Question

You work for a large accounting firm KMPG as a Senior Accountant. Your client Bear plc acquired shares in Wolf plc several years back and you are responsible for the preparation of the year end work.

The following are the Statements of financial position for Bear plc and Wolf plc as at 31 March 2020, together with the additional information provided below.

		Bear plc	Wolf plc
		£	£
Non-Current Assets
Land and buildings		975,000	220,000
Plant and equipment		245,000	75,000
Fixtures and fittings		375,000	54,500
Intangibles: Development costs		30,000
Investment in Wolf plc		350,000
Total Non-Current Assets		1,975,000	349,500
Current Assets
Inventory		625,000	165,000
Trade and other receivables		105,000	76,450
Cash and cash equivalents		65,200	24,500
Total Current Assets		795,200	265,950
Total Assets		2,770,200	615,450

Equity
Ordinary shares (£1)		700,000	120,000
Preference shares (£1)		300,000	30,000
Retained earnings		1,427,750	335,000
Total Equity		2,427,750	485,000
Current Liabilities
Trade payables		105,000	42,500
Taxation		82,450	33,450
Dividends		95,000	32,000
Total Current Liabilities		282,450	107,950
Non-Current Liabilities
Bank Loan		60,000	22,500
Total Non-Current Liabilities		60,000	22,500
Total Equity and Liabilities		2,770,200	615,450

Notes to the above financial statements:

1. Wolf Plc acquired 84,000 ordinary shares in Wolf on 31 March 2017. They also acquired 15% of the preference shares.

2. At the date of acquisition, the retained earnings of Wolf plc were £205,000.

3. During the year, Bear sold goods to Wolf for £10,400 which included a mark-up on cost of 30%. At the end of the year, 50% of this stock was still held by Wolf plc.

4. At the date of acquisition, the land and buildings of Wolf plc had a fair value of £50,000 more than their book value. This fair value increase has not been incorporated into the statement of financial position for Wolf plc. Land accounts for 20% of this amount. Wolf acquired the building on 1 April 2012. The group policy is to depreciate buildings over a period of 50 years.

4. Wolf spent £42,000 on developing a new and innovative product. Wolf’s policy is to expense development costs, however, it is Bear’s policy to capitalise development costs (i.e. treat it as an asset). The following provides a breakdown of expenditure by Wolf:

Development costs up to 31 March 2017     £32,000

Development costs after 31 March 2017     £10,000

6. On the 31March 2020, an impairment test was carried out on the goodwill arising from the acquisition of Wolf plc. The report indicated that the goodwill needs to be written down by £10,000.

7. Wolf declared a dividend to its ordinary shareholders on 15 March 2020 which remained unpaid by 31 March 2020. Bear has not accounted for this income in their financial statements.

1. Prepare the consolidation schedule for Wolf plc at 31 March 2020.

                                                                                          

2. Calculate the equity and non-controlling interest that will appear in the consolidated statement of financial position for the Bear Group plc at 31 March 2020.

c. Prepare a memorandum for the attention of the financial director of Bear Plc explaining why consolidated accounts are necessary and what are the criteria regarding exemption and exclusion from preparing consolidated accounts.

d. Prepare a memorandum for the financial director of Bear plc explaining the limitations of group accounts.

Answer 1

On acquisition date (31 March 2017)
Particulars	Amount
Ordinary Shares	£     120,000
Retained Earnings	£     205,000
Less:- Development cost	-£       32,000
Adjusted RE	£    173,000
Intangible:- Development cost	£       32,000
Fair value markup	£       50,000
	£    375,000
Preference Shares	£       30,000
Net Assets	£    405,000
Less:- Non-controlling interest
Ordinary shares (30%)	£     112,500
Preference shares	£       25,500
Cost of capital to bear plc	£    267,000
Less:- Investment	£     350,000
Goodwill	£      83,000
As on 31 March 2020
Goodwill
Opening Balance	£       83,000
Less:- Impairment	-£       10,000
	£      73,000
Adjusted Retained Earnings wolf plc
RE as per wolf plc balance sheet	£     335,000
Add:- Development cost	£       42,000
Add:- Dividend	£       32,000
	£    409,000
Less:- Adjusted RE as on 31/03/2017	-£     173,000
Post acquisition profits	£    236,000
Non-Controlling Interest
Ordinary shares (30%)	£     112,500
Preference shares (85%)	£       25,500
Add:- Post acquisition profits	£       70,800
	£    208,800
Consolidated Profit & Loss
Retained Earnings of bear plc	£   1,427,750
Add:- post-acq. Profit of wolf	£     165,200
Less:- unrealised profits	-£         1,200
(10400/130 *30 *50%)
	£ 1,591,750

	Consolidated financial statements as at 31 March 2020
	Particulars	Amount
	Non-Current Assets
	Land and Building	£   1,277,000
	Plant and Equipment	£     320,000
	Fixtures and fittings	£     429,500
	Development Costs	£       72,000
	Goodwill	£       28,200
	Total Non-current Assets	£ 2,126,700
	Current Assets
	Inventory	£     788,800
	Trade and other receivables	£     181,450
	Cash and cash equivalents	£       89,700
	Total Current Assets	£ 1,059,950
	Total Assets	£ 3,186,650
	Equity
	Ordinary shares	£     700,000
	Preference shares	£     300,000
	Retained Earnings	£   1,536,950
	non-controlling Interest (NCI)	£     208,800
	Total Equity	£ 2,745,750
	Current Liabilities
	Trade Payables	£     147,500
	Taxation	£     115,900
	Dividends	£       95,000
	Total Current Liabilities	£    358,400
	Non-Current Liabilities
	Bank Loan	£       82,500
	Total Non-Current Liabilities	£      82,500
	Total Equity and Liabilities	£ 3,186,650