Question

QUESTION TWO

On 1 October 2010, Pythias secured a majority equity shareholding in Sara on the following terms: an immediate payment of K4 per share on 1 October 2010 and a further amount deferred until 1 October 2011 of K5.4 million. The immediate payment has been recorded in Pythias’s financial statements, but the deferred payment has not been recorded. Pythias’s cost of capital is 8% per annum. On 1 February 2011, Pythias also acquired 25% of the equity shares of Austin paying K10 million in cash.

The summarised statements of financial position of the three companies at 30 September 2011 are:

Pythias Sara    Austin

Assets    K000 K000 K000

Non-current assets

Property, plant and equipment 40,000 31,000 30,000

Intangible assets    7,500

Investments – Sara (8 million shares at K4 each) 32,000

– Austin    10,000    nil nil

–––––– –––––– ––––––

89,500 31,000 30,000

Current assets

Inventory 11,200    8,400    10,000

Trade receivables    7,400    5,300 5,000

Bank    3,400    nil    2,000

–––––– ––––––    ––––––

Total assets    111,500    44,700    47,000

   –––––– –––––– ––––––

Equity and liabilities

Equity Equity shares of K1 each    50,000    10,000 10,000

Retained earnings – at 1 October 2010 25,700    12,000 31,800

– for year ended 30 September 2011 9,200    6,000    1,200

––––––    –––––– ––––––

   84,900 28,000 43,000

Non-current liabilities

Deferred tax    15,000    8,000 1,000

Current liabilities

Bank nil 2,500 nil

Trade payables 11,600    6,200    3,000

–––––– –––––– ––––––

Total equity and liabilities    111,500 44,700 47,000

   ––––––    ––––––    ––––––

The following information is relevant:

(i) Pythias’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose the directors of Pythias considered a share price for Sara of K3.50 per share to be appropriate.

(ii) At the date of acquisition, the fair values of Sara’s property, plant and equipment was equal to its carrying amount with the exception of Sara’s plant which had a fair value of K4 million above its carrying amount. At that date the plant had a remaining life of four years. Sara uses straight-line depreciation for plant assuming a nil residual value. Also at the date of acquisition, Pythias valued Sara’s customer relationships as a customer base intangible asset at fair value of K3 million. Sara has not accounted for this asset. Trading relationships with Sara’s customers last on average for six years.

(iii) At 30 September 2011, Sara’s inventory included goods bought from Pythias (at cost to Sara) of K2.6 million. Pythias had marked up these goods by 30% on cost. Pythias’s agreed current account balance owed by Sara at 30 September 2011 was K1.3 million.

(iv)Impairment tests were carried out on 30 September 2011 which concluded that consolidated goodwill was not impaired, but, due to disappointing earnings, the value of the investment in Austin was impaired by K2.5 million.

(v) Assume all profits accrue evenly through the year.

Required:

Prepare the consolidated statement of financial position for Pythias as at 30 September 2011.

Answer 1

Consolidated statement of financial position for Pythias as at 30 September 2011
				Consolidation adjustment		Consolidated
Account titles	Pythias	Sara	Austin	Debit	Credit	Total
Assets
Non-current assets
Property, plant and equipment	40,000,000	31,000,000	30,000,000	4,000,000	1,000,000	74,000,000
Intangible assets	7,500,000					7,500,000
Customer relationship				3,000,000	500,000	2,500,000
Goodwill				15,400,000		15,400,000
Investment - sara	32,000,000			5,400,000	37,400,000	0
Investment - Austin	10,000,000				2,500,000	7,500,000
	89,500,000	31,000,000	30,000,000			106,900,000
Current Assets
Inventory	11,200,000	8,400,000	10,000,000		390,000	19,210,000
Trade receivables	7,400,000	5,300,000	5,000,000			12,700,000
Bank	3,400,000		2,000,000			3,400,000
Total assets	111,500,000	44,700,000	47,000,000	0	390,000	142,210,000
Equity and liabilities
Equity at K1 each	50,000,000	10,000,000	10,000,000	10,000,000		50,000,000
Retained earnings-at 1 october 2010	25,700,000	12,000,000	31,800,000	12,000,000		25,700,000
for year ended 30 september 2011	9,200,000	6,000,000	1,200,000	5,290,000		9,910,000
Non-controlling interest						7,900,000
	84,900,000	28,000,000	43,000,000		0	93,510,000
Non-current liabilities
Deferred tax	15,000,000	8,000,000	1,000,000			23,000,000
Deferred liability for investment					5,400,000	5,400,000
Current liabilities						0
Bank		2,500,000				2,500,000
Trade payables	11,600,000	6,200,000	3,000,000			17,800,000
Total equity and liabilities	111,500,000	44,700,000	47,000,000	55,090,000	47,580,000	142,210,000
		Depreciation
Fair value of Investment	37,400,000
Fair value of non-controlling interest	7,000,000
Total fair value	44,400,000
less book value
Equity	10,000,000
Retained earnings	12,000,000
Excess of fair value over book value	22,400,000
Excess applied to
Plant	4,000,000	1,000,000
Customer relationship	3,000,000	500,000
Goodwill	15,400,000
Net income for the year of Sara	6,000,000
less: depreciation and amortization expenses	(1,500,000)
Net income for the year of Sara	4,500,000
Non controlling interest	900,000
Net income to be included in Pythias	3,600,000
Unrealized profit in inventory
Cost of inventory	1,300,000
Profit @30%	390,000
Adjustment in retained earnings	390,000
Adjustment in retained earning
Depreciation and amortization expenses	1,500,000
Noncontrolling interest	900,000
Impairment loss on investment-austin	2,500,000
Unrealized profit in inventory	390,000
Total adjustment	5,290,000
Investment in Austin is not in majority, it is just 25% of total equity
thus cost method is used.
Income will be included in Parent company, when subsidiary distribute
dividend.