Basic Consolidation Question 83

QUESTION 83: BASIC CONSOLIDATION

On 1 April 2013, Polestar acquired 75% of the equity share capital of Southstar. Southstar had
been experiencing difficult trading conditions and making significant losses. In allowing for
Southstar’s difficulties, Polestar made an immediate cash payment of only $1·50 per share. In
addition, Polestar will pay a further amount in cash on 30 September 2014 if Southstar returns to
profitability by that date. The fair value of this contingent consideration at the date of acquisition
was estimated to be $1·8 million, but at 30 September 2013 in the light of continuing losses, its
value was estimated at only $1·5 million. The contingent consideration has not been recorded by
Polestar. Overall, the directors of Polestar expect the acquisition to be a bargain purchase leading
to negative goodwill.

Below are the summarised draft financial statements of both companies.

Statements of profit or loss for the year ended 30 September 2013
Polestar Southstar
$’000 $’000
Revenue 110,000 66,000
Cost of sales (88,000) (67,200)
Gross profit (loss) 22,000 (1,200)
Operating expenses (8,500) (4,400)
Profit (loss) before tax 13,500 (5,600)
Income tax (expense)/relief (3,500) 1,000
Profit (loss) for the year 10,000 (4,600)

Statements of financial position as at 30 September 2013

Assets
Non-current assets
Property, plant and equipment 41,000 21,000
Investments 13,500 -
Current assets 19,000 4,800
Total assets 73,500 25,800
Equity and liabilities
Equity
Equity shares of 50 cents each 30,000 6,000
Retained earnings 28,500 12,000
58,500 18,000
Current liabilities 15,000 7,800
Total equity and liabilities 73,500 25,800

The following information is relevant:

(i) At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying
amounts with the exception of a leased property. This had a fair value of $2 million above
its carrying amount and a remaining lease term of 10 years at that date. All depreciation is
included in cost of sales.

(ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 2013.
Southstar processed all of these materials incurring additional direct costs of $1·4 million
and sold them back to Polestar in August 2013 for $9 million. At 30 September 2013
Polestar had $1·5 million of these goods still in inventory. There were no other intra-group
sales.

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Basic Consolidation Question 83

(iii) Polestar’s policy is to value the non-controlling interest at fair value at the date of
acquisition. This was deemed to be $3.6 million.

(iv) All items in the above statements of profit or loss are deemed to accrue evenly over the
year unless otherwise indicated.

Required:
(a) Prepare the consolidated statement of profit or loss for Polestar for the year ended 30
September 2013. (11)
(b) Prepare the consolidated statement of financial position for Polestar as at 30 September
2013. (09)

ACCA F7 – December 2013 – Q1

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Basic Consolidation Question 83

ANSWER TO QUESTION 83: BASIC CONSOLIDATION

Polester - Consolidated Income Statement for the year ended 30 September 2013
Polestar Southstar 6/12 Group
$000 $000 $000
Sales revenue 110,000 33,000 (13,000 J6) 130,000
Cost of Sales (88,000) (33,600 + 100 J4 + (-13,000 J6) (109,300)
600 J5)
Gross Profit 20,700
Operating exp. (8,500 – 3,400 W3) (2,200) (7,300)
Other income 300 J2 300
Profit before tax 13,700
Taxation (3,500) 500 (3,000)
Profit after tax (3,000) 10,700
NCI share of loss (3,000) x 25% 750
Profit attributable to owners of Parent 11,450

Polestar Group
Consolidated SFP as at 30 September 2013
Non-current assets $000 $000
Property, plant and equipment $41,000 + 21,000 + 2,000 J3 – 100 J4 63,900
Goodwill W3 0 63,900

Current assets 19,000 + 4,800 – 600 J5 23,200

Total assets 87,100

Equity
Equity shares of $50c each 30,000
Retained earnings W6 29,950
59,950
Non-Controlling interest W5 2,850 62,800

Current Liabilities
Contingent consideration $1,800 J1 – 300 J2 1,500
Other 15,000 + 7,800 22,800 24,300
Total equity and liabilities 87,100

W1 GROUP STRUCTURE
SouthStar Subsidiary Acquisition date:1 Apr 2013 Group 75% NCI 25%
$000

W2 NET ASSETS (of subsidiary) AT ACQUISITION S

Equity share capital 6,000
Retained earnings Pre 12,000 + [4,600 x 6/12] 14,300
J3 2,000
22,300

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Basic Consolidation Question 83

W3 GOODWILL S
Investment 13,500 + 1,800 J1 15,300
Less: 22,300 W2 x 75%W1 (16,725)
(1,425)
Fair value of NCI 3,600
Less: 22,300 W2 x 25%W1 (5,575)
(1,975)
(3,400)
Transfer to W6 – negative goodwill 3,400
0

W4 POST ACQUISITION RESERVES (of subsidiary) RE

RE (4,600) x 6/12 (2,300)
J4 (100)
J5 (600)
(3,000)

W5 NON CONTROLLING INTEREST S

22,300 W2 x 25%W1 5,575
NCI goodwill W3 (1,975)
(3,000) W4 x 25% W1 (750)
2,850

W6GROUP RESERVES RE
Parent reserves 28,500
Transfer from W3 3,400
J2 300
32,200
(3,000) W4 x 75% W1 (2,250)
29,950

$000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment 1,800
1
Contingent consideration 1,800
Recording of contingent consideration

Contingent consideration 300

2
RE / Other income (P) 300
Decrease in contingent consideration in post-acquisition period

PPE 2,000
3
RE Pre (S) 2,000
Fair value adjustment

RE / COS (S) 100

4
PPE 100
$ 2,000 / 10 years x 6/12 = $100

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Basic Consolidation Question 83

RE (S) 600
5
Inventory 600
$9,000 [– 4,000 – 1,400] = $ 3,600 / 9,000 x 1,500 = $600

Revenue 13,000
6
COS 13,000
$9,000 + 4,000 = $13,000 cancellation of intra group sales and purchases

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