Question 1As the trainee accountant at Decker, a sweetie manufacturer, you are responsible for pulling together the first draft of the consolidated results for the Group. Decker has acquired shares in a number of other companies in recent years and extracts from the most recent financial statements of some of these companies are shown below for the year to 31 December 2019. Income Statements DeckerMarathonSnickers £m£m£mRevenue 80 70 80Cost of sales(26)(47)(30)Gross profit 54 23 50Operating expenses(18)(14)(20)Operating profit 36 9 30Dividend income 8 Profit before tax 44 9 30Tax(13) (2) (9)Profit for the year 31 7 21 Extract from the Statement of Equity DeckerMarathonSnickers £m£m£mOpening retained earnings 66 24 39Profit for the year 31 7 21Dividends paid(15)(10) Closing retained earnings 82 21 60 Extract from the Statement of Financial Position DeckerMarathonSnickers £m£m£mOrdinary £1 share capital 50 20 20Retained earnings 82 21 60Net Assets 132 41 80 There have been no changes to the share capital of any of the companies since the date Decker acquired their investments. Investments by DeckerDate of AcquisitionCompany% of Ordinary Shares AcquiredInvestment (£m)Net Assets at Date of Acquisition (£m)1/1/14Marathon60%£17m£23m27/8/01Rivers7%£55m£587m1/1/16Snickers40%£12m£30m For each investment, the book value of the net assets acquired closely resembled the fair value. Inter-company Trading In November 2019, Marathon sold £6m of selection boxes to Decker. These selection boxes had cost Marathon £3.2m. 80% of these selection boxes were still in Decker’s inventory at the year end. Goodwill ImpairmentAfter a recent impairment review, the goodwill in Marathon is to be reduced to £2.2m. RequiredCalculate the goodwill that arose on the acquisition of the shares in each of Marathon and Snickers. Prepare the consolidated Income Statement for the Decker Group for the year ended 31 December 2019 Prepare the consolidated extract from the Statement of Equity for the Decker Group for the year ended 31 December 2019 If, on the acquisition of Marathon by Decker, Marathon had a building on its statement of financial position at a valuation of £10m less than its fair value, discuss the factors you, as the trainee accountant, would have needed to consider before finalising the consolidated income statement.

Goodwill on the date of Acquisition: Particulars Marathon Snickers Date of Acquisition…

Answered: trainee accountant at Decker, a sweetie…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question 1

As the trainee accountant at Decker, a sweetie manufacturer, you are responsible for pulling together the first draft of the consolidated results for the Group. Decker has acquired shares in a number of other companies in recent years and extracts from the most recent financial statements of some of these companies are shown below for the year to 31 December 2019.

Income Statements

	Decker	Marathon	Snickers
	£m	£m	£m
Revenue	80	70	80
Cost of sales	(26)	(47)	(30)
Gross profit	54	23	50
Operating expenses	(18)	(14)	(20)
Operating profit	36	9	30
Dividend income	8
Profit before tax	44	9	30
Tax	(13)	(2)	(9)
Profit for the year	31	7	21

Extract from the Statement of Equity

	Decker	Marathon	Snickers
	£m	£m	£m
Opening retained earnings	66	24	39
Profit for the year	31	7	21
Dividends paid	(15)	(10)
Closing retained earnings	82	21	60

Extract from the Statement of Financial Position

	Decker	Marathon	Snickers
	£m	£m	£m
Ordinary £1 share capital	50	20	20
Retained earnings	82	21	60
Net Assets	132	41	80

There have been no changes to the share capital of any of the companies since the date Decker acquired their investments.

Investments by Decker

Date of Acquisition	Company	% of Ordinary Shares Acquired	Investment (£m)	Net Assets at Date of Acquisition (£m)
1/1/14	Marathon	60%	£17m	£23m
27/8/01	Rivers	7%	£55m	£587m
1/1/16	Snickers	40%	£12m	£30m

For each investment, the book value of the net assets acquired closely resembled the fair value.

Inter-company Trading

In November 2019, Marathon sold £6m of selection boxes to Decker. These selection boxes had cost Marathon £3.2m. 80% of these selection boxes were still in Decker’s inventory at the year end.

Goodwill Impairment

After a recent impairment review, the goodwill in Marathon is to be reduced to £2.2m.

Required

Calculate the goodwill that arose on the acquisition of the shares in each of Marathon and Snickers.

Prepare the consolidated Income Statement for the Decker Group for the year ended 31 December 2019

Prepare the consolidated extract from the Statement of Equity for the Decker Group for the year ended 31 December 2019

If, on the acquisition of Marathon by Decker, Marathon had a building on its statement of financial position at a valuation of £10m less than its fair value, discuss the factors you, as the trainee accountant, would have needed to consider before finalising the consolidated income statement.

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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