- 20 Marks
FR – Nov 2024 – L2 – Q1- Group Financial Statements
Preparation of the consolidated statement of profit or loss and statement of financial position for Yarkpawolo Group, including goodwill calculation and intra-group adjustments.
Question
Yarkpawolo LTD, a company in the healthcare industry, purchased 80% of the ordinary shares of Weah LTD on 1 January 2023. There are three elements to the purchase consideration: an immediate payment of GH¢1,400,000 and two further payments of GH¢100,000 on 31 December 2023 and GH¢120,000 on 31 December 2024 if the return on capital employed (ROCE) exceeds 15% in each of the financial years. All indicators have suggested that the ROCE for the company will be 17% and 16% for the financial years ending 31 December 2023 and 31 December 2024 respectively.
Yarkpawolo uses a discount rate of 10% in any present value calculations. The present value of GH¢ 1 receivable based on 10% are as follows:
Year | Present Value |
---|---|
1 | 0.909 |
2 | 0.826 |
The draft financial statements of both companies as at 31 December 2023 are as follows:
Statement of Profit or Loss for the year ended 31 December 2023
Yarkpawolo (GH¢’000) | Weah (GH¢’000) |
---|---|
Sales revenue | 14,000 |
Cost of sales | (10,000) |
Gross profit | 4,000 |
Operating expenses | (2,050) |
Profit before tax | 1,950 |
Income tax expense | (450) |
Profit for the year | 1,500 |
Retained earnings brought forward | 3,500 |
Retained earnings to statement of financial position | 5,000 |
Statement of Financial Position as at 31 December 2023
Yarkpawolo (GH¢’000) | Weah (GH¢’000) |
---|---|
Non-current assets: | |
Property, Plant & Equipment | 4,500 |
Patents | 500 |
Investment in Weah | 1,400 |
Total Non-current assets | 6,400 |
Current assets: | |
Inventories | 5,500 |
Trade and other receivables | 2,000 |
Cash and cash equivalents | 1,200 |
Total Current assets | 8,700 |
Total Assets | 15,100 |
Equity: | |
Share capital (GH¢0.20 per ordinary share) | 1,500 |
General reserve | 3,000 |
Retained earnings as at 31 December 2023 | 5,000 |
Total Equity | 9,500 |
Non-current liabilities: | |
Long-term borrowings | 1,600 |
Current liabilities: | |
Trade and other payables | 4,000 |
Current portion of long-term borrowings | – |
Total Liabilities | 5,600 |
Total Equity and Liabilities | 15,100 |
Additional Information:
-
Fair Value Adjustments on PPE:
- Property: Increase from GH¢200,000 to GH¢250,000 (Depreciation rate 10%)
- Plant: Increase from GH¢80,000 to GH¢100,000 (Depreciation rate 20%)
- Equipment: Decrease from GH¢120,000 to GH¢80,000 (Depreciation rate 20%)
- Weah has not adjusted its PPE values for the fair value assessment.
-
Intra-Group Trading:
- Since acquisition, Weah purchased GH¢50,000 worth of goods from Yarkpawolo. Half of these goods remained in inventory at year-end. Yarkpawolo makes a mark-up on cost of 25%.
- Yarkpawolo also purchased GH¢50,000 of goods from Weah, with one-third remaining in inventory. Weah sells at a margin of 20%.
-
Intercompany Balances:
- Yarkpawolo’s trade receivables include GH¢5,000 owed by Weah. The current accounts do not balance due to GH¢2,000 in transit from Weah.
-
Impairment:
- A goodwill impairment review identified a loss of GH¢100,000. No adjustment has been made yet.
-
Non-controlling Interest Valuation:
- Yarkpawolo values non-controlling interest at fair value at the acquisition date. The share price for Weah was GH¢0.75 per share.
Required:
Prepare for Yarkpawolo LTD:
(a) Consolidated Statement of Profit or Loss for the year ended 31 December 2023
(b) Consolidated Statement of Financial Position as at 31 December 2023
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