UNIT 5 – ANNEXURE B

ACTIVITY 2 – LESSON 2 INTERIM ACQUISITION

The financial statements of P Ltd and its subsidiary, S Ltd, for the year ended 31 December 20.18 are
given below. P Ltd purchased 75% of the issued shares of S Ltd. It was agreed that the acquisition will
become effective from 1 October 20.18. S Ltd appointed management personnel in an attempt to
improve the profitability of S Ltd. The management fee for the period October to December amounted
to a total of R35 000. Profit of S Ltd for 20.18 accrued evenly throughout the year.

The following abridged financial statements must still be adjusted to provide for the management fee:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 902 000 540 000
Investment in S Ltd at cost price 430 000 –
Other investments 188 000 –
Loan to S Ltd 30 000 –
Inventory 10 400 50 250
Trade receivables 59 500 141 000
Total assets R1 619 900 R731 250
EQUITY AND LIABILITIES
Share capital (P Ltd: 160 000 shares/S Ltd: 150 000 shares) 160 000 150 000
Share capital (100 000 8% preference shares) 100 000 –
Retained earnings 989 900 357 380
Long-term liabilities 370 000 130 000
Tax payable – 93 870
Total equity and liabilities R1 619 900 R731 250

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd S Ltd
Revenue 1 295 000 820 000
Cost of sales (815 500) (400 000)
Gross profit 479 500 420 000
Interest received from S Ltd (October to December) 750 –
Dividend received from S Ltd 7 500 –
Interest received on other investments 9 500 –
Other expenses (120 000) (72 000)
Interest paid (41 000) (12 750)
Costs incurred to acquire S Ltd – Consulting fees (8 750) –
Profit before tax 327 500 335 250
Income tax expense (89 600) (93 870)
PROFIT FOR THE YEAR 237 900 241 380
Other comprehensive income for the year – –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R237 900 R241 380
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd S Ltd
Balance at 1 January 20.18 810 000 126 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 237 900 241 380
Preference dividend paid (8 000) –
Ordinary dividend paid (50 000) (10 000)
Balance at 31 December 20.18 R989 900 R357 380

Additional information
1 S Ltd paid the dividend on 20 December 20.18 and P Ltd paid the preference dividend and the ordinary
dividend on 30 June 20.18.
2 The details of the property, plant and equipment of S Ltd on 1 October 20.18 were as follows:
Carrying Fair
amount value
Land R152 500 R247 500
Other property, plant and equipment R240 000 R240 000

There were no other liabilities other than deferred tax which originated from the revaluation of land
at 1 October 20.18. The carrying amount of trade receivables made up the difference of the net assets
and liabilities acquired at acquisition.
3 P Ltd elected to measure the non-controlling interests of the acquiree at its fair value of R142 000 on
the acquisition date.
4 Goodwill has not been subject to any impairment.
5 The company tax rate is 28% and CGT is calculated at 80% thereof.

Required
a) Prepare the consolidated statement of financial position, statement of profit or loss and other
comprehensive income and an extract from the consolidated statement of changes in equity (retained
earnings and non-controlling interests) of the P Ltd Group for the year ended 31 December 20.18.

b) Disclose the acquisition of the subsidiary in the notes to the annual financial statements of the P Ltd
Group for the reporting period ended 31 December 20.18.