Section C FR March/June 2024 (23/24 syllabus)
This scenario relates to two requirements.
On 1 July 20X9, Paisley Co paid $100m in cash to acquire 80% of Scottish Co.
The individual statements of financial position of Paisley Co and Scottish Co as at 31 December 20X9
are shown below.
Paisley Co Scottish Co
$'000 $'000
Non-current assets
Property, plant and equipment 215,000 87,000
Investments 297,000 11,000
Current assets
Inventories 61,300 22,500
Trade receivables 37,100 15,600
Cash 1,300 9,200
Total assets 611,700 145,300
Equity
Equity shares of $1 270,000 40,000
Retained earnings 214,300 81,700
Non-current liabilities
Loan notes 78,000 5,300
Current liabilities
Trade payables 49,400 18,300
Total equity and liabilities 611,700 145,300
The following information is relevant:
(1) The fair value of Scottish Co’s net assets were equal to their carrying amounts with the exception
of its head office. This had a fair value of $12m in excess of its carrying amount. At the date of
acquisition, this had a remaining life of ten years.
(2) On 1 July 20X9, Paisley Co also acquired 40% of Angus Co. Paisley Co paid $30m cash. In
addition to this, Paisley Co issued to the previous owners of Angus Co 30 million shares in Paisley
Co, which had a market value of $2.30 each at 1 July 20X9. The total consideration exceeds the
Group's share of Angus Co's net assets. Paisley Co has only recorded the cash consideration.
(3) Scottish Co made a loss of $10m for the year ended 31 December 20X9 and Angus Co made a
profit of $6m for the same period.
(4) Paisley Co and Scottish Co both hold other equity investments. No election has been made to
classify them as fair value through other comprehensive income. At 31 December 20X9, these
have increased by $15m and $3m respectively but no entries have been made to reflect this. All
of these gains have been made in the post-acquisition period.
(5) Scottish Co and Angus Co have both sold goods to Paisley Co for many years. None of these
goods remained in the group at 31 December 20X9. Paisley Co’s financial statements show a
$5m payable to Scottish Co. This disagreed with the amount of the receivable in the financial
statements of Scottish Co due to a $2m payment made by Paisley Co on 30 December 20X9.
(6) Paisley Co values the non-controlling interests at fair value. At 1 July 20X9 this was valued at
$29m.
Required:
(a) Prepare the consolidated statement of financial position of the Paisley group as at 31 December
20X9. (18 marks)
(b) Explain the rationale behind the elimination of intra-group balances and unrealized profits in
relation to sales made from a parent company to its subsidiary. (2 marks)
(20 marks)
Section C FR March/June 2024 (23/24 syllabus)
This scenario relates to three requirements.
Rey Co is a services company, offering support and training to several large entities.
Extracts from Rey Co’s financial statements for the years ended 31 December 20X8 and 20X9 are
shown below.
Statement of profit or loss for the year ended 31 December:
20X9 20X8
$'000 $'000
Revenue 58,200 63,400
Cost of sales (17,150) (24,650)
Gross profit 41,050 38,750
Operating expenses (31,600) (35,400)
Operating profit 9,450 3,350
Extracts from the statement of financial position as at 31 December:
20X9 20X8
$'000 $'000
Inventories 1,000 900
Trade receivables 6,500 6,100
Cash and cash equivalents 17,100 200
24,600 7,200
Ordinary share capital ($1) 40,000 20,000
Share premium 7,000 16,000
Retained earnings 11,500 5,200
58,500 41,200
Loan notes 8,000 8,000
Deferred income (government grant) 10,000 -
Trade and other payables 2,000 2,800
Deferred income (government grant 5,000 -
Current tax payable 2,650 250
9,650 3,050
The following information is relevant:
(i) One of Rey Co’s directors left on 1 January 20X9 to set up Kylo Co, a business in direct
competition with Rey Co. To maintain its sales levels, Rey Co reduced its prices by 5% and
extended the payment terms to significant customers.
(ii) Kylo Co ran some advertisements, publicly criticising the work of Rey Co. Rey Co began
legal action against Kylo Co and received $4m compensation. This is recognised in
operating expenses.
(iii) Rey Co received a government grant of $20m on 1 January 20X9 for Rey Co to maintain
employment in the local area for four years from 1 January 20X9. Rey Co has recognised
$5m of grant income against cost of sales.
(iv) Rey Co reduced its staff in 20X9 but the finance director believes that the government grant
will not need to be repaid. A government inspector is due to visit Rey Co within a few
months of the reporting date to assess if any of the grant must be repaid.
(v) The loan notes are due for repayment in five years but the bank renegotiated the interest
rate on 1 January 20X9 following concerns it had over Rey Co’s cash flow.
(vi) The earnings per share figure was correctly calculated to be 12.5 cents per share for the
year ended 31 December 20X8. On 1 March 20X9, Rey Co issued ten million new shares at
market value and the cash raised was used to purchase new property. On 1 September
20X9, there was a one-for-three issue of bonus shares. Rey Co’s profit for the year ended 31
December 20X9 was $5.6m.
Required:
(a) Using the information in note (vi), calculate the basic earnings per share figure for Rey Co for
the year ended 31 December 20X9 and the restated earnings per share figure for 20X8.
(4 marks)
(b) Calculate the following ratios for Rey Co for the years ended 31 December 20X8 and 20X9:
Gross profit margin;
Operating profit margin;
Return on capital employed (excluding deferred income);
Current ratio (excluding deferred income); and
Trade receivables collection period. (5 marks)
(c) Comment on the performance and position of Rey Co for the years ended 31 December 20X9
and 20X8. (11 marks)
(20 marks)
