Mull plc acquired shares in two companies as follows:

Skye Ltd Ordinary shares - 8 million acquired on 1 June 1996 for \(£ 4.50\) each.

Preference shares - \(£ 5000008 \%\) redeemable preference shares acquired, at par, on 1 June 1996.
At the date of acquisition the retained profits of Skye Ltd were \(£ 10\) million.
Arran Ltd Ordinary shares - 1 million acquired on 1 June 1998 for \(£ 6\) each.
At the date of acquisition the retained profits of Arran Ltd were \(£ 5\) million and the revaluation reserve was \(£ 11\) million.
The draft balance sheets for the above companies at 31 May 1999 show:

Additional information

(1) Skye Ltd has continued to account for its assets at their book value though their fair values on 1 June 1996 were:

Freehold land - 2.5 million above book value Fixtures and fittings - 1.5 million below book value with an estimated remaining useful economic life of 5 years The fair values of all other assets and liabilities for both Skye Ltd and Arran Ltd approximated to their book values.

(2) Skye Ltd's corporation tax payable at 31 May 1999 includes 1.4 million related to its year ended 31 May 1996. The company had originally provided 500 000 as the

estimated liability as at 31 May 1996. Mull plc incorporated this estimate when establishing the fair values of Skye Ltd's net assets on acquisition. However, following a protracted Inland Revenue investigation, the final liability was agreed on 31 May 1999 at \(£ 1.4\) million, \(£ 900000\) higher than the estimate.
(3) Skye Ltd paid its preference dividend during the year. All proposed dividends relate to ordinary shares. Mull plc has not yet accounted for any dividends receivable.
(4) Any goodwill arising is amortised over 10 years on the straight-line basis.
\section*{Requirements}

(a) Prepare the consolidated balance sheet of Mull plc as at 31 May 1999. (11 marks)
Note: You are not required to produce any disclosure notes.

(b) Briefly explain your accounting treatment of items (1) and (2) above, referring to the provisions of FRS 7, Fair values in acquisition accounting, where appropriate.

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Mull plc Skye Ltd Arran Ltd '000 '000 '000 Fixed assets Freehold property Plant and equipment 40000 20000 10000 5700 Fixtures and fittings 10.500 5900 5 200 Investment in Skye Ltd 36500 Investment in Arran Ltd 6000 93.000 25 900 20 900 Current assets Stock 19000 13000 11000 Debtors 22.500 7000 10000 Cash in hand and at bank 1000 570 780 42.500 20.570 21780 Creditors: amounts falling due within one year Bank overdraft 5 600 8 400 Creditors 18400 9600 7500 Corporation tax payable 4000 5400 2300 Proposed dividends 2000 1500 30000 16 500 18 200 30000 16 500 18200 Net current assets Net assets 12.500 4070 3580 105 500 29970 24480 Capital and reserves Called up share capital Ordinary shares of 1 each 50000 10000 4.000 8% Redeemable preference shares - 2000 Revaluation reserve 10600 11000 Profit and loss account 44 900 17970 9480 105 500 29 970 24480