Question

In: Accounting

On 1 January 2019, Melor acquired 90% of the equity share capital of Chempaka in a share exchange in which Melor issued two new shares for every three shares it acquired in Chempaka.


On 1 January 2019, Melor acquired 90% of the equity share capital of Chempaka in a share
exchange in which Melor issued two new shares for every three shares it acquired
in Chempaka. Additionally, on 31 December 2019, Melor will pay the shareholders of
Chempaka RM1.76 per share acquired. Melor’s cost of capital is 10% per annum. At the date
of acquisition, shares in Melor and Chempaka had a share market value of RM6.50 and
RM2.50 each respectively.

Statement of Profit of Loss for the year ended 30 September 2019
Melor Chempaka
RM’000 RM’000
Revenue 64,600 38,000
Cost of sales (51,200) (26,000)
Gross profit 13,400 12,000
Distribution cost (1,600) (1,800)
Administrative expenses (3,800) (2,400)
Finance costs (420) -
Profit before tax 7,580 7,800
Income tax expenses (2,800) (1,600)
Profit for the year 4,780 6,200

ACCT2131/June2020 Page 5 of 8

Equity as at 1 October 2018:
Equity shares 30,000 10,000
Retained earnings 54,000 35,000

The following information is relevant:
1. At the date of acquisition, the fair values of Chempaka’s assets were equal to their
carrying amounts except for these two items:
(i) An item plant had a fair value of RM1.8 million above its carrying amount. The
remaining life of the plant at the date of acquisition was three years. Depreciation is
charged to costs of sales.
(ii) Chempaka had a contingent liability which Melor estimated to have value of
RM450,000. This has not changed as at 30 September 2019.
2. Melor’s policy is to value the non-controlling interest at fair values at the date of
acquisition. For this purpose, Chempaka’s share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
3. Sales from Melor throughout the year ended 30 September 2019 had consistently been
RM800,000 per month. Melor made a mark-up on cost of 25% on these sales.
Chempaka had RM1.5 million of these goods in inventory as at 30 September 2019.
4. Chempaka has been profitable since its acquisition by Melor’s product. The market for
Chempaka has been badly hit in recent months and the goodwill has been impaired by
RM2 million as at 30 September 2019.
Required:
a) Calculate the consolidated goodwill at the date of acquisition of Chempaka. Show your
workings.

(CLO3:PLO3:C4)

b) Prepare the consolidated statement of profit or loss for Melor for the year ended
30 September 2019. Relevant workings are to be disclosed.

(CLO3:PLO3:C4)

Solutions

Expert Solution

  • 1.

    Calculation of goodwill

    Cost of investment 53400
    amount of NCI 2500
             Total 55900
    Net asset 48200
    Goodwill 7700

    2.

    Consolidated income statement

    Revenue (64400+28500-7200) 85700
    Cost of sale (51200+19500-7200+300) 63800
    Gross profit 21900
    distribution cost (1600+1350) 2950
    adminstration cost (3800+1800) 5600
    finance cost 420 420
    goodwill impairment 2000 2000
    profit before tax 10930
    tax expense (2800+1200) 4000
    profit after tax 6930

    Working Notes

    Calculation of Purchase consideration
    share value (10000/3)*2*.9*6.5 39000
    deferred consideration 14400

    53400

    Particulars 01-Oct-19 change 01-Jan-19
    Share capital 10000 10000
    Retained earning 35000 6200 41200
                                                         Total                                                                45000 6200 51200
    Time adjustment 1550 -1550
    Upward revaluation 1800
    Additional Depreciation -150 -450
    Total net asset 48200 4200

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