Question

Stella Ltd produces mobile accessories for the Australian market. To expand its business Stella Ltd decides to acquire one of its most successful distributors, Rika Ltd.

The acquisition consisted of Stella Ltd acquiring 80% of Rika’ shares for a consideration of $400,000 on 1 July 2018.

The statement of financial position of Rika Ltd as at 1 July 2018 is:

Statement of financial position as at 1 July 2018
Assets Cash	15,000	Liabilities Loans	300,000
Accounts Receivable	45,000	Accounts Payable	20,000
Inventory	90,000		320,000
Buildings	405,000	Shareholders’ Equity Share Capital	300,000
Plant	150,000	Retained Earnings	85,000
			385,000
Total	705,000	Total	705,000

Additional information:

• All the assets and liabilities of Rika Ltd, as recorded above, are fairly valued at the date of the acquisition.
• Rika, at the date of acquisition, had also an internally generated brand name valued at $30,000 and contingent liabilities, as recorded in the notes, for $50,000.

1. Explain whether Rika is a subsidiary of Stella Ltd. Justify your answer. (2 mark)

2. Determine if any goodwill or gain on bargain purchase arises from the business combination. Show all workings necessary to derive your answer.

QUESTION 2:

Provide a example of of Statement of Profits and Loss and other comprehensive income.

Answer 1

IFRS 10 defines a subsidiary as “An entity that is controlled by another entity.”                              
Subsidiary is an entity which is controlled by another entity. The control means that the parent company can govern the financial and operating policies of its subsidiaries to gain benefits from the operations of subsidiary. Control can be gained if more than 50% of the voting rights are acquired by the parent. This is usually done by purchasing more than 50% of the shares of subsidiary. An investor controls an investee if and only if the investor has all the following:                              
(a) power over the investee;                              
(b) exposure, or rights, to variable returns from its involvement with the investee; and                              
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.                              
                              
In the given case, Stella Ltd aquired 80% of the shares of the Rika Ltd for $ 400000. Hence, Rika Ltd is the Subsidiary of the Stella Ltd. Since Stella Ltd holds more than 50% of the shares of Rika Ltd.                              
                              
Goodwill or Gain on Bargain purchase is calculated based on Two methods i.e., i) Fair Value method & ii) Proportionate Share in Net Assets method                              
  
In the given Case, Fair value of the assets is given. Hence we will calculate Goodwill based on Proportionate Share in Net Assets Method                              
                              

Computation of Identifiable Net Assets
Particulars	Amount
Equity Share Capital	300000
Retained Earnings	85000
Brand Name	30000
-Contingent Liabilities	-50000
Total Identifiable Net Assets	365000
Stella ltd Share@80%	292000
Non Controlling Interest@20%	73000
Computation of Goodwill under Proportionate Share of Net Assets method
Particulars	Amount
Net Assets	365000
-Consideration paid	-400000
-Non controlling interest share	-73000
Goodwill	108000

ii)
Example of income Statement and other comprehensive income
Income Statement for the Period ended 2019
Year ended December 31	2019	2018
(in thousands, except per share data)	$	$
Net system sales	3,801,632	4,883,913
Net service and field option sales	929,923	767,122
Total net sales	4,731,555	5,651,035
Cost of system sales	2,308,315	2,891,579
Cost of service and field option sales	527,377	407,714
Total cost of sales	2,835,692	3,299,293
Gross profit on sales	1,895,863	2,351,742
Research and development costs	298,052	492,184
Selling, general and administrative costs	256,479	216,055
Operating income	1,341,332	1,643,503
Interest income	16,585	43,668
Interest expense	(20,008)	(26,361)
Income before income taxes	1,337,909	1,660,810
Provision for income taxes	(35,562)	(166,739)
Net income	1,302,347	1,494,071
Other comprehensive income:
Foreign currency translation, net of taxes:
Gain (loss) on the hedge of a net investment	-	(1,829)
Gain (loss) on translation of foreign operations	5,927	(12,142)
Financial instruments, net of taxes:
Gain (loss) on derivative financial instruments	214	(4,610)
Transfers to net income	(7,761)	51,963
Other comprehensive income for the period, net of taxes	(1,620)	33,382
Total comprehensive income for the period, net of taxes	(1,620)	1,527,453
Attributable to Equity holders	(1,620)	1,527,453
Basic net income per ordinary share	3.07	3.51
Diluted net income per ordinary share	3.05	3.48
Number of ordinary shares used in computing per share amounts (in thousands):
Basic	424,096	425,618
Diluted	426,986	429,053