On 30 June 2017, P Co pays £50,000 cash to acquire 70% of the ordinary shares of S Co. The draft statements of financial position of these two companies as at 30 June 2018 are below: Assets P Co £ S Co £         Property, plant and equipment 400,000 55,000   Investment in S 50,000     Total Non-current Assets 450,000 55,000   Receivables 50,000 5,000   Inventories 50,000 5,000   Bank and Cash 250,000 15,000   Current Assets 350,000 25,000   Total Assets 800,000 80,000   Equity       Ordinary Share Capital (£1 shares) 500,000 50,000   Retained Earnings 200,000 10,000   Liabilities 700,000 60,000         Trade Payables 100,000 20,000   Total Equity and Liabilities 800,000 80,000     The following information is also available: The fair value of the property, plant and equipment of S Co on 30 June 2018is £60,000 as opposed to its carrying amount of £55,000. Ignore any depreciation estimates. S Co’s retained earnings at 30 June 2017 was £5,000 (this is the value on the date of acquisition). The share capital of P Co and S Co have not changed since the acquisition. P Co estimates that the initial goodwill recognised on the purchase needs to be impaired by 20% and the resulting loss needs to be recognised in the consolidated financial statements as at 30 June 2018. Non-controlling interest in the statement of financial position will be measured using the proportionate share (method 1) of the subsidiary’s identifiable net assets. During the year S Co sold P Co goods invoiced at £10,000 which includes 25% mark-up over the original cost of these goods to S Co. P Co still holds 50% of these goods in its inventory. Required: 1.Prepare a consolidated statement of financial position as at 30 June 2018. 2.Suppose that on 30 June 2017 P Co pays £50,000 for 70% (35,000 shares out of 50,000 total number of S Co shares) of  S Co and the fair value of S Co’s net assets was £75,000. If the market price of S Co’ shares was £1.20, calculate the goodwill and non-controlling interest on the day of the transaction (30 June 2017), using the full goodwill method. Explain the reasons for the difference in goodwill under the two alternative methods. 3.Explain (without calculations) how your answer would differ if P Co had bought 40% of the shares in S Co for £30,000 rather than the stake of 70% and that P Co has no other means to control the board/management of S Co.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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On 30 June 2017, P Co pays £50,000 cash to acquire 70% of the ordinary shares of S Co. The draft statements of financial position of these two companies as at 30 June 2018 are below:

Assets

P Co £

S Co £

 

 

 

 

Property, plant and equipment

400,000

55,000

 

Investment in S

50,000

 

 

Total Non-current Assets

450,000

55,000

 

Receivables

50,000

5,000

 

Inventories

50,000

5,000

 

Bank and Cash

250,000

15,000

 

Current Assets

350,000

25,000

 

Total Assets

800,000

80,000

 

Equity

 

 

 

Ordinary Share Capital (£1 shares)

500,000

50,000

 

Retained Earnings

200,000

10,000

 

Liabilities

700,000

60,000

 

 

 

 

Trade Payables

100,000

20,000

 

Total Equity and Liabilities

800,000

80,000

 

 

The following information is also available:

  • The fair value of the property, plant and equipment of S Co on 30 June 2018is £60,000 as opposed to its carrying amount of £55,000. Ignore any depreciation estimates.
  • S Co’s retained earnings at 30 June 2017 was £5,000 (this is the value on the date of acquisition). The share capital of P Co and S Co have not changed since the acquisition.
  • P Co estimates that the initial goodwill recognised on the purchase needs to be impaired by 20% and the resulting loss needs to be recognised in the consolidated financial statements as at 30 June 2018.
  • Non-controlling interest in the statement of financial position will be measured using the proportionate share (method 1) of the subsidiary’s identifiable net assets.
  • During the year S Co sold P Co goods invoiced at £10,000 which includes 25% mark-up over the original cost of these goods to S Co. P Co still holds 50% of these goods in its inventory.

Required:

1.Prepare a consolidated statement of financial position as at 30 June 2018.

2.Suppose that on 30 June 2017 P Co pays £50,000 for 70% (35,000 shares out of 50,000 total number of S Co shares) of  S Co and the fair value of S Co’s net assets was £75,000. If the market price of S Co’ shares was £1.20, calculate the goodwill and non-controlling interest on the day of the transaction (30 June 2017), using the full goodwill method. Explain the reasons for the difference in goodwill under the two alternative methods.

3.Explain (without calculations) how your answer would differ if P Co had bought 40% of the shares in S Co for £30,000 rather than the stake of 70% and that P Co has no other means to control the board/management of S Co.

 

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