Addis Ababa University

CoBE, School of Commerce, Department of Accounting & Finance

ADVANCED FINANCIAL ACCOUNTING
Assignment IV; Total Mark: 30%; Submission Date: 12 June 2020

Q1) On 1 April 20X8, Pedantic acquired 60% of the equity share capital of Sophistic in a
share exchange of two shares in Pedantic for three shares in Sophistic. The issue of shares has
not yet been recorded by Pedantic. At the date of acquisition shares in Pedantic had a market
value of $6 each. Below are the summarised draft financial statements of both companies.
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPT 20X8
Pedantic Sophistic
$'000 $'000
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
Gross profit 22,000 10,000
Distribution costs (2,000) (2,000)
Administrative expenses (6,000) (3,200)
Finance costs ( 300) (400)
Profit before tax 13,700 4,400
Income tax expense (4,700) (1,400)
Profit for the year 9,000 3,000

STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

Pedantic Sophistic
Assets $'000 $'000
Non-current assets
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
Total assets 5 6,600 1 9,200
Equity and liabilities
Equity shares of $1 each 10,000 4,000
Retained earnings 35,400 6,500
45,400 10,500
Non-current liabilities
10% loan notes 3,000 4,000
Current liabilities 8,200 4,700
Total equity and liabilities 56,600 19,200
The following information is relevant.
(i) At the date of acquisition, the FVs of Sophistic's assets were equal to their carrying amounts
with the exception of an item of plant, which had a fair value of $2 million in excess of its
carrying amount. It had a remaining life of five years at that date (straight-line depreciation is
used). Sophistic has not adjusted the carrying amount of its plant as a result of the FV exercise.
(ii) Sales from Sophistic to Pedantic in the post acquisition period were $8 million. Sophistic
made a mark up on cost of 40% on these sales. Pedantic had sold $5.2 million (at cost to
Pedantic) of these goods by 30 September 20X8.
(iii) Other than where indicated, P/L items are deemed to accrue evenly on a time basis.
 Addis Ababa University
CoBE, School of Commerce, Department of Accounting & Finance
ADVANCED FINANCIAL ACCOUNTING
Assignment IV; Total Mark: 30%; Submission Date: 12 June 2020
(iv) Sophistic's trade receivables at 30 September 20X8 include $600,000 due from Pedantic
which did not agree with Pedantic's corresponding trade payable. This was due to cash in
transit of $200,000 from Pedantic to Sophistic. Both companies have positive bank balances.
(v) Pedantic has a policy of accounting for any NCI at full fair value. The FV of the NCI in
Sophistic at the date of acquisition was estimated to be $5.9 million. Consolidated goodwill was
not impaired at 30 September 20X8.

Required
(a) Prepare the consolidated statement of P/L for Pedantic for the year ended 30 Sep 20X8.
(b) Prepare the consolidated statement of financial position for Pedantic as at 30 Sep 20X8.

Q2) On 1 October 20X3, Pyramid acquired 80% of Square’s equity shares by means of a
share exchange of two shares in Pyramid for every three acquired shares in Square. In addition,
Pyramid would make a deferred cash payment of 88 cents per acquired share on 1 October 20X4.
Pyramid has not recorded any of the consideration. Pyramid’s cost of capital is 10% per annum.
The market value of Pyramid’s shares at 1 October 20X3 was $6.
The following information is available for the two companies as at 30 September 20X4.
Pyramid Square
Assets $'000 $’000
Non-current assets:
Property, plant, and equipment 38,100 28,500
Equity and liabilities:
Equity
Equity and shares of $1 each 50,000 9,000
Other components of equity 8,000 nil
Retained earnings – at 1 October 20X3 16,200 19,000
– for the year ended 30 Sept 20X4 14,000 8,000
The following information is relevant:
(i) At the date of acquisition, Square’s net assets were equal to their carrying amounts with the
following exceptions:
An item of plant which had a fair value of $3 million above its carrying amount. At the date of
acquisition it had a remaining life of five years (straight-line depreciation).
Square had an unrecorded deferred tax liability of $1million, which was unchanged as at 30
September 20X4.
(ii) Pyramid’s policy is to value the NCI at FV at the date of acquisition. For this purpose a share
price of $3.50 each is representative of the FV of the shares in Square held by the NCI at the
acquisition date.
(iii) Consolidated goodwill has not been impaired.
Required
Prepare extracts from Pyramid’s consolidated statement of financial position as at 30
September 20X4 for:
(a) Consolidated goodwill (c) Equity (share capital and reserves)
(b) Property, plant and equipment (d) Non-controlling interests
 Addis Ababa University
CoBE, School of Commerce, Department of Accounting & Finance
ADVANCED FINANCIAL ACCOUNTING
Assignment IV; Total Mark: 30%; Submission Date: 12 June 2020
Q3) On 1 Jan 20X4, Plastik acquired 80% of the equity share capital of Subtrak. The
consideration was satisfied by a share exchange of two shares in Plastik for every three
acquired shares in Subtrak. At the date of acquisition, shares in Plastik and Subtrak had a market
value of $3 and $2·50 each respectively. Plastik will also pay cash consideration of 27·5 cents
on 1 Jan 20X5 for each acquired share in Subtrak. Plastik has a cost of capital of 10% per
annum. None of the consideration has been recorded by Plastik. Below are the summarised draft
FS of both Co.
STATEMENTS OF PROFIT OR LOSS & OCI FOR THE YEAR ENDED 30 SEP 20X4
Plastik Subtrak
$’000 $’000
Revenue 62,600 30,000
Cost of sales (45,800) (24,000)
Gross profit 16,800 6,000
Distribution costs (2,000) (1,200)
Administrative expenses (3,500) (1,800)
Finance costs (200) –
Profit before tax 11,100 3,000
Income tax expense (3,100) (1,000)
Profit for the year 8,000 2,000
Other comprehensive income:
Gain on revaluation of property 1,500 –
Total comprehensive income 9,500 2,000

STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X4

Plastik Subtrak
$’000 $’000
ASSETS
Non-current assets
Property, plant and equipment 18,700 13,900
Investments: 10% loan note from Subtrak (note(ii)) 1,000 -
19,700 13,900
Current assets
Inventory (note(iii)) 4,300 1,200
Trade receivables (note(iv)) 4,700 2,500
Bank - 300
9,000 4,000
Total assets 28,700 28,700
EQUITY AND LIABILITIES
Equity
Equity shares of $1 each 10,000 9,000
Revaluation surplus (note(i)) 2,000 -
Retained earnings 6,300 3,500
18,300 12,500
Non-current liabilities
10% loan notes (note(ii)) 2,500 1,000
Current liabilities
 Addis Ababa University
CoBE, School of Commerce, Department of Accounting & Finance
ADVANCED FINANCIAL ACCOUNTING
Assignment IV; Total Mark: 30%; Submission Date: 12 June 2020
Trade payables (note(iv)) 3,400 3,600
 Addis Ababa University
CoBE, School of Commerce, Department of Accounting & Finance
ADVANCED FINANCIAL ACCOUNTING
Assignment IV; Total Mark: 30%; Submission Date: 12 June 2020
Bank 1,700 -
Current tax 2 ,800 800
payable 7,900 4,400
Total equity and liabilities 28,700 28,700

The following information is relevant:

(i) At the date of acquisition, the fair values of Subtrak’s assets and liabilities were equal to their carrying
amounts with the exception of Subtrak’s property which had a FV of $4 million above its carrying
amount. For consolidation purposes, this led to an increase in depreciation charges (in cost of sales) of
$100,000 in the post-acquisition period to 30 September 20X4. Subtrak has not incorporated the fair
value property increase into its entity financial statements.
The policy of the Plastik group is to revalue all properties to FV at each year end. On 30Sep 20X4, the
increase in Plastik’s property has already been recorded, however, a further increase of $600,000 in the
value of Subtrak’s property since its value at acquisition and 30 September 2014 has not been recorded.
(ii) On 30 September 20X4, Plastik accepted a $1 million 10% loan note from Subtrak.
(iii) Sales from Plastik to Subtrak throughout the year ended 30 Sept 20X4 had consistently been
$300,000 per month. Plastik made a mark-up on cost of 25% on all these sales. $600,000 (at cost to
Subtrak) of Subtrak’s inventory at 30 September 20X4 had been supplied by Plastik in the postacquisition
period.
(iv) Plastik had a trade receivable balance owing from Subtrak of $1·2 million as at 30
September 20X4. This differed to the equivalent trade payable of Subtrak due to a payment by
Subtrak of $400,000 made in Sept 20X4 which did not clear Plastik’s bank account until 4 Oct
20X4. Plastik’s policy for cash timing differences is to adjust the parent’s financial statements.
(v) Plastik’s policy is to value the NCI at FV at the date of acquisition. For this purpose
Subtrak’s share price at that date can be deemed to be representative of the FV of the shares held
by the NCI.
(vi) Due to recent adverse publicity concerning one of Subtrak’s major product lines, the
goodwill which arose on the acquisition of Subtrak has been impaired by $500,000 as at 30
September 20X4. Goodwill impairment should be treated as an administrative expense.
(vii) Assume, except where indicated otherwise, that all items of income and expenditure accrue
evenly throughout the year.
Required
(a) Prepare the consolidated statement of P/L & OCI for Plastik for the year ended 30 Sept 20X4.
(b) Prepare the consolidated statement of financial position for Plastik as at 30 September 20X4.
(c) Plastik is in the process of recording the acquisition of another subsidiary, Dilemma, and
has identified two items when reviewing the fair values of Dilemma’s assets.
The first item relates to $1 million spent on a new research project. This amount has been correctly
charged to profit or loss by Dilemma, but the directors of Plastik have reliably assessed the FV of this
research to be $1·2million.
The second item relates to the customers of Dilemma. The directors of Plastik believe Dilemma has a
particularly strong list of reputable customers which could be ‘sold’ to other companies and have assessed
the FV of the customer list at $3 million.
Required
State whether (and if so, at what value) the two items should be recognised in the consolidated statement
 Addis Ababa University
CoBE, School of Commerce, Department of Accounting & Finance
ADVANCED FINANCIAL ACCOUNTING
Assignment IV; Total Mark: 30%; Submission Date: 12 June 2020
of financial position of Plastik on the acquisition of Dilemma.