Question Tag: Unrealized profit

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  • 20 Marks

FR – Nov 2019 – L2 – Q1 – Group Financial Statements and Consolidation

Consolidated statement of financial position of Atia Ltd and Santana Ltd as at 30 June 2019.

The draft statements of financial position of Atia Ltd and that of Santana Ltd as at 30 June 2019 are as follows:

Additional relevant information:
1) On July 1, 2018, Atia Ltd purchased 21 million shares of Santana Ltd. At this date, the retained earnings of Santana Ltd were estimated at GH¢17 million, and the revaluation surplus was GH¢2 million.
2) Atia Ltd paid an initial cash amount of GH¢46 million and agreed to pay Santana Ltd’s shareholders a further GH¢14 million on July 1, 2020. The financial accountant has recorded both elements of the consideration in investments.
3) Atia Ltd has a cost of capital of 8% per annum.
4) During the accounting period, Atia Ltd sold goods totaling GH¢4 million to Santana Ltd at a gross profit margin of 25%. As of 30 June 2019, Santana Ltd still had GH¢0.5 million of these goods in inventory. Atia Ltd has a normal margin of 45%.
5) On the acquisition date, the fair values of Santana Ltd’s net assets were equal to their carrying amounts, except for inventory, which had a cost of GH¢1.5 million but a fair value of GH¢1.8 million. As of 30 June 2019, 10% of these goods remained in Santana Ltd’s inventory.
6) Atia Ltd values non-controlling interest (NCI) at fair value. The NCI’s value at acquisition is estimated at GH¢7.5 million.
7) No impairment was recognized for goodwill.

Required: Prepare the consolidated statement of financial position of the Atia group as at 30 June 2019.
(20 marks)

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  • 15 Marks

FR – May 2018 – L2 – Q5a – Preparation of Financial Statements

Prepare statements of profit or loss and financial position for Head Office, Branch, and the combined entity using trial balances provided.

The following trial balances for the year ended 31 December 2017 were obtained from the Head Office and Branch of Compassionate Grounds Ltd.

Additional information: i) The branch deposited GH¢800,000 on behalf of the head office in the bank on 31 December 2017. No record of this transaction had been made in head office books. ii) All goods sold by the branch are supplied from the head office at cost plus 25%. At 31 December 2017, goods to the value of GH¢10 million were in transit to the branch. iii) Inventories at 31 December 2017, excluding goods in transit were as follows:

  • Branch at markup: GH¢8,000
  • Head Office at cost: GH¢14,500

Required:
Prepare for the head office, branch, and combined entity of Compassionate Grounds Limited:

  • Statement of profit or loss for the year ended 31 December 2017
  • Statement of financial position as at 31 December 2017

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  • 20 Marks

FR – Nov 2015 – L2 – Q5 – Group Financial Statements and Consolidation

This question involves calculating goodwill on acquisition and preparing a consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012, including intragroup adjustments.

On 1 January 2012, VM Ltd acquired 18 million of the equity shares of GR Ltd in a share exchange in which VM Ltd issued two new shares for every three shares it acquired in GR Ltd. This gave VM Ltd a holding of 90%. Additionally, on 31 December 2012, VM Ltd will pay the shareholders of GR Ltd GHS 1.76 per share acquired. VM Ltd’s cost of capital is 10% per annum.

At the date of acquisition, shares in VM Ltd and GR Ltd had market prices of GHS 6.50 and GHS 2.50 each, respectively.

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2012

Description VM (GHS ‘000) GR (GHS ‘000)
Revenue 129,200 76,000
Cost of sales (102,400) (52,000)
Gross profit 26,800 24,000
Distribution costs (3,200) (3,600)
Administrative expenses (7,600) (4,800)
Investment income 1,000 –
Finance costs (840) –
Profit before tax 16,160 15,600
Income tax expense (5,600) (3,200)
Profit for the year 10,560 12,400

Equity as at 1 October 2011

Description VM (GHS ‘000) GR (GHS ‘000)
Stated capital 120,000 30,000
Income surplus 108,000 70,000

The following information is relevant:

(i) At the date of acquisition, the fair values of GR Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:

  1. An item of plant had a fair value of GHS 3.6 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
  2. GR Ltd had a contingent liability which VM Ltd estimated to have a fair value of GHS 900,000. This has not changed as at 30 September 2012.

GR Ltd has not incorporated these fair value changes into its financial statements.

(ii) VM Ltd’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, GR Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(iii) Sales from VM Ltd to GR Ltd throughout the year ended 30 September 2012 had consistently been GHS 1.6 million per month. VM Ltd made a mark-up of 25% on these sales. GR Ltd had GHS 3 million of these goods in inventory as at 30 September 2012.

(iv) VM Ltd’s investment income is a dividend received from its investment in a 40% owned associate, which it has held for several years. The underlying earnings for the associate for the year ended 30 September 2012 were GHS 4 million.

(v) Although GR Ltd has been profitable since its acquisition by VM Ltd, the market for GR Ltd’s product has been badly hit in recent months, and VM Ltd had calculated that the goodwill has been impaired by GHS 4 million as at 30 September 2012.

Required:

(a) Calculate the goodwill on acquisition of GR Ltd.
(5 marks)

(b) Prepare the consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012.
(15 marks)

(Total: 20 marks)

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  • 20 Marks

FR – Nov 2019 – L2 – Q1 – Group Financial Statements and Consolidation

Consolidated statement of financial position of Atia Ltd and Santana Ltd as at 30 June 2019.

The draft statements of financial position of Atia Ltd and that of Santana Ltd as at 30 June 2019 are as follows:

Additional relevant information:
1) On July 1, 2018, Atia Ltd purchased 21 million shares of Santana Ltd. At this date, the retained earnings of Santana Ltd were estimated at GH¢17 million, and the revaluation surplus was GH¢2 million.
2) Atia Ltd paid an initial cash amount of GH¢46 million and agreed to pay Santana Ltd’s shareholders a further GH¢14 million on July 1, 2020. The financial accountant has recorded both elements of the consideration in investments.
3) Atia Ltd has a cost of capital of 8% per annum.
4) During the accounting period, Atia Ltd sold goods totaling GH¢4 million to Santana Ltd at a gross profit margin of 25%. As of 30 June 2019, Santana Ltd still had GH¢0.5 million of these goods in inventory. Atia Ltd has a normal margin of 45%.
5) On the acquisition date, the fair values of Santana Ltd’s net assets were equal to their carrying amounts, except for inventory, which had a cost of GH¢1.5 million but a fair value of GH¢1.8 million. As of 30 June 2019, 10% of these goods remained in Santana Ltd’s inventory.
6) Atia Ltd values non-controlling interest (NCI) at fair value. The NCI’s value at acquisition is estimated at GH¢7.5 million.
7) No impairment was recognized for goodwill.

Required: Prepare the consolidated statement of financial position of the Atia group as at 30 June 2019.
(20 marks)

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  • 15 Marks

FR – May 2018 – L2 – Q5a – Preparation of Financial Statements

Prepare statements of profit or loss and financial position for Head Office, Branch, and the combined entity using trial balances provided.

The following trial balances for the year ended 31 December 2017 were obtained from the Head Office and Branch of Compassionate Grounds Ltd.

Additional information: i) The branch deposited GH¢800,000 on behalf of the head office in the bank on 31 December 2017. No record of this transaction had been made in head office books. ii) All goods sold by the branch are supplied from the head office at cost plus 25%. At 31 December 2017, goods to the value of GH¢10 million were in transit to the branch. iii) Inventories at 31 December 2017, excluding goods in transit were as follows:

  • Branch at markup: GH¢8,000
  • Head Office at cost: GH¢14,500

Required:
Prepare for the head office, branch, and combined entity of Compassionate Grounds Limited:

  • Statement of profit or loss for the year ended 31 December 2017
  • Statement of financial position as at 31 December 2017

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  • 20 Marks

FR – Nov 2015 – L2 – Q5 – Group Financial Statements and Consolidation

This question involves calculating goodwill on acquisition and preparing a consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012, including intragroup adjustments.

On 1 January 2012, VM Ltd acquired 18 million of the equity shares of GR Ltd in a share exchange in which VM Ltd issued two new shares for every three shares it acquired in GR Ltd. This gave VM Ltd a holding of 90%. Additionally, on 31 December 2012, VM Ltd will pay the shareholders of GR Ltd GHS 1.76 per share acquired. VM Ltd’s cost of capital is 10% per annum.

At the date of acquisition, shares in VM Ltd and GR Ltd had market prices of GHS 6.50 and GHS 2.50 each, respectively.

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2012

Description VM (GHS ‘000) GR (GHS ‘000)
Revenue 129,200 76,000
Cost of sales (102,400) (52,000)
Gross profit 26,800 24,000
Distribution costs (3,200) (3,600)
Administrative expenses (7,600) (4,800)
Investment income 1,000 –
Finance costs (840) –
Profit before tax 16,160 15,600
Income tax expense (5,600) (3,200)
Profit for the year 10,560 12,400

Equity as at 1 October 2011

Description VM (GHS ‘000) GR (GHS ‘000)
Stated capital 120,000 30,000
Income surplus 108,000 70,000

The following information is relevant:

(i) At the date of acquisition, the fair values of GR Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:

  1. An item of plant had a fair value of GHS 3.6 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
  2. GR Ltd had a contingent liability which VM Ltd estimated to have a fair value of GHS 900,000. This has not changed as at 30 September 2012.

GR Ltd has not incorporated these fair value changes into its financial statements.

(ii) VM Ltd’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, GR Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(iii) Sales from VM Ltd to GR Ltd throughout the year ended 30 September 2012 had consistently been GHS 1.6 million per month. VM Ltd made a mark-up of 25% on these sales. GR Ltd had GHS 3 million of these goods in inventory as at 30 September 2012.

(iv) VM Ltd’s investment income is a dividend received from its investment in a 40% owned associate, which it has held for several years. The underlying earnings for the associate for the year ended 30 September 2012 were GHS 4 million.

(v) Although GR Ltd has been profitable since its acquisition by VM Ltd, the market for GR Ltd’s product has been badly hit in recent months, and VM Ltd had calculated that the goodwill has been impaired by GHS 4 million as at 30 September 2012.

Required:

(a) Calculate the goodwill on acquisition of GR Ltd.
(5 marks)

(b) Prepare the consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012.
(15 marks)

(Total: 20 marks)

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