Question

QUESTION 3
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

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)

Answer 1

• 
  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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