Case Study 1:

Pyramid Bhd (Pyramid) acquired 75% of Scarlet Sdn Bhd (Scarlet) on 1st July 2020. Scarlet had been experiencing difficult trading conditions and making significant losses. In allowing for Scarlet's difficulties, Pyramid made an immediate cash payment of only RM1.50 per share. In addition, Pyramid will pay a further amount in cash on 31st December 2021 if Scarlet returns to profitability by that date. The fair value of this contingent consideration at the date of acquisition was estimated to be RM1.8 million, but at 31st December 2020 in the light of continuing losses, its value was estimated at only RM1.5 million. The contingent consideration has not been recorded by Pyramid.

Below are the summarized draft financial statements of both companies.

Statements of Profit or Loss for the year ended 31st December 2020

Pyramid Scarlet

RM'000 RM'000

Revenue 110,000 66,000

Cost of sales (88,000) (67,200)

Gross profit / (loss) 22,000 (1,200)

Operating expenses (8,500) (4,400)

Profit / (loss) before tax 13,500 (5,600)

Income tax (expense)

/ relief (3,500) 1,000

Profit after tax 10,000 (4,600)

Statements of financial position as at 31st December 2020

Pyramid Scarlet

Non-current assets: RM'000 RM'000

Property, plant and equipment 41,000 21,000

Investment 13,500 -

-

65,400 21,000

Current assets 19,000 4,800

Total assets 73,500 25,800

Equity and liabilities: Equity shares of RM0.50 each 30,000 6,000

Retained earnings 28,500 12,000

58,500 18,000

Current liabilities 15,000 7,800

Total equity and liabilities 73,500 25,800

The following information is relevant:

(i)At the date of acquisition, the fair values of Scarlet's assets were equal to their carrying amounts except a Building with a fair value of RM2 million above its carrying amount and a remaining useful life of 10 years at that date. All depreciation is included in cost of sales.

(ii)Pyramid transferred raw materials at their cost of RM4 million to Scarlet in September 2020. Scarlet processed all of these materials incurring additional direct costs of RM1.4 million and sold them back to Pyramid in November 2020 for RM9 million. At 31st December 2020 Pyramid had RM1.5 million of these goods still in inventory. There were no other intra-group sales.

(iii)All items in the above statements of profit or loss are deemed to accrue evenly over the year unless otherwise indicated.

(iv)Pyramid's policy is to value the non-controlling interest at fair value at the date of acquisition which amounted to RM3.6 million.

Required:

a)Prepare the consolidated journal entry for the year ended 31st December 2020.

b)Prepare the consolidated statement of profit or loss for Pyramid Bhd for the year ended 31st December 2020.

c)Prepare the consolidated statement of financial position for Pyramid Bhd as at 31st December 2020.