	SH'000	SH'000
1.Equity and Liabilities
Share Holders' Funds
Share Capital			10,000
Profit and Loss Account Balance			22,385
10% Debentures			2,000
2.Minority Interest			12,180
3.Current Liabilites
HB Ltd		7,500
SL Ltd		3,200
Total		10,700
Less: Inter-Company Owings		7,500
			3,200
Current Tax
HB Ltd		2,400
SL Ltd		500	2,900
			49,765
Assets
Property Plant & Equipments
HB Ltd		19,320
SL Ltd		11,200	30,520
Goodwill			3,100
Current Assets
Inventory
HB Ltd		5,000
SL Ltd		3,000	8,000
Accounts Receivable
HB Ltd		4,200
SL Ltd		3,400
Total		7,600
Less: Inter company owings		7,500	100
Cash at Bank
HB Ltd		5,800
SL Ltd		1,600	7,400
			49,120