42 Pentridge plc

Pentridge plc owns 75% of the ordinary shares of Lillington Ltd, which it acquired several years ago.
On 1 April 2015 Pentridge plc purchased 85% of the shares of Crendell Ltd. Pentridge plc measures
all non-controlling interests using the proportionate method.
The individual statements of profit or loss for Pentridge plc, Lillington Ltd and Crendell Ltd for the
year ended 31 March 2016 are shown below.

Draft statements of profit or loss for the year ended 31 March 2016

Pentridge plc Lillington Ltd Crendell Ltd

£ £ £
Revenue 2,390,140 252,860 432,000
Cost of sales (1,007,890) (122,610) (196,400)
Gross profit 1,382,250 130,250 235,600
Operating expenses (224,650) (103,150) (83,700)
Operating profit 1,157,600 27,100 151,900
Investment income 240,000 ––––––– –––––––
Profit before tax 1,397,600 27,100 151,900
Income tax expense (279,300) (5,700) (30,300)
Profit for the year 1,118,300 21,400 121,600

ICAEW 2023 Consolidation questions 69

An extract from the draft individual statements of financial position at 31 March 2016 for the three
companies shows:

Pentridge plc Lillington Ltd Crendell Ltd

£ £ £
Total assets 1,460,300 367,800 525,400
Total liabilities 269,100 73,070 31,800

Additional outstanding information

(1) Pentridge plc acquired its investment in Crendell Ltd for the following consideration:
– Cash of £250,000 paid on 1 April 2015.
– 50,000 ordinary shares in Pentridge plc. The market value of one share in Pentridge plc at 1
April 2015 and 31 March 2016 was £1.45 and £1.55 respectively.
– A further cash payment of £125,000 payable on 31 March 2017 if Crendell Ltd meets specific
profit targets. At 1 April 2015 the probability of the profit target being met was such that the fair
value (discounted correctly) of the possible cash payment was £85,000 and was included in
Pentridge plc’s total liabilities above. At 31 March 2016 the probability of making the payment
had risen such that the fair value of the possible cash payment was estimated at £100,000.
At acquisition Crendell Ltd’s equity total consisted of ordinary share capital of £225,000 and
retained earnings of £147,000. The fair values of the identifiable assets acquired and liabilities
assumed by Pentridge plc at the date of acquisition were the same as their carrying amounts,
with the exception of a machine which was estimated to have a fair value of £50,000 in excess of
its carrying amount. The machine had a remaining useful life of five years at 1 April 2015.
Depreciation on plant and machinery is recognised in operating expenses.
(2) Lillington Ltd’s retained earnings at the date of acquisition by Pentridge plc were £37,000.
Goodwill of £72,250 arising on the acquisition was correctly calculated and recognised in the
consolidated financial statements. Lillington Ltd had 200,000 £1 ordinary shares in issue at both
the date of acquisition and at 31 March 2016. Lillington Ltd had a profit of £21,400 for the year
ended 31 March 2016.
(3) Included in Lillington Ltd’s operating expenses is £36,000 in respect of management charges
invoiced by Pentridge plc. Pentridge plc included this amount in its revenue. The last monthly
instalment of £3,000 relating to charges for March 2016 remained unpaid at 31 March 2016.
(4) During February 2016 Crendell Ltd sold goods to Pentridge plc for £24,000 and to Lillington Ltd
for £18,000 at a mark-up of 20%. At 31 March 2016 both Pentridge plc and Lillington Ltd still
held half of these goods in their inventories. All invoices in relation to these goods had been
paid in full at 31 March 2016.
(5) Lillington Ltd paid an ordinary dividend of 65p per share during the year ended 31 March 2016.
(6) Pentridge plc has undertaken its annual impairment review of goodwill and identified that an
impairment of £6,000 in relation to Lillington Ltd needs to be recognised. Cumulative
impairments of £10,000 had been recognised at 1 April 2015 in respect of Lillington Ltd.
Requirements
42.1 Calculate the goodwill arising on the acquisition of Crendell Ltd.
(3 marks)
42.2 Prepare, for Pentridge plc for the year ended 31 March 2016:
(a) a consolidated statement of profit or loss; and
(b) an extract from the consolidated statement of financial position, showing total assets and
total liabilities.
(19 marks)
Total: 22 marks

70 Financial Accounting and Reporting − IFRS Standards ICAEW 2023