Basic Consolidation Question 73

QUESTION 73: BASIC CONSOLIDATION

On 1 October 2006 Plateau acquired 3 million equity shares in Savannah by an exchange of one
share in Plateau for every two shares in Savannah plus $1.25 per acquired Savannah share in
cash. The market price of each Plateau share at the date of acquisition was $6.

Only the cash consideration of the above investments has been recorded by Plateau. In addition
$500,000 of professional costs relating to the acquisition of Savannh are also included in the cost
of the investment.

The summarized draft statements of financial positions of the companies at 30 September 2007
are:
Plateau Savannah
Assets $’000 $’000
Non-current assets
Property, plant and equipment 18,400 10,400
Investments in Savannah and Axle 13,250 Nil
Investments (FVTPL) 6,500 Nil
38,150 10,400

Current assets
Inventory 6,900 6,200
Trade receivables 2,800 1,300
Cash 400 200
Total assets 48,250 18,100

Equity and liabilities

Equity shares of $1 each 10,000 4,000
Retained earnings – at 30 Sept. 2006 16,000 6,500
– for year ended 30 September 2007 9,250 2,400
35,250 12,900

Non-current liabilities 5,000 1,000

Current liabilities 8,000 4,200

Total equity and liabilities 48,250 18,100

The following information is relevant:

(i) At the date of acquisition the fair values of Savannah’s assets were equal to their carrying
amounts with the exception of Savannah’s land which had a fair value of $500,000 below its
carrying amount; it was written down by this amount shortly after acquisition and has not
changed in value since then.

(ii) During the year ended 30 September 2007 Savannah sold goods to Plateau for $2·7
million. Savannah had marked up these goods by 50% on cost. Plateau had a third of the
goods still in its inventory at 30 September 2007.

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Basic Consolidation Question 73

(iii) Savannah’s trade payable account (in the records of Plateau) of $700,000 does not agree
with Plateau’s trade receivable account (in the records of Savannah) due to cash in transit
of $400,000 paid by Plateau.

(iv) Plateau has a policy of non-controlling interest at the fair value at the date of acquisition.
The fair value of the shares not owned by Plateau at acquisition was $3.25 million.

(v) The fair value through profit or loss investments are included in Plateau’s statement of
financial position (above) at their fair value on 1 October 2006, but they have a fair value of
$9 million at 30 September 2007

(vi) Plateau also acquired 30% of the 4 million equity shares of Axle at a cost of $7.50 per
share in cash. Since acquisition, Axle have made profits of $5 million.

Required:
Prepare the consolidated statement of financial position for Plateau as at 30 September
2007 (20 marks)

ACCA F7 – December 2007 – Q1

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Basic Consolidation Question 73

ANSWER TO QUESTION 73: BASIC CONSOLIDATION

Plateau
Consolidated Statement of financial position
As at 30 September 2007
Assets $000 $000
Goodwill W3 6,000
Investments in associate $9,000 J1+ 1,500 J7 10,500
Investment in Savannah and Axle $13,250 – 13,250 J1 -
Investments (FVTPL $6,500 + 2,500 J6 9,000
PPE $18,400 + 10,400 28,800 54,300

Current assets
Inventory $6,900 + 6,200 – 300 J5 12,800
Trade receivables $2,800 + 1,300 – 1100 J4 3,000
Cash 400 + 200 + 400 J4 1,000 16,800
Total assets 71,100

Equity
Equity shares of $1 each $10,000 + 1,500 J2 11,500
Share premium J2 7,500
Retained earnings W6 30,700
49,700
Non-controlling Interest W5 3,900 53,600

Non – current liabilities $5,000+1,000 6,000

Current Liabilities $8,000+4,200 - 700 J4 11,500

Total equity and liabilities 71,100

W1 GROUP STRUCTURE
Savannah Subsidiary Acquisition date:1 Oct 2006 Group = 75% NCI 25%
Axle Associate Acquisition date:1 Oct 2006 Group = 30%
$000

W2 NET ASSETS (of subsidiary) AT ACQUISITION S

Equity share capital 4,000
Retained earnings (pre) 6,500
J3 (500)
10,000

W3 GOODWILL S
Investment $3,750 J1 + 9,000 J2 12,750
Less: 10,000 W2 x 75%W1 (7,500)
5,250
Fair value of NCI 3,250
Less: 10,000 W2 x 25%W1 (2,500)
750
6,000
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Basic Consolidation Question 73

W4 POST ACQUISITION RESERVES (of subsidiary) RE

Balance 2,400
J3 500
J5 (300)
2,600

W5 NON CONTROLLING INTEREST S

10,000 W2 x 25%W1 2,500
NCI goodwill W3 750
2,600 W4 x 25% W1 650
3,900

W6 GROUP RESERVES RE
Parent reserves 25,250
J1 (500)
J6 2,500
J7 1,500
28,750
2,600W4 x 75% W1 1,950
30,700

$ 000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment in Subsidiary 3,750

Investment in Associate 9,000
- 1
RE (P) Acquisition costs 500
Investment in Savannah and Axle 13,250
Investment in subsidiary Cash 3,000 x $1.25 = $3,750
Investment in associate Cash 4,000 x 30% x $7.50 = $9,000
Acquisition costs of $500 are to be expensed.

Investment in Subsidiary 9,000

- 2 Share Capital 1,500
Share premium 7,500
Investment in subsidiary to be recorded
Shares 3,000 x ½ x $6 [1,500 share capital & 7,500 premium] = $9,000

Reserve pre (S) 500

(i) 3
RE (S) 500
The fair value adjustment has been made by subsidiary but it was made incorrectly in post
acquisition period, so the error has been corrected.

Trade payables 700

(iii) 4 Cash in transit 400
Trade receivable 1,100
Cancellation of balances with cash in transit.

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Basic Consolidation Question 73

RE (S) 300
(iii) 5
Inventories 300
Unrealised profit in inventory
$2,700 x 1/3 x 50/150 = $300

Investments (FVTOCI) 2,500

(iii) 6
Reserves (P) 2,500
Gain on investments recognised in other comprehensive income. $9,000 – $6,500 = $2,500

Investment in associate 1,500

(iv) 7
RE (P) 1,500
Share of profit of associate
$5,000 x 30% = $1,500

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