Principles and Practice of Group Accounts: A European ...cws.cengage.co.uk/piercebrennan/students/solutions.pdf · 5 Minority interest B B Consolidated balance sheet 22,100 Share

Principles and Practice of Group Accounts:

A European Perspective

Solutions to self-assessment exercises

Aileen Pierceand

Niamh Brennan

Copyright Cengage Learning 2003

Aileen Pierce and Niamh Brennan have taken great care to ensure the accuracy and reasonablenessof these solutions. However, there may remain some errors, and/or a particular solution may beunclear. The authors would welcome being alerted to any such deficiencies in the material includedin this website.

[email protected]@ucd.ie


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2.1 Tony and Gerry

80%(W1) Group structure Tony Gerry

(W2) Goodwill BB BB

Investment at cost 71,000Net assets acquired Ordinary share capital 80,000General reserves 5,000Profit and loss account 2,500

87,500Group acquired (87,500@80%) 70,000Goodwill 1,000

(W3) Consolidated general reservesBB

Tony 15,000Group share of post-acquisition reserves of Gerry ([12,500reserves –5,000pre-acquisition] @ 80%)

6,00021,000

(W4) Consolidated profit and loss accountBB

Tony 11,000Group share of post-acquisition reserves of Gerry ([7,500profit and loss account – 2,500pre-acquisition] @ 80%) 4,000

15,000

(W5) Minority interest in net assets of GerryBB

Net assets of Gerry at year end 100,000Minority interest: 20%minority share 20,000

Consolidated balance sheetBB

Fixed assets 70,000Goodwill (W2) 1,000Net current assets 85,000

156,000

Share capital 100,000General reserve (W3) 21,000Revenue reserve (W4) 15,000

136,000Minority interest (W5) 20,000

156,000

2.2 Tom and Joe75%

(W1) Group structure Tom Joe

(W2) Consolidated balance sheet working accounts

Adjustment/cost of control accountBB000 BB000

Investment 130 Share capital 75Revenue reserves (60pre-acquisition reserves @ 75%group share) 45

___ Balance c/d – goodwill 10130 130

Balance b/d – goodwill 10 Consolidated reserves 10


4

Minority interest accountBB000 BB000

Balance c/d 36.5 Share capital 25.0 ____ Revenue reserves (46Joe @ 25%minority interest) 11.536.5 36.5

Consolidated reserves accountBB000 BB000

Adjustment/cost of control 45.0 Tom 73.0 Minority interest 11.5 Joe 46.0 Goodwill written off 10.0 Balance c/d 52.5 _____

119.0 119.0

Consolidated balance sheet as at 31 December 20X7BB000

Sundry assets (140Tom + 290Joe) 430.0

Share capital 50.0Revenue reserves 52.5

102.5Minority interest 36.5Debentures (50Tom + 80Joe) 130.0Creditors (97Tom + 64Joe) 161.0

430.0

3.1 Jack and Box80%

(W1) Group structure Jack Box

(W2) Year-end entries None

(W3) Reconciliation of current accountsBB BB

Dr Stock 700Cr Debtors 700

Also exclude inter company balances from debtors and creditors

(W4) Unrealised profit None


Cost of control accountBB BB

Cost 80,000 Share capital (50,000 @ 80%group share) 40,000Capital reserves (10,000pre-acquisition @ 80%group share) 8,000Profit and loss (30,000pre-acquisition @ 80%group share) 24,000

______ Balance c/d – goodwill 8,00080,000 80,000

Balance b/d – goodwill 8,000 Consolidated profit and loss account 6,000_____ Balance c/d – goodwill 2,0008,000 8,000

Consolidated profit and loss accountBB BB

Cost of control 24,000 Jack 21,600Minority interest 8,000 Box 40,000Goodwill written off 6,000 Consolidated balance sheet 23,600 ______

61,600 61,600


5

Minority interestBB BB

Consolidated balance sheet 22,100 Share capital (50,000Box @ 20%minority share) 10,000Profit and loss (40,000Box @ 20%minority share) 8,000

______ Capital reserve (20,500Box @ 20%minority share) 4,10022,100 22,100

Capital reservesBB BB

Cost of control 8,000 Jack 10,000Minority interest 4,100 Box 20,500Consolidated balance sheet 18,400 ______

30,500 30,500

Jack GroupConsolidated balance sheet at 31 March 20X7

BB BB

Fixed assetsIntangible – Goodwill 2,000Tangible ([25,400+14,200+3,200+3,160]Jack +

[10,100 + 8,180 + 1,020+2,100]Box) 67,36069,360

Current assetsStock (34,140Jack + 32,100Box + 700stock in transit) 66,940Debtors (16,800Jack + 48,050Box – 2,800inter-company debtors) 62,050Prepayments (1,200Jack + 5,050Box) 6,250Cash and bank (1,470Jack + 38,200Box + 30Jack + 900Box) 40,600

175,840Creditors and accruals (44,500Jack + 34,000Box + (81,100)

3,500Jack + 1,200Box – 2,100inter-company creditors) 94,740164,100

Financed byShare capital 100,000Capital reserve 18,400Profit and loss account 23,600

142,000Minority interest 22,100

164,100

3.2 Potato and Peeler75%

(W1) Group structure Potato Peeler



Investment 800 Ordinary share capital 450 Preference share capital 50Revenue reserves (100pre-acquisition @ 75%group share) 75


Minority interestBB000 BB000

Balance c/d 275 Ordinary share capital 150 Preference share capital 50

___ Revenue reserves (300Peeler @ 25%minority share) 75275 275


6

Consolidated revenue reserves accountBB000 BB000

Adjustment/cost of control 75 Potato 1,200 Minority interest 75 Peeler 300 Goodwill written off 225 Unrealised profit 65(160inter-company stock + 100stock in transit) / 25%margin33.3%mark-up � 25%margin on salesBalance c/d 1,060 _____

1,500 1,500

(W3) Workings for the balance sheetInter-

Potato Peeler company Unrealised TotalBB000 BB000 BB000 BB000 BB000

Fixed assets 2,000 700 2,700Stocks 1,500 400 100 (65) 1,935Debtors 1,200 300 (200) 1,300Bank 600 100 50 750Creditors 1,200 300 (50) 1,450Taxation 400 200 600

Consolidated balance sheet as at 31 December 20X8BB000 BB000

Fixed assets (W3) 2,700 Current assetsStocks (W3) 1,935Debtors (W3) 1,300Bank (W3) 750

3,985

Current liabilitiesCreditors (W3) 1,450Taxation (W3) 600Proposed dividends 300

2,350Net current assets 1,635

4,335 Shareholders’ fundsShare capital 3,000 Revenue reserves 1,060

4,060 Minority interest 275

4,335

4.1 Monitor and Screen75%ordinary shares

50%preference shares

(W1) Group structure Monitor Screen


(Note: ‘Completing the entries’ approach has been taken to deal with the proposed dividends in Screen)


Investment in Screen Ordinary share capital 3,000Ordinary shares 3,800 Preference share capital 500Preference share 490 Creditors due after more than one year 200Loan stock 200 Capital reserves (400pre-acquisition @ 75%group share) 300

Revenue reserves (200pre-acquisition @ 75% group share) 150_____ Balance c/d – goodwill 3404,490 4,490


7


Balance c/d 2,350 Ordinary share capital 1,000 Preference share capital 500 Capital reserves (2,000Screen @ 25%minority share) 500

_____ Revenue reserves (1,400Screen @ 25%minority share) 3502,350 2,350

Consolidated reserves accounts

Capital Revenue Capital RevenueBB000 BB000 BB000 BB000

Adjustment/cost of control 300 150 Monitor 2,000 1,300 Minority interest 500 350 Screen 2,000 1,400 Goodwill 340 Ordinary dividends receivable 15

(20Screen proposed dividends @ 75%group share) Balance c/d 3,200 1,877 Preference dividends receivable 2

(4Screen proposed dividends @ 50% group share) _____ _____4,000 2,717 4,000 2,717

Dividend elimination accountBB000 BB000

Consolidated revenue reserves Proposed dividends Screen: Preference 4Dividend receivable Proposed dividends Screen: Ordinary 20

Monitor: Preference 2 Monitor: Ordinary 15

Consolidated balance sheet – due to minority 7 __24 24

Consolidated balance sheet as at 31 December 20X8BB000

Fixed assetsTangible assets (4,500Monitor + 5,000Screen) 9,500 Financial assets (4,500Monitor + 1,000Screen – 4,490inter-company) 1,010

10,510Current assets

Stocks (3,900Monitor + 2,900Screen) 6,800 Debtors (5,600Monitor + 3,800Screen) 9,400 Bank (900Monitor + 500Screen) 1,400

17,600Creditors due within one year (6,060Monitor + 3,776Screen + 7minority dividend + 40proposed dividend) 9,883

7,71718,227

Ordinary share capital 6,000 Preference share capital 2,000

8,000 Capital reserves 3,200 Revenue reserves 1,877

13,077 Minority interest 2,350 Creditors due after one year (2,000Monitor + 1,000Screen – 200inter-company) 2,800

18,227


8

5.1 Increasing stake of existing subsidiary – Teeny and Tiny(W1) Group structure

60%first acquisition

+20%second acquisition

Teeny Tiny

(W2) Goodwill First acquisition Second acquisition TotalBB000 BB000 BB000 BB000 BB000

Investment at cost 11,500 4,900 16,400Net assets acquiredOrdinary share capital 15,000 15,000 Profit and loss account 2,500 *6,250 Fair value adjustment 400 600

17,900 21,850Group acquired 60%/20% 10,740 4,370 15,110Goodwill 760 530 1,290

Annual amortisation (one-fifth) 152 106 258

Cumulative amortisation at 1 July 20X4 456(152 × 3 years) 456*[5,500Tiny opening balance profit and loss account + (1,500Tiny profit for year @ 6months /12months) = 6,250]



Investment at cost 16,400 Ordinary share capital (15,000Tiny @ 80%group share) 12,000Revenue reserves (2,500Tiny 31.12.X1 @ 60%first acquisition) 1,500([5,500Tiny 30.6.X4 + 750Tiny 1.7.X4–31.12.X4] @ 20%second acquisition) 1,250Fair value adjustments (400 excess fair value 31.12.X1 @ 60% first acquisition) 240(600excess fair value 31.12.X4 @ 20%second acquisition) 120

______ Balance c/d – goodwill (see W2) 1,29016,400 16,400

Balance b/d 1,290 Accumulated amortisation at 1.7.X4 456Charge for year (W2) 258

_____ Balance c/d 5761,290 1,290


Consolidated balance sheet 4,400 Ordinary share capital (15,000Tiny @ 20%minority share) 3,000_____ Revenue reserves (7,000Tiny @ 20%minority share) 1,4004,400 4,400

Consolidated revenue reservesBB000 BB000

Cost of control – pre-acquisition 2,750 Teeny 24,500Cost of control – fair value adjustment1 240 Tiny 7,000Cost of control – fair value adjustment1 120 Minority interest 1,400 Goodwill amortisation – 1.7.X4 456 Amortisation year ended 30.6.X5 258 Consolidated balance sheet 26,276 ______

31,500 31,500

1 The net assets subject to fair value adjustments at the time of acquisition have been consumed/disposed of by the balance sheet date. Consequently, group revenue reserves are reduced by the amounts effectively treated as pre-acquisition reserves.


9

Consolidated balance sheetBB000

Goodwill 576Sundry net assets (20,100Teeny + 22,000Tiny) 42,100

42,676

Share capital 12,000Revenue reserve 26,276


42,676

5.2 Simple investment becomes subsidiary – Teeny and Tiny(W1) Group structure



Teeny Tiny

(W2) GoodwillBB000 BB000

Investment at costSimple investment (10%) 1,750Majority share (70%) 14,650 16,400

Net assets acquiredOrdinary share capital 15,000Profit and loss account 6,2501

Fair value adjustment 60021,850

Group acquired 80% 17,480Negative goodwill (1,080)

Annual credit to profit and loss account2 (216)

1 [5,500 + (6/12 × 1,500) = 6,250].2 Negative goodwill is assumed to be treated in a parallel way to positive goodwill.



Investment at cost 16,400 Ordinary share capital (15,000Tiny @ 80%group share) 12,000Balance c/d – goodwill (see W2) 1,080

Revenue reserves ([5,500Tiny 30.6.X4 + 750Tiny 1.7.X4–31.12.X4] @ 80%group share) 5,000

______ Fair value adjustments (600excess fair value 31.12.X4 @ 80%group share) 48017,480 17,480

Credit for year 216 Balance b/d 1,080Balance c/d 864 _____

1,080 1,080

Minority interest (exactly the same as 5.1)BB000 BB000



Cost of control – pre-acquisition 5,000 Teeny 24,500Cost of control – fair value adjustment1 480 Tiny 7,000Minority interest 1,400 Goodwill credited to profit and loss account 216Consolidated balance sheet 24,836 ______

31,716 31,716

1 The net assets subject to fair value adjustments at the time of acquisition have been consumed/disposed of by the balance sheet date. Consequently, group revenue reserves are reduced by the amounts treated as pre-acquisition reserves.


10


Goodwill (864)Sundry net assets 42,100

41,236



41,236

5.3 Associate becomes subsidiary – Teeny and Tiny(W1) Group structure



Teeny Tiny

(W2) Goodwill First acquisition Second acquisition TotalBB000 BB000 BB000 BB000 BB000

Investment at cost 7,400 9,000 16,400Net assets acquired

Ordinary share capital 15,000 15,000 Profit and loss account 2,500 6,250*

Fair value adjustment 400 60017,900 21,850

Group acquired 40% / 40% 7,160 8,740 15,900Goodwill 240 260 500

Annual amortisation 48 52 100

Cumulative amortisation at 1 July 20X4 144(3 years × 48) 144

*[5,500Tiny opening balance profit and loss account + (1,500Tiny profit for year @ 6months /12months) = 6,250]



Investment at cost 16,400 Ordinary share capital (15,000Tiny @ 80%group share) 12,000

Revenue reserves (2,500Tiny 31.12.X1 @ 40%first acquisition) 1,000([5,500Tiny 30.6.X4 + 750Tiny 1.7.X4–31.12.X4] @ 40%second acquisition) 2,500

Fair value adjustments 160(400 excess fair value 31.12.X1 @ 40% first acquisition)(600excess fair value 31.12.X4 @ 40%second acquisition) 240

______ Balance c/d – goodwill (see W2) 50016,400 16,400

Balance b/d 500 Accumulated amortisation at 1.7.X4 (W2) 144Charge for year (48first acquisition W2

+ 52second acquisition W2) 100

____ Balance c/d – goodwill 256500 500

Minority interest (exactly the same as 5.1 and 5.2)BB000 BB000



11


Cost of control – pre-acquisition 3,500 Teeny 24,500Cost of control – fair value adjustment1 160 Tiny 7,000Cost of control – fair value adjustment1 240 Minority interest 1,400 Goodwill amortisation – 1.7.X4 144 Amortisation year ending 30.6.X5 100 Consolidated balance sheet 25,956 ______

31,500 31,500

1 The net assets subject to fair value adjustments at the time of acquisition have been consumed/disposed of by the balance sheetdate. Consequently, group revenue reserves are reduced by the amounts effectively treated as pre-acquisition reserves.


Goodwill 256Sundry net assets 42,100

42,356



42,356

6.1 Tic, Tac and Toe(W1) Group structure

35% 31.12.X2

Tic Toe

80% 30.6.X2

40%31.12.X1

Tac

Tac Toe% %

Group share (direct) 80 35Indirect — 32 (80% × 40%)

80 67

Minority share (direct) 20 25Indirect — 8 (20% × 40%)

20 33

Tac is a subsidiary on 30 June 20X2. Pre-acquisition reserves of Tac at that date are B6m.

Toe is an associate at 30 June 20X2 and becomes a subsidiary at 31 December 20X2.

Consequently, Toe is a piecemeal acquisition using the step-by-step approach to identifying the pre-acquisition reserves: Pre-acquisition reserves for associate undertaking status are those at 30 June 20X2, i.e., B4.5m. Pre-acquisition reserves whensubsidiary status is achieved are those at 31 December 20X2, i.e., B5m.


Cost of controlBB000 BB000

Tic’s investment at cost 28,000 Tac: Ordinary share capital (20,000 @ 80%group share) 16,000Tac’s investment Tac: Pre-acquisition reserves (6,000 @ 80%group share) 4,800(5,900 @ 80%group share) 4,720 Toe: Ordinary share capital (10,000 @ 67%group share) 6,700

Toe: Pre-acquisition reserves (4,500first acquisition@ 32%) 1,440(5,000second acquisition@ 35%) 1,750

______ Bal c/d – goodwill 2,03032,720 32,720


12


Cost of control: Tac (6,000@ 80%group share) 4,800 Tic 20,000Cost of control: Toe ([4,500first acquisition@32%]+[5,000second acquisition@35%]) 3,190 Tac 16,000Minority interest: Tac (16,000 @ 20%minority share) 3,200 Toe 10,000Minority interest: Toe (10,000 @ 33%minority share) 3,300 Consolidated balance sheet 31,510 ______

46,000 46,000


Minority share of cost of Tac: Ordinary share capital (20,000 @ 20%group share) 4,000Tac’s investment in Toe Toe: Ordinary share capital (10,000 @ 33%group share) 3,300(20% × 5,900) 1,180 Tac: Revenue reserves (16,000 @ 20%minority share) 3,200Consolidated balance sheet 12,620 Toe: Revenue reserves (10,000 @ 33%minority share) 3,300

13,800 13,800


AssetsGoodwill 2,030Sundry net assets (22,000Tic + 30,100Tac + 20,000Toe) 72,100

74,130Financed byShare capital 30,000Consolidated revenue reserves 31,510


74,130

6.2 Petal, Rose and Stem(W1) Group structure

Petal

80%

1.1.20X4

Rose

80%

1.7.20X6

Stem

Rose Stem% %

Group share (direct) 80 —Indirect — 64 (80% × 80%)

80 64

Minority share (direct) 20 20Indirect — 16 (20% × 80%)

20 36


13


Cost of control

B000 BB000Cost – Rose 180 Rose: Ordinary share capital (100,000 @ 80%group share) 80.0

Rose: Share premium (60,000 @ 80%group share) 48.0Rose: Revaluation reserve (10,000 @ 80%group share) 8.0Rose: P/L (20,000 @ 80%group share) 16.0

Cost – Stem (100 @ 80%group share) 80 Stem: Ordinary share capital (40,000 @ 64%group share) 25.6Stem: P/L (60,000 @ 64%group share) 38.4

___ Goodwill (28Rose + 16Stem) 44.0260 260.0

Balance b/d 44 Profit and loss account 20X4 (28÷4) 7Profit and loss account 20X5 (28÷4) 7Profit and loss account 20X6 (28÷4) + (16÷4) 11

__ Balance c/d 1944 44

Consolidated profit and loss accountBB000 BB000

Rose: Cost of control (20,000 @ 80%group share) 16.0 Rose 145Stem: Cost of control (60,000 @ 64%group share) 38.4 Petal 84Goodwill amortised (7+7+11) 25.0 Stem 70Rose: Minority interest (84,000 @ 20%minority share) 16.8 Stem: Minority interest (70,000 @ 36%minority share) 25.2 Consolidated balance sheet 177.6 ___

299.0 299


Rose: Ordinary share capital (100,000 @ 20%minority share) 20.0Rose: Share premium (60,000 @ 20%minority share) 12.0

Investment in Stem Rose: Revaluation reserve (50,000 @ 20%minority share) 10.0Rose: P/L (84,000 @ 20%minority share) 16.8

(100 @ 20%minority share) 20.0 Stem: Ordinary share capital (40,000 @ 36%minority share) 14.4Stem: P/L (70,000 @ 36%minority share) 25.2

Consolidated balance sheet 78.498.4 98.4

Consolidated balance sheetBB000 BB000

Fixed assetsTangible fixed assets 250.0Goodwill 19.0

Current assets (375Petal + 215Rose + 140Stem – [22+20inter-company accounts] + 5goods in transit + 7cash-in-transit) 700

Creditors: Amounts due within one year(130Petal + 121Rose + 80Stem – [15 + 15inter-company accounts]) (301) 399.0

668.0

Financed by Share capital 200.0Share premium account (Petal only) 150.0Revaluation reserve (30Petal + (40,000 @ 80%)post-acquisition Rose) 62.0Profit and loss account 177.6Minority interest 78.4

668.0


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7.1 Champion Group(W1) Group structure

30%Champion Ship

80%

1.1.20X4

Winner

75%

1.9.20X3

Trier

(W2) Group shareWinner Trier Ship

Direct 80% — 30%Indirect — 60% (80% × 75%) ____

80% 60% 30%

(W3) Minority shareWinner Trier

Direct 20% 25%Indirect — 15% (20% × 75%)

20% 40%

(W4) Unrealised profitsA Adjust stock in Winner/ profit in Trier by B100,000 (see note (v)).

B Fixed asset in Champion (note vii): • Eliminate profit on disposal (Winner) B100,000 (B500,000transfer value-400,000book value)• Uplift book value• Additional depreciation (Champion) B25,000 pa for 3 years = B75,000• Current depreciation: B500,000transfer value @ 1/4th

remaining useful life= 125,000 pa• Original depreciation: B800,000original cost@12½% = 100,000 pa• Difference B25,000 pa – Extra depreciation to be adjusted

(W5) Consolidated balance sheet working accountsCost of control accountBB000 BB000

Investment in Winner 2,500 Ordinary share capital (750Winner @ 80%) 600Investment in Trier (1,500cost @ 80%) 1,200 Ordinary share capital (500Trier @ 60%) 300

Reserves Winner (1,450pre-acquisition @ 80%) 1,160Reserves Trier (940pre-acquisition @ 60%) 564Revaluation surplus (350land note (iv) @ 80%) 280

_____ Balance c/d – goodwill 7963,700 3,700

Balance b/d 796 Goodwill amortised (6years/8years × 796balance b/d) 597___ Balance b/d 199796 796


Ordinary share capital (750Winner @ 20%) 150Investment in Trier (1500cost @ 20%) 300 Ordinary share capital (500Trier @ 40%) 200

Revenue reserves (1,750Winner –100profit on disposal @ 20%) 330Revenue reserves (1,290Trier –100profit on sale stock@ 40%) 476

Balance c/d 926 Revaluation surplus (350land note (iv) @ 20%) 701,226 1,226


15

Consolidated revenue reserves accountBB BB

Unrealised profit in stock (note v) 100 Champion 2,970Unrealised fixed asset profit (note vii) 100 Winner 1,750Minority – Winner (1,750reserves Trier 1,290

–100unrealised fixed assets profit @20%) 330Minority–Trier (1,290reserves Depreciation adjustment (25adjustment pa × 3years) 75

–100unrealised stock profit @ 40%) 476Cost of control Winner 1,160 Associated company Cost of control Trier 564 (120[420 retained profits – 300 pre-acquisition] @ 30%group share) 36Goodwill amortised: Subsidiaries 597

Associatesee below 45 Balance c/d 2,749

6,121 6,121

(W6) Investment in associateInvestment in associate

BB BB

Investment @ cost 240 Goodwill amortised (3years /8years × [240cost–[100share capital+300pre-acquisition reserves@30%]]) 45

Group share of post-acquisition revenue reserves (420reserves–300pre-acquisition @ 30% 36 Balance c/d 231

276 276

Presentation of associated company BB

Group share of net assets at balance sheet date 520share capital 100 and reserves 420 @ 30% 156Group share of goodwill: (5years /8years × [240cost–[100share capital+300pre-acquisition reserves@30%]) 75

231

(W7) Workings for the balance sheet

Champion Winner Trier Inter TotalBB000 BB000 BB000 BB000 BB000

Land 750 400 850 fair value adjustment (iv)350 2,350Equipment 1,045 345 250 depreciation (3 × 25,000)75

_____ ___ _____ unrealised profit (vii)(100) 1,615Tangible assets 1,795 745 1,100 325 3,965Stocks 644 423 241 profit(100) 1,208Debtors 921 647 407 1,975Bank 713 232 353 1,298Creditors due within one year 843 1,047 311 2,201Creditors due after one year 1,000 1,000

Champion and GroupConsolidated balance sheet at 31 December 20X9

BB000 BB000Fixed assetsIntangible fixed assets (W5) 199Tangible fixed assets (W7) 3,965Financial fixed asset

Investment in associate (W6) 231

Current assetsStocks (W7) 1,208Debtors (W7) 1,975Bank (W7) 1,298

4,481Less: Creditors due within one year (W7) 2,201Net current assets 2,280

6,675

Creditors falling due after more than one year (W7) 1,000

Share capital and reservesOrdinary share capital 2,000Revenue reserves (W5) 2,749Minority interest (W5) 926

6,675


16

8.1 Luke and Warm(W1) Group structure

Luke Warm

75% 31.12.20X1

(W2) AdjustmentsBonus issue BB BB

Dr Capital reserve 20,000Cr Share capital 20,000

DevaluationDr Capital reserve 14,000Cr Fixed assets 14,000

(W3) Provision for unrealised profitUnrealised profit B4,800inter-company stock × 20mark-up /120cost + mark-up = B800Dr Cost of control 600Dr Minority interest 200Cr Stock 800

(W4) Consolidated balance sheet working accountsCost of controlBB BB

Cost 100,000 Ordinary share capital (100Warm@ 75%group share) 75,000Capital reserve —

Unrealised profit (W3) 600 Revenue reserve (10pre-acquisition @ 75%group share) 7,500Profit and loss account (10pre-acquisition @ 75%group share) 7,500

_______ Goodwill 10,600100,600 100,600

Consolidated revenue reservesBB BB

Cost of control (W3) 7,500 Luke 20,000Minority interest 2,500 Warm 10,000Consolidated balance sheet 20,000 ______

30,000 30,000

Consolidated profit and loss accountBB BB

Cost of control 7,500 Luke 50,000Minority interest 2,500 Warm 10,000Consolidated balance sheet 50,000 ______

60,000 60,000


Unrealised profit (W3) 200 Ordinary share capital (100Warm × 25%minority share) 25,000Consolidated balance sheet 29,800 Revenue reserve (10Warm @ 25%minority share) 2,500

______ Profit and loss account (10 Warm @ 25%minority share) 2,50030,000 30,000

Alternative approach (assuming share capital and capital reserves are before bonus issue and fixed asset write down)

Alternative cost of controlBB BB

Cost 100,000 Ordinary share capital (80Warm @ 75%group share) 60,000Capital reserve (34pre-acquisition × 75%group share) 25,500

Devaluation (14 @ 75%group share) 10,500 Revenue reserve (10 pre-acquisition × 75%group share) 7,500Unrealised profit (W3) 600 Profit and loss account (10 pre-acquisition × 75%group share) 7,500

_______ Balance c/d – goodwill 10,600111,100 111,100


17

Alternative minority interestBB BB

Unrealised profit (W3) 200 Ordinary share capital (80Warm @ 25%minority share) 20,000Devaluation (14 × 25%minority share) 3,500 Capital reserve (34Warm @ 25%minority share) 8,500Consolidated balance sheet 29,800 Revenue reserve (10Warm @ 25%minority share) 2,500

______ Profit and loss account (10Warm @ 25%minority share) 2,50033,500 33,500

Luke and GroupConsolidated balance sheet at 31 December 20X1

BB BB

Fixed assets (–14devaluation) 367,000Goodwill 10,600

Current assetsStock (–800unrealised profit) 39,200Bills receivable (–700inter-company) 1,300Debtors and bank 37,000

77,500

Current liabilitiesCreditors 52,500Bills payable (–700inter-company) 2,800

55,300 22,200399,800

Share capital 300,000Revenue reserves 20,000Profit and loss account 50,000


399,800

Note: There is a contingent liability for bills receivable discounted of B900 (B1,200Q – 300inter-company bills receivable discounted and now eliminated).

9.1 Harold (W1) Group structure

100%Harold Sivex

Consolidated balance sheets (a) (b)Acquisition Merger

method methodBB BB

Freehold property 960,000 860,000Goodwill (250cost – [139net assets acquired + 100revaluation]) 11,000 Current assetsCash 79,000 79,000Other 70,000 70,000

149,000 149,000Creditors: Amounts falling due within one year (155,000) (155,000)Net current (liabilities) (6,000) (6,000)

965,000 854,000Creditors: Amounts falling due after more than one year Bank term loan 400,000 400,000

Ordinary shares 350,000 350,000Capital reserves 210,000* 35,000**Revenue reserves 5,000 69,000

565,000 454,000965,000 854,000

BB

*Capital reservesHarold 60,000Sivex —Share premium (100,000shares issued × B1.50premium) 150,000

210,000


18

**Nominal value of shares issued 100,000 Nominal value of shares acquired 70,000

(30,000)Capital reserves – Harold 60,000

– Sivex 5,00035,000

9.2 Mergacquis(W1) Group structure

90%Mergacquis Sivex

Consolidated balance sheets (a) (b)Acquisition Merger

method methodBB BB

Freehold property 930,000 880,000Goodwill (180cost – [149net assets acquired+ 50revaluation] @ 90%group share) 900 _______Current assets 930,900 880,000

Stock 120,000 120,000Debtors 80,000 80,000Cash 99,000 99,000

299,000 299,000Creditors: Amounts falling due within one year (175,000) (175,000)Net current assets 124,000 124,000Total assets less current liabilities 1,054,900 1,004,000

Creditors: Amounts falling due after more than one year Bank term loan 350,000 350,000

Share capital and reserves Ordinary shares 400,000 400,000Capital reserves (80,000share premium+ 80,000capital reserves) 160,000 65,500*Revenue reserves 125,000 173,600

685,000 639,100Minority interest (149net assets acquired+ 50revaluation) @ 10%minority share) 19,900 14,900

1,054,900 1,004,000

BB000 BB000*Capital reserves Mergacquis 80.0Sambon (15,000 @ 90%group share) 13.5

93.5Nominal value of shares: Issued 100.0

Acquired 72.0 (28.0)65.5

10.1 Large, Medium and SmallConsolidated workings

(W1) Group structure

90%

Large Medium

60%

Small

(W2) Intercompany cost of sales adjustment BB000In Large: Purchases from Small less closing stock (1,500sales–300stock) 1,200In Small: Goods sold to Large and in stock @ year-end (300stock – 331/3%) 200

1,400

(W3) Intercompany dividends in Large BB000From Medium ([240dividends – 40preference dividends] @ 90%group share) 180From Small (60dividends @ 60%group share ) 36

216


19

(W4) Consolidated profit and loss Large Medium Small Adjustment Consolidatedaccount profit and

loss accountBB000 BB000 BB000 BB000 BB000

Sales 17,000 10,000 1,500 (1,500) 27,000Cost of sales (12,000) (6,000) (1,000) 1,400 (17,600)Gross profit 5,000 4,000 500 (100) 9,400Expenses (3,600) (2,400) (280) (6,280)Investment income 216 — — (216) —Profit before tax 1,616 1,600 220 (316) 3,120Tax (628) (650) (70) (1,348)Profit after tax 988 950 150 (316) 1,772Minority interest – preference (40) —Minority interest – ordinary (91) (60) Minority interest in unrealised profit ___ ____ ___ 40

— (131) (60) 40 (151)

Profit after tax after minority interest 988 819 90 (276) 1,621Dividends: Large (400) (400)Dividends: Medium (180) 180 Dividends: Small ___ ___ (36) 36 _____Retained for year 588 639 54 (60) 1,221Retained b/f 912 540 310 Less: Pre-acquisition — (140) (110) Post-acquisition 912 400 200

Group share (90% / 60%) 912 360 120 1,392Retained c/f 1,500 999 174 (60) 2,613

10.2 Head and ToeConsolidated workings

(W1) Group structure:

80% Ordinary share capital

Head Toe

1/10/20X4

(W2) Revaluation of tangible fixed assets at acquisition and depreciation adjustmentBB

Total revaluation surplus 175,000Group share (80%) 140,000

Minority share (20%) 35,000

Plant and machineryDepreciation on revalued amount (50,000 @ 20%) 10,000

For six months (6months /12months) 5,000

Group share (80%) 4,000

Minority share (20%) 1,000

(W3) Pre-acquisition dividendDividend for year ended 31 March 20X5 B60,000

Group share (80%) B48,000

Pre-acquisition (6months /12months) B24,000

Post-acquisition (Consolidated profit and loss) B24,000

(W4) Provision for unrealised profit in stockHead 25%mark-up on cost → 20%gross profit percentage on sales valueUnrealised profit on stock B50,000stock(half) @ 20%gross profit percentage on sales value = B10,000 Cost of sales adjustment = 100inter-company sales – 10unrealised profit on stock = B90,000

(W5) Total cost of sales adjustmentProvision for unrealised profit in stock (W4) 90,000Additional depreciation (W2) (5,000)

85,000


20


Cost of control accountBB000 BB000

Investment at cost Ordinary share capital (150Toe @ 80%group share) 120Toe 900 Pre-acquisition dividend (24) 876 Revaluation surplus (175excess fair values @ 80%group share) 140(60dividend × 6 months /12 months @ 80%group share) Profit and loss account ([500opening bal + 70six months] @ 80%group share) 456


Balance b/d 160 Consolidated profit and loss account (one-fifth × 6months /12months) 16___ Balance c/d 144160 160

Consolidated revenue reserves accountBB000 BB000

Provision for unrealised profit 10 Head 410Cost of control ([500opening bal+70six months]

@ 80%group share) 456 Toe 640Depreciation adjustment (W2) 4 Dividends receivable 24Goodwill amortisation 16 (60dividends × 6months /12months @ 80%group share)Minority interest (640Toe @ 20%minority share) 128 Consolidated balance sheet 460 _____

1,074 1,074


Depreciation adjustment (W2) 1 Ordinary share capital (150Toe @ 20%minority share) 30Consolidated balance sheet 192 Revaluation surplus (175excess fair value @ 20%minority share) 35

___ Profit & loss account (640Toe@ 20%minority share) 128193 193

(W7) Consolidated profit and loss account workings

Head Toe Adjustment Total6months /12months

BB000 BB000 BB000 BB000Turnover 1,200 500 (100) 1,600Cost of sales (650) (330) 85 W5 (895)

550 170 (15) 705Operating expenses (120) (44) (16) W6 (180)Operating profit 430 126 (31) 525Investment income 24 (24) —Debenture interest — (6) ___ (6)Profit before tax 454 120 (55) 519Tax (100) (20) ___ (120)

354 100 (55) 399Minority interest (20%) ____ (20) 1 W8 (19)Attributable to Group 354 80 (54) 380Dividends (80) (80)Inter-company dividends ___ (24) 24 W3 ___Retained for year 274 56 (30) 300Retained profit b/f 160 — — 160

434 56 (30) 460

(W8) Minority interest adjustment: profit and loss accountBB

Minority share of depreciation adjustment (B5,000 × 20%) 1,000

(W9) Retained earnings b/fwd

Head balance at 1.4.20X4 = B160,000


21

Consolidated profit and loss account for year ended 31 March

20X5 20X4BB000 BB000

Turnover 1,600Cost of sales (895) CGross profit 705 OOperating expenses (180) MOperating profit 525 PInterest payable (6) AProfit before taxation 519 RTaxation (120) AProfit after tax 399 TMinority interest (19) I

380 VDividends (80) EProfit retained for year 300 SRetained earnings b/f (W9) 160Retained earnings c/f 460

Consolidated balance sheet at 31 March 20X520X5 20X4

BB000 BB000 BB000Fixed assetsLand and buildings (400Head + 150Toe + 125excess fair value note (i)) 675Plant and machinery

(220Head + 510Toe + 50excess fair value note (i) – 5depreciation adjustment) 7751,450 C

Financial fixed assets 30 OIntangible fixed assets (W6) 144 M

1,624 PCurrent assets AStock (240Head + 280Toe – 10unrealised profit) 510 RDebtors (170Head + 210Toe – 56inter-company current account) 324 ACash (20Head + 40Toe + 20cash-in-transit) 80 T

914 ICreditors: Amounts due in less than one year VTrade creditors (170Head + 155Toe – 36inter-company current account) 289 ETax (50Head + 45Toe) 95 SDividends (40Head + 60Toe – 48inter-company) 52

436Net current assets 478Total assets less liabilities 2,102Creditors: Amounts due in more than one year (150)

1,952

Ordinary share capital (400balance sheet + 300share issue) 700Share premium account (300shares issued × B2premium on issue) 600Profit and loss account (W6) 460Shareholders’ funds 1,760Minority interest (W6) 192

1,952

11.1 Golf, Club, Ball and Tee(W1) Group structure

50% preference share capital

75% ordinary share capital

Golf Tee

1.11.X230%

1.7.X2

Ball

Investment in Club is a simple investment.

(W2) Unrealised profitB24,000 × 25% = B6,000 provision required


22

(W3) Dividends receivable by GolfPer question BB

Ball (60,000ordinary dividend @ 30%group share) 18,000Tee (32,000ordinary dividend @ 75%group share) 24,000

(9,000preference dividend @ 50%group share) 4,50046,500

To be recorded in consolidated profit and loss accountClub (100,000ordinary dividend @ 15%group share) 15,000Ball (60,000ordinary dividend @ 30%group share) 18,000Tee (32,000ordinary dividend @ 75%group share × 8months /12months) 16,000

(9,000preference dividend @ 50%group share × 8months /12months) 3,00052,000

Inter-company (18,000Ball + 16,000Tee ordinary + 3,000Tee preference) (37,000)Group (i.e., dividend due from Club – see note 2 of question) 15,000

To be recorded in consolidated revenue reserves accountClub (100,000ordinary dividend @ 15%group share) 15,000Less: Pre-acquisition Tee (32,000ordinary dividend @ 75%group share × 4months /12months) (8,000)

(9,000preference dividend @ 50%group share × 4months /12months) (1,500)5,500

(W4) Consolidated workings: Golf Tee Adjustment Total BallProfit and loss account 75% 30%

8/12BB000 BB000 BB000 BB000 BB000

Turnover (W2) 2,100 800 (24)* 2,876 1,900Expenses (W2) (1,850) (716) 18* (2,548) (1,690)Operating profit (W2) 250 84 (6) 328 210Dividends receivable (W3) 52 (37) 15 Share of associate (30%) ___ ___ ___ 63 63

302 84 (43) 406 63Taxation (90) (34) (124) Share of associate (30%) ___ ___ ___ (25.5) (25.5)

212 50 (43) 256.5 37.5Minority interest: Preference dividend

(9,000preference dividend @ 50% minority share × 8months /12months) (3) Attributable to ordinary minority shareholders

(50,000profit after tax – [9preference dividend × 8months /12months] 25%minority share) ___ (11) ___ (14) ____

212 36 (43) 242.5 37.5

Profit b/f 450 200 720.5 (30%)70.5 Pre-acquisition profits (75%group share) (150) (220.5) (70.5)Minority interest in pre-acquisition profits (25%minority interest) ___ (50) (50) ___

450 — 450 —

Profit c/f 662 36 (43) 692.5 37.5Dividends – Golf (132) (132) Inter-company: Tee (32ordinary dividend × 75%group share × 8months /12months) (16) 16 —Tee (9preference dividend × 50%group share × 8months /12months) (3) 3 —Ball (60ordinary dividend × 30%group share) ___ ___ 18 — (18)

530 17 (6) 560.5 19.5

*Adjustments to sales and expenses are incomplete and based only on details relating to goods remaining in stock at the year-end.

(W5) For information only: Balance sheet workings (extract)

Consolidated revenue reserves accountBB BB

Provision for unrealised profit 6,000 Golf 524,500Pre-acquisition Tee* 158,500 Dividend receivable (52W3 – 46.5W3) 5,500Minority interest: (234Tee @ 25%minority share) 58,500 Tee 234,000Consolidated balance sheet 560,500 Ball (65,000retained profit × 30%group share) 19,500

783,500 783,500

*Pre-acquisition profits of Tee BB

Retained profits b/f 200,000Pre-acquisition (34,000current year retained profit × 4months /12 months) 11,333

211,333

Group share (75%) 158,500


23

Golf GroupConsolidated profit and loss accountfor the year ended 30 June 20X3

Notes BB

Turnover 1 2,876Expenses (2,548)Operating profit 2 328Investment income 15Share of pre-tax profits of associate 63Profit before tax 3 406Taxation

Group (124)Associate (25.5)

Profit after tax 256.5Minority interest (14)Profit attributable to group 4 242.5Dividends (132)Profit retained for year 110.5Balance b/f 450Retained profit c/f 5 560.5

Notes to the accounts

Note 4 Profit attributable to the groupOf this profit, B212,000W4 is dealt with in the accounts of Golf.

Note 5 Retained profitBB000

Retained in group 541Retained in associates (W4) 19.5

560.5

(b) Consolidated workings: Golf Tee Adjustment Total BallProfit and loss account 75% 30%

8/12BB000 BB000 BB000 BB000 BB000

Turnover (W2) 2,100 800 (24)* 2,876 1,900Expenses (W2) (1,850) (716) 18* (2,548) (1,690)Operating profit (W2) 250 84 (6) 328 210Dividends receivable (W3) 52 (37) 15 Share of associate (30%) ___ ___ ___ 63 63

302 84 (43) 406 63Taxation (90) (34) (124) Share of associate (30%) ___ ___ (25.5) (25.5)

212 50 256.5 37.5Minority interest: Preference dividend (9,000preference dividend @ 50% minority share × 8months /12months) (3) Attributable to ordinary minority shareholders (50,000profit after tax – [9preference dividend × 8months /12months] 25%minority share) (11) (14) Minority share of unrealised profit (6unrealised profit @ 25%minority interest) ___ __ 1.5 1.5 ____

212 36 (41.5) 244.0 37.5

Profit b/f 450 200 720.5 (30%)70.5 Pre-acquisition profits (75%group share) (150) (220.5) (70.5)Minority interest in pre-acquisition profits (25%minority interest) ___ (50) (50) ___

450 — 450 —

Profit c/f 662 36 (41.5) 694 37.5Dividends – Golf (132) (132) Inter-company: Tee (32ordinary dividend × 75%group share × 8months /12months) (16) 16 —Tee (9preference dividend × 50%group share × 8months /12months) (3) 3 —Ball (60ordinary dividend × 30%group share) ___ ___ 18 — (18)

530 17 (4.5) 562 19.5

*Adjustments to sales and expenses are incomplete, and based only on details relating to goods remaining in stock at the year-end.


24

Balance sheet workings (extract)Consolidated revenue reserves account

BB BB

Provision for unrealised profit 4,500 Golf 524,500Pre-acquisition Tee* 158,500 Dividend receivable (52W3 – 46.5W3) 5,500Minority interest: (234Tee @ 25%minority share) 58,500 Tee 234,000Consolidated balance sheet 562,000 Ball (65,000retained profit × 30%group share) 19,500

783,500 783,500

11.2 Kale, Leek, Neep and Sage(W1) Group structure

Kale

1.3.X0 1.3.X4 1.4.X4↓ ↓ ↓

80% 40% 90%

Leek SageNeep

(W2) Adjustments

Neep’s gross margin3,105/6,900 = 45%

Unrealised profitB222,435 @ 45% = B100,096

Say B100,000

• Paragraph 31(b) FRS 9: Adjust for associated company unrealised profit in stock.• Adjust for the group share of unrealised profit, against the group share of the associated company’s profit (i.e., B40,000).

(W3) Dividends received/receivable by KaleBB000

Leek (180dividend × 80%group share) 144Sage (250dividend × 90%group share) 225Neep (150dividend × 40%group share) 60

429Less: Pre-acquisition (225Sage × 1month/12months) 18.75Group 410.25

(W4) Consolidated workings: Profit and loss account

Kale Leek Sage Adjustment Total Neep11/12

BB000 BB000 BB000 BB000 BB000 BB000Turnover 15,721 5,488 5,594 26,803 6,900Cost of sales (8,018) (3,183) (2,349) ______ (13,550) (3,795)Gross profit 7,703 2,305 3,245 13,253 3,105Distribution expenses (1,964) (622) (1,040) (3,626) (875)Administration costs (4,584) (1,384) (1,555) ______ (7,523) (1,799)Operating profit 1,155 299 650 2,104 431Dividend income 410.25 ____ ____ (410.25) ____Profit before tax 1,565.25 299 650 (410.25) 2,104Share of Neep (40%) — — — (40.00) 132 172Profit before tax 1,565.25 299 650 (450.25) 2,236 172Tax (504.00) (112) (236) (852)Share of Neep (40%) — — — — (59) (59)

1,061.25 187 414 (450.25) 1,325 113Minority interest — (37)20% (41)10% _______ (78) —Attributable to group 1,061.25 150 373 (450.25) 1,247 113Profit b/f 3,216 175 463 3,854 78.8Minority interest — (35)20% (46) (81) (78.8)Pre-acquisition — 12 (417) (405) ___

3,216 152 — 3,368 —Profit c/f 4,277.25 302 373 (450.25) 4,615 113Dividend (500) — — (500) —Inter-company (W3) (144) — 144 — —Dividends (206.25) 206.25 — —

________ ___ ______ 60 — (60)3,777.25 158 166.75 (40) 4,115 53


25

(W5) For information only: Balance sheet workings


Unrealised profit 40.0 Kale 3,796Sage: Pre-acquisition (463retained profit b/f +

[201retained profit for year × 1/12] @ 90%group share) 431.8 Leek 182Sage: Pre-acquisition dividend (250dividend × 90%group share × 1month/12months) 18.8 Sage 664Minority Interest Neep (133current year retained profit @ 40%group share) 53Leek (182retained profit @ 20%minority share) 36.4 Leek: Pre-acquisition (15debit on p/l @ 80%group share) 12Sage (664 retained profit @ 10%minority share) 66.4Consolidated balance sheet 4,113.6 _____

4,707.0 4,707

Pre-acquisition profits of Sage BB000Retained profits b/f at 1.3.20X4 463Pre-acquisition (201current year retained profit x 1month /12months) 16.75

479.75Group share (90%) 431.78

Kale GroupConsolidated profit and loss account for year ended 28 February 20X5

Notes BB000Turnover 1 26,803Cost of sales (13,550)Gross profit 13,253Distribution costs (3,626)Administration expenses (7,523)Operating profit 2,104Share of pre-tax profits of associated undertaking 132Profit on ordinary activities before tax 2 2,236Taxation 3 (911)Profit after tax 1,325Minority interest (78)Profit attributable to group 4 1,247Dividends (500)Profit retained for year 747Balance b/f 3,368Retained profit c/f 5 4,115

12.1 Atley, Bartram and Conway: disposal of entire holding mid-year(W1) Group structure

20W6 100%

1.7.20X6 (100%)

Atley Conway

75% 30.9.20X6

Bartram

(W2) Profit/loss on disposal of Conway (a)BB

Proceeds 100,000 × B3 300,000Less: Cost (150,000)Profit in the individual accounts of Atley 150,000

Loss in group accounts = ① Profit in company accounts less ② post-acquisition retained profits of subsidiary disposed of

BB BB

① Profit in company accounts 150,000② Post-acquisition profits disposed ofReserves at 31.12.20X5 (400closing profit – 24current year profit) 376,000Current year profit to date disposal (24 × 6months /12months) 12,000Total reserves to date of disposal 388,000Pre-acquisition profit (200,000)Post-acquisition profit disposed of (188,000)Consolidated loss on disposal (38,000)


26

(W3) Profit and loss account columnar workings (d)3/12 6/12

Atley Bartram Conway Adjustment TotalBB000 BB000 BB000 BB000 BB000

Operating profit 500.00 25 25 — 550Dividend receivable (20 x 75%group share × 3months /12months) 3.75 (3.75) Profit/(loss) on disposal of subsidiary (W2) 150.00 — — (188.00) (38)Profit before tax 653.75 25 25 (191.75) 512Taxation (260.00) (13) (13) — (286)

393.75 12 12 (191.75) 226Minority interest (12 × 25%) — 25% (3) — — (3)

393.75 9 12 (191.75) 223Profit b/f (900Q–150profit on disposal Conway–180profit for year) 570.00 570

(600Q – 28profit for year) 572 572(400Q – 24profit for year) 376 376

Pre-acquisition (572 × 75%group share) (429) (200) (629)Minority interest (572 @ 25%minority interest) — (143) — — (143)

570.00 Nil 176 — (b) 746Profit c/f 963.75 9 188 (191.75) 969Proposed dividend (60.00) (60)Inter-company dividend (20 x 75%group share × 3months /12months) (3.75) 3.75 Reserves no longer consolidated — — (188) 188.00 —

903.75 5.25 — — 909

(W4) Consolidated workings: balance sheetReversing the entries (proposed dividends)Gross of pre-acquisition dividend (in cost of control)


Cost of investments – Bartram 700 Ordinary share capital (200 @ 75%group share) 150Reserves 456([600Q – 28retained profit for year] + [48profit for year × 9/12] @ 75%group share)

___ Goodwill 94700 700


Pre-acquisition 456 Atley 900Minority interest (620 @ 25%minority interest) 155 Bartram (+ 20inter-company dividend) 620Consolidated balance sheet 909 _____

1,520 1,520


Current liability (20proposed dividend × 25%minority share) 5 Share capital (200 @ 25%minority interest) 50Consolidated balance sheet 200 Revenue reserves (620 @ 25%minority interest) 155

205 205

(W5) Alternative approach to balance sheet workings: Complete the entries and net cost

Cost of controlBB BB

Cost of investment 700.00 Ordinary share capital (200 @ 75%group share) 150.00Less: Pre-acquisition dividends receivable Reserves ([600Q – 28retained profit for year] + [28profit for year(20proposed dividend × 9months /12months @ 75%group share) (11.25) × 9/12] @ 75%group share) 444.75

______ Goodwill 94.00688.75 688.75


Pre-acquisition profit 444.75 Atley 900.00Minority interest (600 @ 25%minority interest) 150.00 Bartram 600.00Consolidated Balance Sheet 909.00 Dividends receivable 3.75

(20proposed dividend x 75%group share x 3months /12months) ________1,503.75 1,503.75


27


Ordinary share capital (200 @ 25%group share) 50Consolidated balance sheet 200 Reserves (600 @ 25%minority interest) 150

200 200

Dividend eliminationBB BB

Investment @ cost 11.25 Proposed dividend: Bartram 20Revenue reserves 3.75 Due to minority 5.00 __

20.00 20

(W6) Consolidated profit and loss account for year ended 31 December 20X6 (d)

BB000Operating profit 550Loss on disposal of subsidiary (38)Profit before tax 512Tax (286)Profit on ordinary activities after tax 226Minority interest (3)Profit attributable to group shareholders 223Dividends (60)Retained profit 163Balance b/f 746Balance c/f 909

(W7) Consolidated balance sheet at 31.12.20X6 (c)BB000 BB000

Fixed assets (1,200Atley + 700Bartram) 1,900Goodwill (W5) 94Net current assets (100Atley + 100Bartram) 200Proposed minority dividend (W5) (5) Add back: Proposed dividend Bartram 20 215

2,209

Share capital 700Revenue reserves (W5) 909

1,609Minority interest (W5) 20012% debentures (400Atley) 400

2,209

(W8) Reconciliation: Consolidated reserves for 20X6 (e)B000 BB000

Opening balance (W3) (b) 746([900Q Atley– 150profit on disposal conway – 180profit for year] + [400Q Conway – 200pre-acquisition – 24profit for year])Profit for year before exceptional item (W3) 550Tax charge (W3) (286) 264Minority interest (W3) (3)Exceptional itemCompany profit and loss account (W2) 150Consolidated reserves of Conway no longer consolidated (W2) (188) (38)Proposed dividend (60)Balance c/f (W3) 909


28

12.2 Hot, Cross and Bun(W1) Group structure

90% 1.7.X6

Hot Bun

90% 1.10.X0

(20%) 31.3.X6

Cross

Sale of part-shareholding but with retention of control

(W2) Post-acquisition retained profits on shares disposedBB000

Profit retained at 30.9.X6 10Add: Loss from 1.4 – 30.9.X6 (2nd six months) 10Retained profit at date of disposal (31.3.X6) 20Less: Profit at date of acquisition (40cent per share note 1) (40)Loss since acquisition (20)

(W3) Exceptional profitBB000

Proceeds of disposal (20,000 × B1.70proceeds of disposal per share) 34Cost (20,000 × B1.20cost per share) (24)Exceptional profit: Parent company 10Post-acquisition retained loss (20,000)loss W2 × 20%group share disposed) 4Group exceptional profit 14

(W4) Consolidated balance sheet workings

Complete entries, net cost of investmentCost of control

BB000 BB000Investment @ cost Cross (100share capital @ 70%group share) 70Cross (70shares × B1.20cost per share) 84 Cross (40reserves @ 70%group share) 28Bun 180 Bun (100share capital @ 90%group share) 90Less: Bun pre-acquisition dividend Bun (40profit b/f × 90%group share) 36(20proposed dividend × 90%group share × 9months /12months) (13.5) Bun (20profit for year × 90%group share × 9months /12months) 13.5

Balance c/d – goodwill 13 250.5 250.5

Consolidated profit and loss accountBB000 BB000

Cost of control Hot 284Cross (40reserves @ 70%group share) 28 Cross 10Bun (40profit b/f × 90%group share) + (20profit for year × Bun 6090%group share × 9months /12months) 49.5Minority interest Exceptional profit on disposal 10Cross (10reserves @ 30%minority share) 3 Dividends receivableBun (60reserves @ 10% minority share) 6 (20 @ 90%group share × 3months /12months) 4.5Consolidated B/S 282 368.5

368.5


Cross (100ordinary share capital @ 30%minority share) 30Bun (100ordinary share capital @ 10%minority share) 10Cross (10reserves @ 30%minority share) 3

Consolidated balance sheet 49 Bun (60reserves @ 10% minority share) 649 49

Dividend eliminationBB000 BB000

Dividends receivable: Bun proposed dividend 20Cost of control: Bun pre-acquisition dividend 13.5(20proposed dividend × 90%group share × 9months /12months) Revenue reserves 4.5 Due to minority (20proposed dividend × 10%minority share) 2.0 __

20.0 20


29

(W5) Consolidated profit and loss account columnar workings

3/12 Hot Cross Bun Adjustment Total BB000 BB000 BB000 BB000 BB000

Operating profit 250.0 (20) 16.25 246.25 Profit on disposal 10.0 4.0 14.00Dividends receivable (20,000 × 90%group share × 3/12) 4.5 ___ _____ (4.5) ______Profit before tax 264.5 (20) 16.25 (0.5) 260.25Taxation (128.0) — (6.25) ____ (134.25)Profit after tax 136.5 (20) 10.00 (0.5) 126.00Minority interest (20,000 × 6/12 × 10%minority share) 1

(20,000 × 6/12 × 30%minority share) 3 Bun: 10% _____ ___ (1.00) ___ 3.00Profit for year 136.5 (16) 9.00 (0.5) 129.00 Profit b/f 242.0 30 40 Minority interest (3) (4)Pre-acquisition reserves — (36) (36)

242.0 (9) — 233.00

Profit c/f 378.5 (25) 9.0 (0.5) 362.00 Accumulated losses no longer consolidated 4 (4.0)([(10)+(10)]@ 20%portion disposed of) Proposed dividend (80.0) (80.00)Inter-company dividend _____ ___ (4.5) 4.5 ______

298.5 (21) 4.5 — 282.00

Consolidated profit and loss account BB000

Operating profit 246.25 Profit on disposal 14.00Profit before tax 260.25Taxation (134.25)Profit after tax 126.00Minority interest 3.00Profit attributable to the group 129.00 Proposed dividend (80.00)

49.00Profit b/f 233.00Profit c/f 282.00


Net assets (430Hot + 110Cross + 160Bun + 20proposed dividend –2 minority interest in proposed dividend) 718Goodwill (W4) 13

731

Share capital 400Revenue reserves (W4 /W5) 282

682Minority interest (W4) 49

731

12.3 Leap, Jump and Step(W1) Group structure

Ordinary share capital 100% 30.9.X3Ordinary share capital (62½%) 1.10.X3Preference share capital 66.67%

Leap Jump

80%

Step

On disposal of 62½% of Jump by Leap, Jump becomes an associated undertaking half-way through the year


30

(W2) Profit/loss on disposal – Jump Individual accounts of Leap BB000Proceeds 700Cost 500shares disposed / 800shares owned × B1,880cost (1,175)Loss 475

Group loss/profit BB000 BB000Company loss (475)Post-acquisition retained profit disposed ofRetained profits at 31.3.X4 630Less: Retained 1.10.X3 to 31.3.X4 (200retained profit × 6months /12months) (100)Retained profits to date of disposal 530Pre-acquisition profit (520)Post-acquisition profit 10Amount disposed of (62½%) (6.25)Consolidation loss on disposal (481.25)

(W3) Pre-acquisition reserves – Step

The question does not specify whether B900,000 reserves are gross (i.e., before pre-acquisition dividend) or net of pre-acquisitiondividend. The solution assumes that B900,000 reserves are before deduction of the dividend which gave Leap B50,000 return ofcapital.


Cost of control accountBB000 BB000

Cost – Step 1,655 Step (700ordinary share capital @ 80%group share) 560Pre-acquisition dividend (50) Step (900revenue reserves @ 80%group share) – 50pre-acquisition dividend) 670

_____ Balance c/d – goodwill 3751,605 1,605


Loss on disposal of subsidiary 475.00 Leap 2,030.00Minority interest 324.00 Dividends receivable (100from Step × 80%group share + (1,620Step @ 20%minority share) 100from Jump @ 37.5%group share) 117.50Pre-acquisition: Cost of control(900Step@ 80%group share) – 50pre-acquisition dividend) 670.00 Step 1,620.00Consolidated balance sheet 2,339.75 Jump – share of associate 41.25

([630reserves–520pre-acquisition profit] @ 37½%group share)3,808.75 3,808.75


Consolidated balance sheet 464 Step: (70,000ordinary share capital @ 20%minority share) 140___ Step: (1,620Step @ 20%minority share) 324464 464

Investment in associateBB000 BB000

Investment @ cost (1,880 @ 37½%group share) 705.00 Post-acquisition revenue reserves ([630reserves–520pre-acquisition profit] @ 37½%group share) 41.25 Preference shares @ cost 190.00 Consolidated balance sheet 936.25

936.25 936.25

Investment in associate – Jump BB000Share of net assets ([1,730total net assets – 300preference shares] × 37½%group share) + (300preference shares @ 66.7%group share)) 736.25Goodwill: ([1,880total cost × 3/8 + 190cost preference shares] – [300ordinary share capital + 200preference shares + (520reserves @ 37½%group share)]) 200.00

936.25

Dividend eliminationBB000 BB000

Revenue reserves 80 Proposed dividends: Step 100Due to minority 20 ___

100 100


31

Dividend receivableBB000 BB000

Revenue reserves: Due from Jump 37.50 Consolidated profit and loss account 37.50

(W5) Consolidated profit and loss account workings Leap Jump Step Adjustment Total Jump

6/12 6/12BB000 BB000 BB000 BB000 BB000 BB000

Profit for the year 523.0 215.00 310 (120.00) 928.00 215Loss on disposal (475.0) (6.25) (481.25)

Dividends receivable: Jump 37.5 (37.50) Step 80.0 ______ ___ (80.00) _____ ___

165.5 215.00 310 (243.75) 446.75 215Share of Jump’s profits

(430–30 × 6/12 @ 37.5%) + (30 × 2/3 × 6/12) ____ _____ ___ _______ 85.00 85Profit after tax 165.5 215.00 310 (243.75) 531.75 85Minority interest (20%) (62) Preference dividends of Jump (30 × 6/12 × 1/3) ____ (5.00) ___ ______ (67.00) __

165.5 210.00 248 (243.75) 464.75 85

Profit b/f 1,707.0 430.00 1,410 3,547.00Pre-acquisition (520.00) (520.00)((900Step pre-acquisition @ 80%) – 50pre-acquisition dividend) (670) (670.00)Minority interest (@20%) ______ _____ (282) _____ (282.00) __

1,707.0 (90.00) 458 — 2,075.00 —Profit c/f 1,872.5 120.00 706 (243.75) 2,539.75 85Reserves no longer consolidated (6.25) 6.25 Dividend (200.0) (200.0)Inter-company dividendsJump ordinary paid (100.00) 100.00 Jump preference paid (10.00) 20.00 (10.0)Jump ordinary proposed 37.50 (37.5)Step ordinary proposed (80) 80.00 Transfer of reserves _______ (3.75) — — — 3.75

1,672.5 — 626 — 2,339.75 41.25

Leap and GroupConsolidated profit and loss account

BB000Profit for the year 928.00Loss on disposal (481.25)

446.75Share of associate’s profits 85.00Profit after tax 531.75Minority interest (67.00)Profit attributable to group 464.75Dividend (200.00)Profit retained for year 264.75Profit b/f 2,075.00Profit c/f 2,339.75

Leap and GroupConsolidated balance sheet BB000 BB000Fixed assets (3,205Leap + 1,760Step) 4,965.00Goodwill (W4) 375.00Investment in associate (W4) 936.25Current assets Stock (1,740Leap + 1,060Step) 2,800.0Debtors (910Leap + 840Step + 37.5dividend receivable from Step) 1,787.5Bank (950Leap) 950.0

5,537.5Creditors: Amounts falling due within one year Bank overdraft (130Step) 130.0Creditors (1,850Leap + 910Step) 2,760.0Proposed dividends (200Leap + 20minority share of Step proposed dividend) 220.0

3,110.0 2,427.508,703.75


32

Creditors: Amounts falling due after more than one year Long-term loan 2,400.00Share capital and reserves Share capital 2,000.00Share premium 1,500.00Revenue reserves (W4) 2,339.75 5,839.75Minority interest (W4) 464.00

8,703.75

12.4 Knife, Fork and Spoon(W1) Group structure at beginning of year

80%

Knife Spoon

75%

Fork

Disposal of Spoon shares Date Proportion of Spoon’s Holdingprofit included in remainingconsolidated P/L

(A) Sale of entire holding 1 January 20X9 0%

(B) Sale of part-holding 1 April 20X9 3months /12months 60%→Retention of control

(C) Sale of part-holding 1 July 20X9 6months /12months 5%→Retention of simple investment

(D) Sale of part-holding 1 October 20X9 9months /12months 30%→Retention of associated undertaking

(W2) Gain / loss on disposal

(A) (B) (C) (D)BB BB BB BB

Proceeds 700 180 600.00 500.0Original cost (300) (20proportion sold /80original group share × B300original cost) (75) (75proportion sold /80original group share × B300original cost) (281.25)(50proportion sold /80original group share × B300original cost) ___ ___ ______ (187.5)

Profit in the individual accounts of Knife 400 105 318.75 312.5

Post-acquisition retained profits ‘sold’ (160) (300opening reserves – 100pre-acquisition profit) × 80%group share ‘sold’ (40) (300opening reserves – 100pre-acquisition profit) × 20% group share ‘sold’ (150.00)(300opening reserves – 100pre-acquisition profit) × 75%group share ‘sold’ (100.0)(300opening reserves – 100pre-acquisition profit) × 50%group share ‘sold’

Profit 20X9 ‘sold’ (200retained profit for year × 3months /12 months) × 20%group share ‘sold’ (10) (200 retained profit for year × 6 months /12 months) × 75%group share ‘sold’ (75.00)(200 retained profit for year × 9 months /12 months) × 50%group share ‘sold’ ___ ___ ___ (75.0)

Group profit 240 55 93.75 137.5

(W3) Simple investment – additional consolidation adjustment required

Profits attaching to remaining 5% now included in surrogate costsBB

Post-acquisition profits (300opening reserves – 100pre-acquisition profit) 200Profit to date of disposal (200retained profit for year × 6months /12months) 100

300 @ 5% = 15


33

(W4) Profit brought forwardKnife Fork Spoon GroupBB BB BB BB

Profit b/f 400 400 300 1,100Minority interest — 25%(100) 20%(60) (160)Pre-acquisition profit (group share) — (150) 80%(80) (230)

400 150 160 710

(W5) Consolidated profit and loss account: Workings(A) (B) (C) (D)BB BB BB BB

Profit before taxKnife 500 500 500.00 500.0Fork 400 400 400.00 400.0Spoon — 300 6/12150.00 9/12225.0

900 1,200 1,050.00 1,125.0Profit on disposal (W2) 240 55 93.75 137.5

1,140 1,255 1,143.75 1,262.5Share of associated undertaking (30% × 3 months /12 months) — — — 22.5

1,140 1,255 1,143.75 1,285.0Tax

Knife (200) (200) (200.00) (200.0)Fork (100) (100) (100.00) (100.0)Spoon — (100) 6/12(50.00) 9/12(75.0)

Share of associated undertaking (30% × 3months /12months) — — — (7.5)Profit after tax 840 855 793.75 902.5Minority interest

Fork (25%) (75) (75) (75.00) (75.0)Spoon (20% × 3 months /12months) (10) Spoon 20% × 6/12 (20.00)Spoon 20% × 9/12 (30.0)Spoon 40% × 9/12 ___ (60) — —

Group profit after tax and minority interest 765 710 698.75 797.5Dividends (100) (100) (100.00) (100.0)

665 610 598.75 697.5Retained profit b/f (W5) 710 710 710.00 710.0c/f 1,375 1,320 1,308.75 1,407.5

(W6) Minority interests – balance sheet workings(A) (B) (C) (D)BB BB BB BB

Fork: (800share capital + 300reserves) @ 25%minority share 275 275 275 275Spoon: (500share capital + 200 reserves) @ 40%minority share — 280 — —

275 555 275 275

(W7) Sundry assets (excluding cash on disposal) – balance sheet workings

Knife Fork SpoonBB BB BB

At 31 December 20X8 1,000 800 500Less: Investments (800) Add: Profit retained 200 300 200

400 1,100 700

(W8) Goodwill – balance sheet workings(A) (B) (C) (D)BB BB BB BB

Fork: 500cost – ((400share capital + 200pre-acquisition reserves) × 75%group share) 50 50 50 50Spoon: 60/80 × (300 cost – [200 share capital + 100 pre-acquisition reserves] @ 80%group share) — 45 — —

50 95 50 50


34

(W9) Investment in associated company – balance sheet workings (D only)BB

Spoon: Cost: (30%retained/80%acquired × B300total cost) 112.50Post-acquisition retained profit ((500total reserves–100pre-acquisition reserves) @ 30%group share) 120.00

232.50

Group share of Spoon net assets ([500opening net assets + 200profit for year] @ 30%group share) 210.00Goodwill on acquisition (30%retained/80%acquired × (300 cost – [200 share capital + 100 pre-acquisition reserves]) @ 80%group share) 22.50

232.50

(W10) Simple investment at surrogate cost – balance sheet workings (C only)BB

Actual cost 5/80 × B300 18.75Post-acquisition retained earnings (W3) 15.00

33.75

Consolidated balance sheets(A) (B) (C) (D)BB BB BB BB

Share capital 600 600 600.00 600.00Revenue reserves (W5) 1,375 1,320 1,308.75 1,407.50

1,975 1,920 1,908.75 2,007.50Minority interest (W6) 275 555 275.00 275.00

2,250 2,475 2,183.75 2,282.50

Net assets (W7) 1,500 2,200 1,500.00 1,500.00Cash proceeds 700 180 600.00 500.00Investments (W10) — — 33.75 —Goodwill (W8) 50 95 50.00 50.00Investment in associate (W9) _____ _____ ________ 232.50

2,250 2,475 2,183.75 2,282.50

16.1 Cormorant and Albatross(i) Conditions for merger accounting under the Seventh Directive

The Seventh Directive specifies three conditions that must be met for a business combination to be accounted for as a merger.These are:

1 At least 90% of the nominal value of the relevant shares (i.e., shares carrying unrestricted rights to participate in distributionsand assets on liquidation) in the undertaking acquired is held by the group.

2 The 90% holding was obtained by an issue of shares to the parent or its subsidiaries.3 The cash value of any non-share consideration does not exceed 10% of the nominal value of the shares issued as part consideration.

Even if these criteria are satisfied, the Seventh Directive does not compel companies to adopt merger accounting. The decisionrests with the business in question, once it qualifies under the criteria.

Albatross

The shares and cash issued by Cormorant in consideration for Albatross are as follows:

Shares % Consideration000 BB

750 15 287,000 Cash4,250 85 630,000 3Cormorant shares × 140cent × 750,000/5Albatross shares = B630,0005,000 100 917,000

Are Seventh Directive conditions complied with?

Merger accounting would not be permitted under the conditions of the Seventh Directive because the cash element of thepurchase consideration is too high – the cash value of any non-share consideration should not exceed 10% of the nominal valueof the shares issued as part consideration. As is now shown, the cash element comprises 21.3% of the nominal value of theshares issued as part consideration:

Nominal value of shares issued: 4,250,000 × 3issued/5acquired = 2,550,000nominal value of shares issued

Cash: 4,250,000/5 × 30 cent = B255,000 + B287,000 = B542,000cash element of consideration

(i.e., 21.3% [542,000cash/2,550,000nominal value of shares issued]of the nominal value of the shares issued).

(ii) Conditions for merger accounting under FRS 6

Under FRS 6, there are five criteria which must be satisfied for merger accounting to apply:

1 No party to the combination is portrayed as either acquirer or acquired.2 All parties to the combination participate in establishing the management structure for the combined entity.3 The relative sizes are not so disparate that one party dominates.


35

4 Consideration received comprises primarily equity shares and any non-equity consideration or shares carrying reduced votingrights represent an immaterial proportion of the fair value of consideration.

5 No equity shareholders retain any material interest in the future performance of only a part of the combined entity.

Where the five criteria for merger accounting under FRS 6 are satisfied the combination must be accounted for as a merger. Thesecriteria are more restrictive than the conditions in the Seventh Directive.

Are FRS 6 conditions complied with?

Size criterionThere is a rebuttable presumption in FRS 6 that one party will dominate the combined entity if it is more than 50% larger thaneach of the other parties to the combination, judged by reference to ownership interests – i.e., by considering the proportion ofequity of the combined entity attributable to the shareholders of each of the combining parties.

A proportional split up to a maximum of 60:40 between parent and subsidiary shareholders is acceptable to meet the sizecriterion for merger accounting. In this example, Cormorant is only 17% larger than Albatross so the size criterion for mergeraccounting under FRS 6 is met.

Voting shares %000

Cormorant (per Q) 3,000 54Albatross 2,550 46

5,550 100

Non-equity considerationUnder FRS 6, the condition whereby no party to the combination is portrayed as either acquirer or acquired appears (from thewording of the question) not to be complied with. In addition, FRS 6 requires that the consideration comprise primarily equityshares and any non-equity consideration should represent an immaterial proportion of the fair value of the consideration.

FRS 6 provides guidance on what constitutes immaterial. Under FRS 6, the non-equity consideration should represent animmaterial proportion of the fair value of consideration. In assessing this, any acquisition of shares by one combining party ofshares in the other party within two years before the combination should be taken into account in determining whether the non-equity consideration is an immaterial proportion.

Consideration is: 4,250,000shares ÷ 5 × B4.50 ([3shares × 140cent]+ 30cent)= B3,825,000 + B287,000earlier purchase = B4,112,000 consideration

Cash element of the consideration:

4,250,000shares/5 × 30cent = B255,000 + B287,000earlier purchase = B542,000 cash element of consideration

Proportion of consideration comprising cash:

B542,000 cash element of consideration = 13%B4,112,000 fair value of consideration

This (13%) would not meet the criterion of immateriality.

16.2 Bogart and BacallConditions for merger accounting under FRS 6

Under FRS 6, there are five criteria which must be satisfied for merger accounting to apply:

1 No party to the combination is portrayed as either acquirer or acquired.2 All parties to the combination participate in establishing the management structure for the combined entity.3 The relative sizes are not so disparate that one party dominates.4 Consideration received comprises primarily equity shares and any non-equity consideration or shares carrying reduced voting

rights represent an immaterial proportion of the fair value of consideration.5 No equity shareholders retain any material interest in the future performance of only a part of the combined entity.

Where the five criteria for merger accounting under FRS 6 are satisfied the combination must be accounted for as a merger. Thesecriteria are more restrictive than the conditions in the Seventh Directive.

The shares and cash issued by Bogart in consideration for Bacall are as follows:

Shares % Consideration000 BB

1,910 95.5 2,674,000 1Bogart share × B2.80 × 1,910,000/2Bacall shares = B2,674,0002,000 100.0

Are FRS 6 conditions complied with?

Size criterionThere is a rebuttable presumption in FRS 6 that one party will dominate the combined entity if it is more than 50% larger thaneach of the other parties to the combination, judged by reference to ownership interests – i.e., by considering the proportion ofequity of the combined entity attributable to the shareholders of each of the combining parties.

A proportional split up to a maximum of 60:40 between parent and subsidiary shareholders is acceptable to meet the sizecriterion for merger accounting. In this example, Bogart is not 50% larger (is only 36% larger to be precise) than Bacall so the sizecriterion for merger accounting under FRS 6 is met.


36

Voting shares %000

Bogart (per Q) 1,300 58Bacall 955 42

2,255 100

Non-equity considerationUnder FRS 6, the condition whereby no party to the combination is portrayed as either acquirer or acquired appears (from thewording of the question) not to be complied with. In addition, FRS 6 requires that the consideration comprise primarily equityshares and any non-equity consideration should represent an immaterial proportion of the fair value of the consideration.

FRS 6 provides guidance on what constitutes immaterial. Under FRS 6, the non-equity consideration should represent animmaterial proportion of the fair value of consideration. In assessing this, any acquisition of shares by one combining party ofshares in the other party within two years before the combination should be taken into account in determining whether the non-equity consideration is an immaterial proportion.

As can be seen from the calculations that follow, the cash (non-equity) elements of the consideration proposed would bothamount to 12.5% of the total consideration, which would not be considered immaterial. Thus, condition 4 in the list is not met.

(1) Cash consideration 20 cent × 1,910,000equity shares acquired 382,000

(2) Non-equity consideration Non-equity: 1,910,000shares acquired ÷ 6 = 318,333preference shares @ B1.20 = 382,000

Equity 955,000 B1 shares (1,910,000 ÷ 2) @ B2.80 = 2,674,000

Total consideration 3,056,000

Proportion of fair value of consideration(1) B382,000cash / B3,056,000fair value of consideration = 12.5% Material/not immaterial(2) B382,000preference shares / B3,056,000fair value of consideration = 12.5% Material/not immaterial

17.1 Charlton(W1) Group structure

75% 1.4.20X4

Charlton Venables

(W2) Dividends paid out of pre-acquisition profitsBB000

Venables dividends for year ending 30/6/20X4 (160interim + 400proposed) 560Pre-acquisition (9/12) 420From interim dividend (160)From final dividend 260Group share (75%) 195

Post-acquisition (3/12 × 560) 140Group share (75%) 105

(W3) Calculation of goodwill on acquisition


Cost – immediate 3,500 Share capital (500 @ 75%group share) 375Deferred consideration 750 Reserves ([2,000Venables – 180post-acquisition – 1,170

260dividend pre-acquisition ] × 75%group share)Less: Pre-acquisition dividends (W2) (195)

_____ Goodwill – Balance c/d 2,5104,055 4,055

Balance b/d 2,510 Goodwill amortisation (2,510 × 3/12 × 20%) 125_____ Balance c/d 2,3852,510 2,510

(W4)Consolidated revenue reserves

BB000 BB000Cost of control ([2,000Venables – 180post-acquisition – Charlton 7,800

260dividend pre-acquisition ] × 75%Group share) 1,170Proposed dividend – Venablesto dividend elimination account W6 400 Venables 2,000Proposed dividend – Charlton 600 Post-acquisition dividend

(140 × 75%) W2 105Reorganisation costs 450 Minority interest ([2,000 – 400proposed dividend – 450reorganisation costs] × 25%) 287 Goodwill – amortisation (W3) 125 Balance c/d 6,873 _____

9,905 9,905


37

(W5) Minority interestBB000 BB000

Share capital (500 × 25%minority share) 125Consolidated balance sheet 412 Reserves ([2,000 – 400proposed dividend– 450reorganisation costs× 25%) 287

412 412

(W6) Dividend elimination account

BB000 BB000Cost of control (Pre-acquisition dividend) 195 Proposed dividend – Venables 400Consolidated reserves 105 Consolidated balance sheet 100 ____

400 400

(a) Journal entriesBB000 BB000

1 Dr Investment in Venables 750Cr Long-term creditors 750Being the additional purchase consideration due on the acquisition of Venables

2 Dr Debtors (75% × 400) 300Cr Investment in Venables 195Cr Reserves – post-acquisition 105Being recognition in Charlton of the dividend due from Venables

3 Dr Reserves – pre-acquisition 260Dr Reserves – post-acquisition 140Cr Creditors 400Being recognition in consolidation workings of dividends payable by Venables

4 Dr Reserves – post-acquisition 450Cr Provision for liabilities and charges 450Being recognition of reorganisation costs at 30 June 20X4

5 Dr Reserves 600Cr Share capital 300Cr Share premium 300Being scrip dividend proposed by Charlton at 30 June 20X4

(b)Charlton and its subsidiaryConsolidated balance sheet as at 30 June 20X4

BB000 BB000Fixed assetsIntangible assets: Goodwill (W3) 2,385Tangible assets (5,250Charlton + 1,600Venables) 6,850

9,235Current assetsStocks (2,150Charlton + 800Venables) 2,950Debtors (1,500Charlton + 600Venables) 2,100Cash (200Charlton + 500Venables) 700

5,750Creditors: Amounts falling due in less than one year(1,800Charlton+1,000Venables + 450reorganisation costs +100dividends Venables) 3,350Net current assets 2,400Total assets less current liabilities 11,635Creditors: Amounts falling due after more than one year (750deferred purchase consideration) (750)

10,885

Capital and reservesCalled up share capital (3,000 + 300) 3,300Share premium 300Reserves (W4) 6,873

10,473Minority interest (W5) 412

10,885


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17.2 Palma International(a)Palma International and its subsidiariesSummarised consolidated balance sheet as at 31 March

20X1 20X2 20X3 20X4BBm BBm BBm BBm

Goodwill –— — W8669 W11688 Investment in Pizza W5149 W5437 –— –-Other net assets 4,240 4,190 4,780 4,777

4,389 4,627 5,449 5,465

Ordinary B1 shares 1,000 1,000 1,000 1,000 Reserves W23,389 W63,627 W93,963 W124,171

4,389 4,627 4,963 5,171 Minority interest — — W10486 W13294

4,389 4,627 5,449 5,465

Notes for the year ended 31 March 20X2Investment in associated company BBmShare of net assets (W5) 161 Goodwill (W5) 276

437


+10%first acquisition


+30%third acquisition

+20%fourth acquisition

Palma Pizza

(W2) Correction to treatment of pre-acquisition dividendDividend received = 10% × B10 million = B1 millionDr. Profit and loss account 1Cr. Investment account 1

BBmReserves Palma 3,390per QLess: Pre-acquisition dividend (1)Net reserves 3,389

(W3) Palma’s investment in Pizza

Year of acquisition Number of shares held as a proportion of total % Statusshares in issue holding

Year ended 31.3.X1 50purchased /500total Pizza shares 10 InvestmentYear ended 31.3.X2 50holding+75purchased /500total Pizza shares 25 AssociateYear ended 31.3.X3 50 holding +75 holding +150purchased /500total Pizza shares 55 SubsidiaryYear ended 31.3.X4 50holding +75holding +150holding +100purchased /500total Pizza shares 75 Subsidiary

(W4) Group’s share of post-acquisition reserves for the year ended 31 March 20X225% × B32 million = B8 millionDr. Investment account 8Cr. Consolidated reserves 8This treatment accords with FRS 9 on associates

(W5) Analysis of investment in associated companyBBm BBm

Cost (150cost 30.9.X2–1pre-acquisition dividend w2+300cost 1.4.X3) 449 Share of post-acquisition reserves (W4) 8 Amortisation of goodwill (one-tenth) (20)

437

Share of net assets (25% × B645 million) 161 Share of goodwill (25% × B400 million) 100 Goodwill on acquisitionCost 449Share of capital and reserves at date of acquisition (25% × B1,013 million) (253)

196Less: Amortisation (over ten years, i.e., one-tenth) 20 176

437


39

(W6) Consolidated reserves for year ending 31 March 20X2 BBmDraft Palma 3,640 Less: Pre-acquisition dividend W2(1)Add: Share of post-acquisition reserves of associated company W48 Less: Amortisation of goodwill arising on acquisition W5(20)

3,627

(W7) Elimination of unrealised profit: Year ended 31 March 20X3BBm BBm

Sales value 100Mark up on transfer price (20%) 20Profit made by subsidiary: Dr Consolidated revenue reserves 11 Dr Minority interest 9 Cr Stock 20

(W8) Goodwill arising on acquisition in year ending 31 March 20X3

Cost of control accountBBm BBm

Investment at cost Ordinary share capital (55% × 500) 275 10% 149 Pre-acquisition reserves: (25% × 513) 128 15% 300 Pre-acquisition reserves: (30% × 545) 164 30% 550 Balance c/d – Goodwill 432

999 999

Goodwill 432 Profit and loss account (20X2 – W5 196 × 10%) 20 Profit and loss account (20X3 – 432 × 10%) 43

___ Balance 369432 432

Balance sheet amount: 369 + 300 = B669 million

(W9) Consolidated reserves at 31 March 20X3

Consolidated reserves accountBBm BBm

Cost of control 292 Palma 4,000Pre-acquisition dividend (W2) 1 Pizza 600Unrealised profit (W7) 11 Goodwill 20X2 20 Goodwill 20X3 43 Minority interest (45% × 600) 270 Balance c/d 3,963 _____

4,600 4,600

(W10) Minority interest at 31 March 20X3Minority interestBBm BBm

Unrealised profit (W7) 9 Ordinary share capital (45% × 500) 225 Consolidated balance sheet 486 Reserves (45% × 600) 270

495 495

(W11) Goodwill arising on acquisition in year ending 31 March 20X4BBm

Cost of additional 20% 400 Share of share capital at date of acquisition (20% × B500 million) (100)Share of reserves at date of acquisition (20% × B600 million) (120)Goodwill 180 Goodwill b/f W8432

612 Amortise over ten years (612 ×10%) (61)Goodwill written off 20X2 (20)Goodwill written off 20X3 (43)

488 Add goodwill in Pizza balance sheet 200

688


40

Cost of control accountBBm BBm

Investment at cost (W8) 999 Ordinary share capital (500 × 75%) 375 Cost in 20X4 400 Pre-acquisition reserves (292W8/W9 + [20% × 600]) 412

_____ Goodwill 6121,399 1,399

Profit and loss account 20X2 20 Balance b/d 612 Profit and loss account 20X3 43

Profit and loss account 20X4 61 ___ Balance c/d 488612 612

(W12) Consolidated reserves at 31 March 20X4Consolidated reservesBBm BBm

Cost of control (292 + 120) 412 Palma 4,200Pre-acquisition dividend (W2) 1 Pizza 677Goodwill written off 20X2 20 Goodwill written off 20X3 43 Goodwill written off 20X4 61 Minority (25% × 677) 169 Consolidated balance sheet 4,171 _____

4,877 4,877

(W13) Minority interest at 31 March 20X4Minority interest

Balance c/d 294 Ordinary share capital (25% × 500) 125 ___ Reserves (25% × 677) 169294 294

(b) Outline draft replyThe treatment of purchased goodwill which allows it to be capitalised is based on the view of goodwill as one of the assets,either tangible or intangible, that a business may acquire in order to generate a stream of economic benefits. This view ofgoodwill sees it as quite similar to other tangible assets except that goodwill is, by definition, physically unidentifiable. Theidentifiability of the transaction that gave rise to an asset is seen as essential for its inclusion in the balance sheet, which is whyinternally generated goodwill should not be recorded in the balance sheet. It is regarded as more important that purchasedgoodwill should be treated consistently with other purchased intangible and tangible fixed assets than that purchased and non-purchased goodwill be treated consistently

18.1 Cole and Palm(a) (i) Translated balance sheet using closing rate method

Balance sheet as at 31 December 20X1 $ Rate BB

Fixed assets – cost 200,000 1.3 153,846Fixed assets – depreciation (90,000) 1.3 (69,231)

110,000 84,615Net current assets 170,000 1.3 130,769

280,000 215,384Long-term liability (60,000) 1.3 (46,154)

220,000 169,230Capital and reservesOrdinary share capital 100,000 1.25 80,000Reserves at acquisition 30,000 1.25 24,000Reserves 90,000 Bal 65,230

220,000 169,230

(ii) Movement on reserves(on consolidation only post-acquisition reserves are included)

$ Rate BB

Balance at beginning 30,000 1.28 23,437Net assets at acquisition retranslated(130,000 @1.28) – (130,000 @ 1.25) (2,437)Profit for year 60,000 1.30 46,153Net assets at beginning retranslated(160,000 @1.30) – (160,000 @ 1.28) (1,923)

65,230


41

Alternative approach to calculationOpening reserves BB

Net assets at 1.1.20X1 125,000 (160,000 at 1.28)Less initial investment 104,000 (130,000 at 1.25)

21,000Foreign exchange differences(160,000 at 1.30 less 160,000 at 1.28) (1,923)Retained profit (60,000 at 1.30) 46,153

65,230

(iii) Fixed assets $ Rate BB

Cost – at 1.1.20X1 200,000 1.28 156,250Exchange difference (2,404)Cost – at 31.12.20X1 200,000 1.3 153,846

Depreciation – at 1.1.20X1 50,000 1.28 39,063Exchange difference (601)Charge for year 40,000 1.30 30,769Depreciation – at 31.12.20X1 90,000 1.30 69,231

Net book value at 31.12.20X1 84,615

(b) Foreign subsidiaries’ policy noteThe accounts of foreign subsidiaries are included in the group accounts at the exchange rate ruling at the balance sheet date. Alltranslation differences arising on consolidation are dealt with through reserves.

18.2 Athgoe (a) Consolidated balance sheet

BB000Tangible fixed assets (17,658Athgoe + 55,000Bergin W3) 72,658Stock (22,454Athgoe + 5,250Bergin W3) 27,704Debtors (6,153Athgoe + 2,500Bergin W3) 8,653Cash (1,562Athgoe + 13,500Bergin W3) 15,062Creditors (22,457Athgoe + 6,250Bergin W3) (28,707)Loan (12,310Athgoe + 12,400Bergin W3) (24,710)

70,660

Ordinary share capital 6,000Retained earnings (W5) 41,620Shareholders’ funds 47,620Minority interest (W5) 23,040

70,660

Consolidated profit and loss accountBB000

Turnover (92,253Athgoe+118,130Bergin W2) 210,383Cost of sales (60,274Athgoe +78,750Bergin W2) (139,024)Gross profit 71,359Distribution costs (12,900Athgoe +9,440Bergin W2) (22,340)Administration expenses (14,697Athgoe + 3,150Bergin W2) (17,847)Other costs (1,913Athgoe +2,630Bergin W2) (4,543)Profit before tax 26,629Taxation (1,939Athgoe +9,460Bergin W2) (11,399)Profit after tax 15,230Minority interest (14,700 @ 40%minority share) (5,880)Profit attributable to group 9,350Dividends (1,830)Profit retained for year 7,520

(b) (i) Movement on reserves BB000Consolidated reserves at beginning of year (W6) 25,900.40Retained profit for year 7,520.00Group share of difference on exchange (13,666 (b) (iii) @ 60%group share) 8,199.60

41,620.00(iii) Difference on exchange

Kr 000 Rate BB000 BB000Net assets at beginning 327,600 9.5 34,484 Restated at year-end rate 7.0 46,800 12,316Profit for year 75,600 8.0 9,450 Restated at year-end rate 7.0 10,800 1,350

13,666


42


60% Athgoe Bergin

(W2) Translation of profit and loss accountKr000 Rate BB000

Turnover 945,040 8 118,130Cost of sales 630,000 8 78,750Gross profit 315,040 8 39,380Distribution costs 75,520 8 9,440Administration expenses 25,200 8 3,150Depreciation 21,040 8 2,630Profit before tax 193,280 8 24,160Taxation 75,680 8 9,460Profit after tax 117,600 8 14,700Dividend 42,000 3,150per Q ÷ 60%group share 5,250Retained 75,600 9,450

(W3) Translation of balance sheetKr000 Rate BB000

Tangible fixed assets 385,000 7 55,000Stock 36,750 7 5,250Debtors 17,500 7 2,500Cash 94,500 7 13,500

Creditors (43,750) 7 (6,250)Loan (86,800) 7 (12,400)

Net assets 403,200 7 57,600

Ordinary share capital 35,000 10 3,500Pre-acquisition profit 15,000 10 1,500Profit forward (368,200–15,000–75,600) 277,600 W4 29,484Profit for year 75,600 W2 9,450Difference on exchange (balancing amount) _______ * 13,666

403,200 7 57,600

(W4) Net assets at beginning of yearKr000 Rate BB000

Ordinary share capital 35,000 10 3,500Pre-acquisition profit 15,000 10 1,500Post-acquisition profit (368,200–15,000–75,600) 277,600 * 29,484Net assets 327,600 9.5 34,484

(W5) Consolidated balance sheet workingsCost of control accountBB000 BB000

Investment at cost 3,050 Ordinary share capital (3,500 @ 60%) 2,100Pre-acquisition reserves (1,500 @ 60%) 900

_____ Goodwill to profit and loss account 503,050 3,050

Consolidated reservesBB000 BB000

Goodwill 50 Athgoe 10,110Pre-acquisition reserves 900 BerginMinority interest 21,640 (1,500 + 29,484 + 9,450 + 13,666) 54,100Consolidated balance sheet 41,620 ______

64,210 64,210

Minority InterestBB000 BB000

Consolidated balance sheet 23,040 Ordinary share capital (3,500 @ 40%) 1,400______ Reserves (54,100 @ 40%) 21,64023,040 23,040

(W6) Consolidated reserves at beginning of year BB000Athgoe (10,110closing profit and loss account – 1,850retained profit for year) 8,260.00Group share of post-acquisition reserves of Bergin (29,484 @ 60%group share) 17,690.40Goodwill written off (50.00)

25,900.40


43

(W7) Minority interest BB000Balance at beginning (34,484W4 @ 40%minority share) 13,793.60Share of profit for year (14,700W2 × 40%) 5,880.00Share of difference on exchange (13,666 × 40%) 5,466.40Dividends paid to minority (5,250 × 40%) 2,100.00

23,040.00

Note: No offset procedures are applied in this solution because there is no suggestion in the question that Athgoe’s loan isexpressed in foreign currency.

18.3 Glenmore(a) For the year ended 30 June 20X9

• Investment in Plenborg is restated using year-end rates.• DK loan of 2,100,000 is restated using year-end rates.• Differences on the borrowings are offset in reserves to the extent of the opposite difference arising on the investment.• Any balance of difference on the borrowings is taken to profit and loss account for the year.

Investment @ cost: DK 1,600,000 BB

Translated at date of acquisition (@8) 200,000Translated at 30 June 20X8 (@7) 228,570Translated at 30 June 20X9 (@6) 266,667Gain on exchange in 20X9 38,097Credit to reserves 38,097

Borrowings of DK2,100,000Translated at date of acquisition (@8) 262,500Translated at 30 June 20X8 (@7) 300,000Translated at 30 June 20X9 (@6) 350,000Loss on exchange in 20X9 50,000Debit to reserves 38,097Charge in P&L account for year 11,903

50,000

(b) Revised amounts to be included in Glenmore’s balance sheet as at 30 June 20X9

BB

Investment at cost 266,667Loan of DK2,100,000 350,000Retained earnings (1,780,000 – 11,903) 1,768,097

(c) (i) Paragraph 30, SSAP 20 Similar to the individual company offset rules, foreign borrowings may have been used to finance group investment in foreignenterprises or to provide a hedge against the exchange risk associated with similar existing investments. Any increase or decreasein the amount outstanding on the borrowings arising from exchange movements will probably be covered by correspondingchanges in the carrying amount of the net assets underlying the net investment (which would be reflected in reserves). Since inthis case the group will be covered in economic terms against any movement in exchange rates, it would be inappropriate torecord an accounting profit or loss when exchange rates change.

In the consolidated financial statements, therefore, subject to certain conditions, the exchange gains or losses on such foreigncurrency borrowings, which would otherwise have been taken to the group profit and loss account, may be offset as reservemovements against exchange differences on the retranslation of the net investments. The conditions which must apply are asfollows:

(a) The relationship between the investing company and the foreign enterprises concerned should be such as to justify the use ofthe closing rate method for consolidation purposes.

(b) In any accounting period, exchange gains or losses arising on foreign currency borrowings may be offset only to the extent ofthe exchange differences arising on the net investments in foreign enterprises.

(c) The foreign currency borrowings, whose exchange gains or losses are used in the offset process, should not exceed, in theaggregate, the total amount of cash that the net investments are expected to be able to generate, whether from profits orotherwise.

(d) The accounting treatment adopted should be applied consistently from period to period.

(c) (ii) Opening net assets of Plenborg

DK000 Rate BB000Ordinary share capital 1,600 8 200Pre-acquisition profits 240 8 30Post-acquisition profits 806 * 148Net assets at 30.6.20X8 2,646 7 378Profit retained for year 756 6 126Difference on exchange _____ * 63Net assets at 30.6.20X9 3,402 6 567


44

ReconciliationNet assets at 30.6.20X8 2,646 Translated at DK7 = B1 378Translated at DK6 = B1 441Gain on retranslation 63

(c) (iii) Group share of difference on translation of net assets 63 @ 80%group share = 50.4

Difference on retranslation of borrowings 50

Therefore, entire difference on borrowings can be offset against difference arising on retranslation of net assets in reserves

(d)(i) BB

Investment at cost 200,000Group share of net assets at acquisition ([1,600+240] ÷ 8 × 80%group share) 184,000Goodwill 16,000Less: Amortisation 20X6–20X9 (one-eight per annum) 8,000Written down amount at 30 June 20X9 8,000

(ii) BB

Net assets of Plenborg at 30 June 20X9 567,000Minority interest 20% 113,400

(e) (i) Consolidated balance sheet: Full consolidation BB000Tangible fixed assets (1,029 + 301working) 1,330.00Goodwill (d(i)) 8.00Net current assets (2,632.43 + 301working) 2,933.43

4,271.43Loan (350 + 35working) (385.00)

3,886.43

Ordinary share capital 1,700.00Share premium 40.00Revaluation reserve 70.00Retained earnings ([1,780 – 28.57 – 50]Glenmore + [(80% × 337) -8]Plenborg)

1,963.03Shareholders’ funds 3,773.03Minority interest (d(ii)) 113.40

3,886.43

(e) (ii) Consolidated balance sheet: Equity accounting for Plenborg BB000Tangible fixed assets 1,029.00Investment in Plenborg [(80% × 567) + 8] or [200 + (80% × 337) – 8] 461.60Net current assets 2,632.43

4,123.03Loan (350.00)

3,773.03

Ordinary share capital 1,700.00Share premium 40.00Revaluation reserve 70.00Retained earnings ([1,780 – 28.57 – 50]Glenmore + [(80% × 337) -8] Plenborg) 1,963.13Shareholders’ funds 3,773.03

Translation of balance sheetDK000 Rate BB000

Tangible fixed assets 1,806 6 301Net current assets 1,806 6 301Loan (210) 6 (35)Net assets 3,402 567

Ordinary share capital 1,600 8 200Pre-acquisition profit 240 8 30Profit forward (1,802 – 756 – 240) 806 c (ii) 148 Profit for year 756 6 126 337Difference on exchange _____ c (ii) 63

3,402 6 567


45

18.4 Carpro(W1)

Rate Fixed asset LoanBB BB

1.7.20X2 At cost (800,000/8) 100,0001.7. 20X2 Cash (720,000/8) 90,00030.6. 20X3 Depreciation [12½% × 100,000] (12,500)30.6. 20X3 Repayment [(720,000/8) × 1/3] — (30,000)30.6. 20X3 Balance sheet amount 87,500 60,000

Due within one year 30,000Due after more than one year 30,000

60,000(W2)

Rate BB

30.6.X2 Interest accrued [(15% × 720,000)/10] 10,800

(W3)Parqs PQ=BB1 BB

Purchases 10,700 25 42815,432 24 64317,094 22 77714,638 26 56322,059 27 81779,923 3,228

Payments 9,988 22 45412,117 21 57718,000 25 72016,900 25 67613,048 28 46670,053 2,893

Balance owing 9,870 24 4113,304

Exchange translation loss charged to profit and loss (76)

3,228

Balance owing 9,870 24 411Payment 9,870 26 380Exchange translation gain (year ended 30.6.20X4) 31

(W4)BB

Dividend income receivable [36,000/20] 1,800

(W5)Skrams SK=BB1 BB

Hedging loanat 1 January 20X3 9,600,000 24 400,000at 30 June 20X3 9,600,000 30 320,000Exchange translation gain 80,000

Equity investment Arlods AD=BB1 BB

at 1 January 20X3 7,200,000 18 400,000at 30 June 20X3 7,200,000 20 360,000Exchange translation loss 40,000Excess gain, credited to profit and loss 40,000

(W6)BB

Interest accrued on skrams loan of 9,600,000[(6months /12months × 8% × 9,600,000)/30] 12,800


46

(W7)Five-year loan Parqs PQ=BB1 BB

at 1 January 20X3 6,000,000 20 300,000at 30 June 20X3 6,000,000 24 250,000Exchange translation gain, credited to profit and loss account 50,000

(W8)BB

Interest accrued on parqs loan of 6,000,000[(6/12 × 15% × 6,000,000)/24] 18,750

(a) Accounting policiesForeign currenciesAssets, liabilities, revenues and costs denominated in a foreign currency are translated into euro at the transaction date rate.At balance sheet date monetary items, except for those subject to fixed rates, are translated at closing rate; exchange ratedifferences are then dealt with under appropriate headings within the profit and loss account.

Exchange differences on foreign currency borrowings arranged as a hedge against overseas investments are set primarilyagainst exchange differences on the carrying amount of these investments, as movements on reserves. Any excess of exchangedifferences on such foreign currency borrowings is dealt with in the profit and loss account.

(b) CarproProfit and loss account (extract) for the year ended 30 June 20X3

Transaction (1) (2) (3) (4)BB BB BB BB

Cost of salesDepreciation W112,500 Purchases of materials W33,228

Income from fixed asset investments W41,800Other operating income/(expense) W3(76) Other interest receivable and similar income W540,000 W750,000Interest payable and similar charges W210,800 W612,800 W818,750

Carpro Balance sheet (extract) as at 30 June 20X3Transaction (1) (2) (3) (4)

BB BB BB BB

Tangible fixed assets Plant W187,500

Financial fixed assetsOther investments W5360,000

Current assets Debtors (dividends receivable) W41,800

Creditors: Amounts falling due within one yearLoans W130,000 Trade w3411 Other creditors (interest) W612,800 W818,750

Creditors: Amounts falling due after more than one yearLoans W130,000 W5320,000 W7250,000

(c)The rules for individual companies apply to all the transactions as follows: (1) Translation rate

Plant – at acquisition rate – transaction rateLoan – at contracted rate – future settlement rateInterest – at payment date (or at average rate) – transaction rate

Accounting treatmentNo exchange differences; translated amounts shown at appropriate lines in final accounts

(2) Translation ratePurchases and payments – at rate of each transactionBalance owing – at closing rate – unsettled monetary liability

Accounting treatmentExchange difference on settled transactions is of a trading nature and reported as another operating expense. The subsequentgain when settlement takes place will affect that year’s accounts. Balance shown as trade creditor.


47

(3) Foreign currency borrowings have been used as a hedge against foreign equity investments.

Translation rateEquity investment – at closing rate – hedged investment rateHedging loan – at closing rate – unsettled monetary liabilityDividend receivable – at closing rate – unsettled monetary assetLoan interest – at payment date – transaction rate

Accounting treatmentThe exchange gain on retranslation of the hedging loan is partly offset in reserves by the exchange gain on the retranslationof the equity investment; the excess gain is credited to profit and loss as other interest receivable and similar income, becauseit results from a financing operation.

The subsequent gain when the dividend is remitted will affect that year’s accounts [B2,000 ((36,000/18) – 1,800)].The equity investment and its dividend receivable and accompanying hedging loan and interest are all included in the

balance sheet at translated amounts.

(4) Translation rateLoan – at closing rate – unsettled monetary liabilityLoan interest charged as accrual – at closing rate – unsettled monetary liability

Accounting treatmentThe exchange gain on retranslation of the loan is credited to profit and loss account as other interest receivable and similarincome, because it is of a financing nature.

The loan and loan interest accrued are reported on the appropriate lines of the final accounts at the translated amounts.

19.1 Plath Cash flow statement for the year ended 31 March 20X2

BBmNet cash outflow from operating activities (145)Returns on investments and servicing of finance (note 1) 24Taxation (W2) (6)Capital expenditure and financial investment (note 1) (239)Acquisitions and disposals —Equity dividends paid (W1) (22)Net cash outflow before management of liquid resources and financing (388)Management of liquid resources 25Financing (note 1) 286(Decrease) in cash (77)

Reconciliation of operating profit to net cash outflow from operating activitiesBBm

Operating profit 139Depreciation charge 22Amortisation charge 7Gain on disposal of tangible fixed asset (W6) (6)Premium on debenture issue (10)Gain on disposal of short-term investment (5)Increase in stock (118)Increase in debtors (107)Decrease in creditors (67)Net cash outflow (145)

Reconciliation of net cash flow to movement in net debtBBm

Decrease in cash in the period (77)Cash inflow from debenture issue (211)Cash from decrease in liquid resources (25)

Change in net debt resulting from cash flows (313)Non-cash movement in debentures 10Profit on disposal of investment 5

Net debt at 1 April 20X1 (596)Net debt at 31 March 20X2 (894)

Notes to the cash flow statement Note 1 Gross cash flows BBm BBm

Returns on investment and servicing of finance Interest received 79Interest paid (55) 24


Capital expenditure and financial investment Payments to acquire intangible fixed assets (W3) (50)Payments to acquire tangible fixed assets (W4) (438)Payments to acquire investments (1)Receipts from sales of tangible fixed assets 250 (239)

Management of liquid resources Sale of short-term investments 25

FinancingIssue of ordinary share capital (W5) 75Issue of debentures (201 + 10) 211 286

Note 2 Analysis of changes in net debtAt 1 April Cash Other At 31 March

20X1 flows changes 20X2BBm BBm BBm BBm

Cash in hand, at bank 124 126 250Overdrafts (185) (203) (388)

(61) (77) (138)Debt due within one year Debt due after one year (555) (211) 10 (756)

Current asset investments 20 (25) 5 —(596) (313) 15 (894)

(W1) Dividend paidDividend provisionBBm BBm

Cash 22 Balance b/f 22Balance c/f 49 Profit and loss account 49

71 71

(W2) Taxation paidTaxation provisionBBm BBm

Cash 6 Balance b/f 25Balance c/f 42 Balance b/f 2Balance c/f 3 Profit and loss account 24

51 51

(W3) Purchase of intangible fixed assetsIntangible fixed assets

BBm BBmBalance b/f 234 Profit and loss – amortisation 7Cash purchases 50 Balance c/f 277

284 284

(W4) Purchase of tangible fixed assetsTangible fixed assetsBBm BBm

Balance b/f 600 Revaluation reserve 251 Profit and loss account depreciation 22Disposal (Aggregate depreciation) 1,220 Disposal (Cost) 1,464Cash purchase 438 Balance c/f 1,023

2,509 2,509

(W5) Ordinary shares issuedBBm

Share capital: 25 million shares at 20 cent 5Share premium: 25 million shares at B2.80 70

75

(W6) Gain on disposal of tangible fixed assetBBm BBm

Sale proceeds 250Cost 1,464Accumulated depreciation (1,220) 244Gain 6

48


49

(b) DepreciationDepreciation is charged to the profit and loss account, in accordance with the accruals principle, in order not to overstate thesurplus available for distribution while maintaining capital.

It does not describe a movement in cash. It does not affect the cash newly invested in fixed assets during the year nor any cashreleased by their sale.

Therefore it is not recognised in the cash flow statement but is recognised in the profit and loss account and hence becomes areconciling item.

Dividends paidThe profit and loss account shows dividends as an appropriation of profit. The cash flow statement shows dividends paid. Thedividends paid may be the previous year’s final dividend and the current year’s interim dividend.

However, no reconciling item is required (unlike depreciation) because the net cash inflow is being reconciled to profit beforetax which has not been influenced by appropriation. If the cash flow were being reconciled to retained profit say, then areconciling item would be required.

(c)The profit and loss account is prepared under the all inclusive concept adopted by FRS 3 and therefore it explains all changes inshareholders’ funds between one balance sheet date and the next, apart from share capital and reserves movements and fixedasset revaluations.

The cash flow statement explains a selection of those changes which result in an inflow or outflow of cash.The cash flow statement is particularly useful in evaluating liquidity and solvency because it enables a juxtaposition of cash

inflows and outflows thereby overcoming the limitations of the convention indicators which derived from a static balance sheet.Various measures are available from the cash flow statement. For example, the ratio of working capital to net cash inflow from

operating activities or the ratio of net cash inflow to current debt. These measures all incorporate a dynamic element inevaluation.

The standard headings prescribed by FRS 1 ‘ensure that cash flows are reported in a form that highlights the significantcomponents of cash flow and facilitates comparison of the cash flow performance of different business’.

A cash flow statement is considered to be more useful than a working capital based funds flow statement for the followingreasons:

1 In the assessment of short-term liquidity the business will not be alerted to a critical cash shortage where a significantdecrease in cash is masked by a compensating increase in stock, as it may be in a funds flow statement.

2 Non-accountants are more familiar with cash flows than with funds flows.3 Cash flows can be a direct input to a business valuation model.4 The cash flow statement and associated notes prescribed by FRS 1 may include new data i.e., not contained in balance sheet

and profit and loss account.

19.2 A–Z Group Cash flow statement for year ended 30 June 20X2

BBmOperating activitiesCash received from customers 1,520Cash payments to suppliers (430)Cash paid to employees (326)Other cash payments (237)Net cash inflow from operating activities 527

Dividends received from associated undertakings (W1) 120

Returns on investment and servicing of financeInterest paid (40)

Taxation paid (W2) (112)

Capital expenditure and financial investmentPurchases of tangible fixed assets (W3) (324)

Acquisitions and disposalsPurchases of subsidiary undertakings (W4) (521)

Equity dividends paidDividends paid (44)

Net cash outflow before use of liquid resources and financing (394)

Management of liquid resources —

FinancingRepayment of amounts borrowed (38)

Decrease in cash (432)


50

Reconciliation of operating profit to net cash inflow from operating activitiesBBm

Operating profit 565Depreciation charge 55Profit on sale of tangible assets — Share of profit of associate (183)Increase in stocks (W5) (28)Increase in debtors (W5) (26)Increase in creditors (W5) 144

527

Reconciliation of net cash flow to movement in net debtBBm

Decrease in cash in the period (432)Cash outflow to repay loan 38Change in net debt resulting from cash flows (394)Net debt at 1 July 20X1 (643)Net debt at 30 June 20X2 (1,037)

Notes to the cash flow statement

Note 1 Analysis of changes in net debtAt 1 July Cash Other At 30 June

20X1 flows changes 20X2BBm BBm BBm BBm

Cash in hand, at bank 54 (25) 29Overdrafts (240) (407) (647)

(186) (432) (618)Debt due within one yearDebt due after one year (457) 38 (419)Current asset investments — — — —

(643) (394) — (1,037)

Note 2 Purchase of subsidiaryBBm

Fixed assets 486Stock 214Debtors 130Cash 4Creditors (104)

730Goodwill 30

760Satisfied by:Shares allotted (84 million ordinary shares of B1) 235Cash 525

760

(W1) Dividends received from associated undertakings

BBm BBmOpening balance 1,522Add: Profit 183Less: Tax (49) 134

1,656Closing balance 1,536Dividends received 120

(W2) Taxation paidBBm

Opening balances (140corporation tax + 126deferred tax) 266Add: Charge in profit and loss account (137–49) 88

354Less: Closing balances (165corporation tax + 77deferred tax) 242Payment made *112


51

(W3) Fixed assetsBBm

Opening balance 2,579Less: Depreciation (55)Add: Purchases during the year *324Add: Purchased on acquisition of subsidiary 486Closing balance 3,334

(W4) Purchase of subsidiary – net outflow of cashBBm

Cash consideration 525Cash acquired (4)

521

(W5) Movements in working capital

Stocks Debtors CreditorsBBm BBm BBm

Balance 1.7.X1 972 1,705 1,082Add: Acquired 214 130 104

1,186 1,835 1,186Closing balance 1,214 1,861 *1,330Increase 28 26 144

*Creditors adjusted for accrued interest

19.3 Hugh GroupCash flow statement for the year ended 31 December 20X2

BB000 Cash flow from operating activities (note 1) 16,022Dividends from associated undertakings (W2) 15Returns on investments and servicing of finance (note 2) (2,254)Taxation (5,414closing – 5,414P/L charge– 2,887opening) (2,887)Capital expenditure and financial investment (note 2) (468)Acquisitions and disposals (note 2) (18,221)Equity dividends paid (3,219closing – 3,219P/L charge– 2,606opening) (2,606)Cash outflow before use of liquid resources and financing (10,399)Management of liquid resources (note 2) —Financing (note 2) – issue of shares 49

– increase in debt 2,350Decrease in cash in the period (8,000)

Reconciliation of net cash flow to movement in net debt (note 3)

Decrease in cash in the period (8,000)Cash inflow from increase in debt and lease financing (2,350)Cash inflow from decrease in liquid resources —Change in net debt resulting from cash flows (10,350)Loans and finance leases acquired with subsidiary (3,817)New finance leases (2,845)Translation difference (102)Movement in net debt in the period (17,114)Net debt at 1.1.X2 (7,511)Net debt at 31.12.X2 (24,625)

Notes to the cash flow statementNote 1 Reconciliation of operating profit to operating cash flows

BB000Operating profit (per question) 19,157Depreciation charges (per note 1 in question) 3,158Profit on disposal of fixed asset (per note 1 in question) (50)Translation loss on foreign exchange overdraft (per note 2 in question) 102Increase in stocks (W7) (41,639closing – 9,384subsidiary acquired –19,992opening) (12,263)Increase in debtors (W7) (38,667closing – 13,856subsidiary acquired – 21,057opening) (3,754)Increase in creditors (W7) (43,555closing trade creditors – 20,579subsidiary acquired – 13,304closing trade creditors) 9,672Net cash inflow from continuing operating activities 16,022


52

Note 2 Analysis of cash flows for headings netted in the cash flow statementReturns on investments and servicing of finance BB000Interest received (W3) (100opening interest note 2+ 458interest receivable P/L – 50closing interest note 2= 508interest received) 508Interest paid (W3) (102opening interest note 3 + 2,497interest payable P/L – 210closing accrued interest note 3 = 2,389interest paid) (2,389)Interest element of finance lease rental payments (per profit and loss) (373)Net cash outflow for returns on investments and servicing of finance (2,254)

Capital expenditure and financial investmentPurchase of tangible fixed assets (W4) (3,512)Sale of plant and machinery (W6) 3,044Net cash outflow for capital expenditure and financial investment (468)

Acquisitions and disposals BB000Purchase of subsidiary undertaking (cash paid) (12,705)Net overdrafts acquired with subsidiary (1,439cash – 6,955overdraft) (5,516)Net cash outflow for additions and disposals (18,221)

Financing BB000Issue of ordinary share capital (19,902closing share capital – 9,519on acquisition of subsidiary – 10,334opening share capital) 49Debt due within a yearIncrease in short-term borrowings (note 4 to the question) 2,006Increase in short-term element of long-term loans (note 4 to the question) (847)Debt due beyond a year: (6,633closing – 2,000subsidiary acquired – 2,100opening) 2,533Capital element of finance lease rental repayments (Closing [4,454short term+ 2,806long term]

– New leases [2,845note 4] – Subsidiary acquired [1,107short term +710long term] – Opening [2,179short term +1,761long term]) (1,342)

Net cash inflow from financing 2,350

Note 3 Analysis of net debt

At 1 Jan Cash Acquisition Other Exchange At 31 20X2 flow (excl. cash and non-cash movement Dec 20X2

overdrafts) changesBB000 BB000 BB000 BB000 BB000 BB000

Cash in hand, at bank 1,279 (238) 1,041Overdrafts (1,201) (7,762) Note 3 (102) (9,065)

(8,000)

Debt due after 1 year (2,100) (2,533) (2,000) (6,633)Debt due within 1 year (1,549) (1,159) (2,708)Finance leases (3,940) 1,342 (1,817) (2,845) (7,260)

______ (2,350) ______ ______ ____ _______

Total (7,511) (10,350) (3,817) (2,845) (102) (24,625)

(W1) Tangible assets BB000Opening balance 31/12/X1 (balance sheet) 13,791∴Additions 6,386Additions on acquisition of subsidiary (note 6) 12,194Disposals (net book value – note 2) (1,474)Depreciation for year (note 2) (3,158)Closing balance 31/12/X2 (balance sheet) 27,739Profit on disposal of fixed assets B50,000 (note 2)

(W2) Investment in associated company BB000Opening balance 31/12/X1 (balance sheet) 429Share of profit before tax (profit and loss account) 61Share of tax charge (profit and loss account) (18)∴Dividend received (15)Closing balance 31/12/X2 (balance sheet) 457

(W3) Interest paid and received Paid ReceivedBB000 BB000

Per profit and loss account 2,497 458Add: Opening accrual 102 100Less: Closing accrual (210) (50)Cash paid/received 2,389 508


53

(W4) Purchase of tangible fixed assets BB000Additions (W1) 6,386Less: Inception of finance leases (note 4 to the question) (2,845)Less: Creditors at 31/12/X2 (note 3 to the question) (94)Add: Creditors at 31/12/X1 (note 3 to the question) 65∴Payments 3,512

(W5) Purchase of subsidiary undertakings BB000Cash consideration 12,705Less: Cash acquired (1,439)Add: Overdraft of subsidiary when acquired 6,955Net cash outflow 18,221

(W6) Sale of plant and machinery BB000Net book value of disposals (note 1 to the question) 1,474Profit on disposal (note 1 to the question) 50Proceeds 1,524Less: Debtor at 31/12/X2 (121)Add: Debtor at 31/12/X1 1,641∴Received 3,044

(W7) Increase in stocks, debtors and creditors

Stocks Trade Tradedebtors creditors

BB000 BB000 BB00031 December 20X2 41,639 38,667 43,55531 December 20X1 19,992 21,057 13,304

21,647 17,610 30,251Effect of acquisition 9,384 13,856 20,579

12,263 3,754 9,672

19.4 Barolo GroupBarolo GroupCash flow statement for year ended 31 December 20X9 Note BB000Operating cash flows 4,200Dividends from associate undertaking (W3) 100Returns on investment and servicing of finance 1 (1,070)Taxation paid (W6) (575)Capital expenditure 1 (1,060)Acquisitions and disposals (W8) (900)Equity dividends paid (W9) (525)Cash flow before management of liquid resources 170Management of liquid resources 1 (715)Decrease in cash flow (W1) (545)

Reconciliation of movement in net debt BB000Reduction in cash flow for year (545)Cash outflow on liquid resources 715Change in net debt resulting from cash flows 170Net debt at 1 January 20X9 (W10) (185)Net debt at 31 December 20X9 (W10) (15)

Reconciliation of operating profit to operating cash flow BB000Operating profit 2,635Depreciation (note 3) 750Increase in stock (W2) (500)Increase in debtors (W2) (845)Increase in creditors (W2) 2,160

4,200

Note 1 Analysis of headings netted in cash flow statement

Returns on investment and servicing of finance BB000Interest received (W4) 130Interest paid (W4) (45)Dividends paid to minority (W5) (1,155)Cash outflow (1,070)


Capital expenditure BB000Fixed assets purchased (W7) (1,900)Fixed asset disposals (W7) 840Cash outflow (1,060)

Management of liquid resources BB000Investment in government securities 140Cash on short-term deposit 400Investment in corporate bonds 175Cash outflow (715)

(W1) Change in cash flow for period BB000 BB000Closing: Cash at bank 120

Bank overdraft —120

Less: Opening cash at bank 665Opening bank overdraft — (665)

Reduction in cash for year (545)

(W2) Changes in working capital items

Stock Trade Tradedebtors creditors

BB000 BB000 BB000Balance at 1.1.20X9 3,400 2,680 4,865Less disposal (300) (250) (525)

3,100 2,430 4,340Balance at 31.12.20X9 3,600 3,275 6,500Increase 500 845 2,160

(W3) Dividends from associated undertaking BB000Investment at cost (note 4 to the question) 1,125Share of profit after tax (475share of associate’s profit before tax –100share of associate’s tax) 375Share of surplus on revaluation (from STRGL) 75

1,575Year-end balance (note 4 to the question) 1,475∴Dividend received 100

(W4) Interest paid and received Paid ReceivedBB000 BB000

Per profit and loss account 95 135Accrued at year-end (note 7/note 6) (200) (25)Accrued at beginning (note 7/note 6) 150 20

45 130

(W5) Dividends paid to minority BB000Minority interest at beginning 2,850Share of profit after tax (P/L) 375Disposal (note 1: 2,100net assets at disposal × 20%minority share) (420)‘Expected’ balance at end of year 2,805Actual balance at end of year 1,650∴Dividend paid 1,155

(W6) Taxation paid BB000Balance at 1.1.20X9 (note 7) 750Profit and loss account (note 2) 855Disposal of corporation tax liability of subsidiary (note 1) (125)

1,480Balance at 31.12.20X9 (note 7) 905Cash outflow 575

(W7) Cash flow on capital expenditure BB000 BB000Additions to tangible fixed assets (note 3) 1,900Proceeds of disposal

Net book value of tangible fixed assets disposed ([3,400cost note 3–475agg depr note 3]-1,550NBV samic fixed assets note 1–500transfer of fixed assets note 4) 875Loss on disposal (P/L) 35∴Proceeds (840)

Net cash outflow (1,060)

54


55

(W8) Cash flow on acquisitions and disposals BB000Cash proceeds of subsidiary sold (note 1) 375Cash balance disposed of (note 1) (650)Net cash outflow on disposal (275)Cash consideration for associate (note 4) (625)Cash outflow (900)

(W9) Equity dividends paid BB000Proposed dividends at 1.1.20X9 350Appropriations for year (P/L) 575Proposed dividends at 31.12.20X9 (400)Cash outflow (525)

(W10) Net debt At 1.1.20X9 At 31.12.20X9BB000 BB000

Cash at bank 665 120Overdraft — —

Borrowings Creditors > one year (1,070) (1,070)

Liquid resources Government securities 115 255Seven day deposits 105 505Corporate bonds — 175Net (debt) (185) (15)


Documents

Principles and Practice of Group Accounts: A European ...cws.cengage.co.uk/piercebrennan/students/solutions.pdf · 5 Minority interest B B Consolidated balance sheet 22,100 Share