On January 1, 2016 Kehinde Plc acquired 45million of the Equity shares of Taiwo Plc in a share exchange in which Kehinde Plc issued two (2) new shares for every three (3) shares it acquired in Taiwo Plc. This gave Kehinde Plc a holding of 90%, additionally on 31 December, 2016, Kehinde Plc will pay shareholders of Taiwo Plc N1.76 per share acquired. Kehinde Plc cost of capital is 10% per annum.
At the date of acquisition, the shares in Kehinde Plc and Taiwo Plc had a market price of N6.50 and N2.50 respectively.
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2016
|
KEHINDE PLC |
TAIWO PLC |
|
N’000 |
N’000 |
Revenue |
323,000 |
190,000 |
Cost of Sales |
(256,000) |
(130,000) |
Gross Profit |
67,000 |
60,000 |
Distribution Cost |
(8,000) |
(9,000) |
Administrative Expenses |
(19,000) |
(12,000) |
Investment Income |
2,500 |
– |
Finance Cost |
(2,100) |
– |
Profit before Tax |
40,400 |
39,000 |
Income Tax Expenses |
(14,000) |
(8,000) |
Profit for the year |
26,400 |
31,000 |
Equity as at October 1, 2015:
|
|
|
Share Capital(N1 per share) |
300,000 |
75,000 |
Retained Earnings |
270,000 |
175,000 |
The following additional information is also relevant:
(i) At the date of acquisition the Fair Value of Taiwo Plc’s assets and liabilities were equal to their carrying amount with the exception of two items:
- An item of plant had a fair value of N9million above the carrying amount. The remaining life of the plant at the date of acquisition was three (3) years. Depreciation is charged to cost of sales.
- Taiwo Plc had a contingent liability which Kehinde Plc estimated to have a fair value of N2.25million. This has not changed as at September 30, 2016.
- Taiwo Plc has not incorporated this fair value changes into its financial statements.
(ii) It is Kehinde Plc’s policy to value non-controlling interest at fair value at the date of acquisition. For this purpose, Taiwo Plc 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 Kehinde Plc to Taiwo Plc throughout the year ended September 30, 2016 had consistently been N4million per month. Kehinde Plc made a mark-up of 25% on these sales. Taiwo Plc had N7.5million of these goods in inventory as at September 30, 2016.
(iv) Kehinde Plc’s investment income is a dividend received from its investment in a 40% owned associates which it has held for several years. The underlying earnings of the associate for the year ended September 30, 2016 were N10million.
(v) Although Taiwo Plc has been profitable since its acquisition by Kehinde Plc, the market for Taiwo Plc’s product has been badly hit in recent months and Kehinde Plc has calculated that the goodwill has been impaired by N10million as at September 30, 2016.
Required:
(i) Calculate the goodwill on acquisition of Taiwo Plc. (7 Marks)
(ii) Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income for Kehinde Plc group for the year ended September 30, 2016. (15 Marks)