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Q1.

Q2.

Gamma prepares consolidated financial statements to 31 March each year. Notes 1 and 2 contain information relevant to these financial statements: Note 1 - Impairment of goodwill On 1 April 20X3, Gamma purchased 75% of the equity shares of subsidiary X for a cash payment of $99 million. The fair value of the net assets of subsidiary X on that date was $108 million. Gamma measured the non-controlling interest in subsidiary X using the proportionate method. On 31 March 20X4, Gamma reviewed the goodwill on acquisition of subsidiary X for impairment but no impairment was evident. On 31 March 20X5, the carrying amount of the net assets of subsidiary X in the consolidated financial statements of Gamma (excluding goodwill on acquisition) was $115 million. Subsidiary X is a single cash-generating unit for impairment purposes. On 31 March 2005, the value in use of subsidiary X was $135 million and its fair value less costs of disposal was $130 million. (8 marks) Note 2 - Purchase of machine On 1 January 20X4, Gamma entered into a firm commitment to purchase a machine from a supplier whose functional currency is the kroner. This firm commitment was not an onerous contract. The cost of the machine was 14:4 million kroner and the agreed delivery date was 30 June 20X4. Gamma was due to pay 14:4 million kroner to the supplier on 31 July 20X4. On 1 January 20X4, Gamma entered into a forward exchange contract with a bank to purchase 14.4 million kroner for $1.44 million on 31 July 20X4. The forward exchange contract was entered into so as to provide a hedge against the currency risk associated with the firm commitment to purchase the machine. On 30 June 20X4, Gamma took delivery of the machine and immediately brought the machine into use. Gamma estimated that the machine would have a useful life of five years from 30 June 20X4, with no residual value. On 31 July 20X4, Gamma paid 14.4 million kroner to the supplier of the machine and received payment of $360,000 from the bank in settlement of the forward exchange contract (see below). Gamma designated the forward exchange contract as a hedge of the cash flows expected to arise on the purchase of the machine. This contract was a perfectly effective hedge of those cash flows. Gamma wishes to use hedge accounting to reflect the above transactions in its financial statements. Relevant exchange rates and fair values of the forward eychance contract are as follows: Date Exchange rate Fair 10:27 0.00 KB/S Von LTE 2 E 0 00 consolidated financial statements of Gamma (excluding goodwill on acquisition) was $115 million. Subsidiary X is a single cash-generating unit for impairment purposes. On 31 March 20X5, the value in use of subsidiary X was $135 million and its fair value less costs of disposal was $130 million. (8 marks) Note 2 - Purchase of machine On 1 January 20X4, Gamma entered into a firm commitment to purchase a machine from a supplier whose functional currency is the kroner. This firm commitment was not an onerous contract. The cost of the machine was 14:4 million kroner and the agreed delivery date was 30 June 20X4. Gamma was due to pay 14:4 million kroner to the supplier on 31 July 20X4. On 1 January 20X4, Gamma entered into a forward exchange contract with a bank to purchase 14:4 million kroner for $1.44 million on 31 July 20X4. The forward exchange contract was entered into so as to provide a hedge against the currency risk associated with the firm commitment to purchase the machine. On 30 June 20X4, Gamma took delivery of the machine and immediately brought the machine into use. Gamma estimated that the machine would have a useful life of five years from 30 June 20X4, with no residual value. On 31 July 20X4, Gamma paid 14.4 million kroner to the supplier of the machine and received payment of $360,000 from the bank in settlement of the forward exchange contract (see below). Gamma designated the forward exchange contract as a hedge of the cash flows expected to arise on the purchase of the machine. This contract was a perfectly effective hedge of those cash flows. Gamma wishes to use hedge accounting to reflect the above transactions in its financial statements. Relevant exchange rates and fair values of the forward exchange contract are as follows: Date Exchange rate Fair value of forward contract (kroners to $1) (favourable to Gamma) $'000 1 January 20X4 10 Nil 31 March 20X4 9.6 60 30 June 20X4 9 160 31 July 20X4 8 360 (17 marks) Required: Using the information in notes 1 and 2, explain and show how the two events would be reported in the consolidated financial statements of Gamma for the year ended 31 March 20X5. On 1 June 20X5 Delta sold two business units. The first unit was a business segment in its own right. Delta made a decision to withdraw from this particular business segment and concentrate on its 'core business. This segment generated post-tax profits of $5 million from 1 October 20x4 to 31 May 20X5. On 1 June 20x5, the net assets of the segment were $50 million. The sale proceeds were $54 million. The second sale was one of Delta's distribution centres as a result of a decision to rationalise the way in which Delta distributed its products. The net assets of the distribution centre were $10 million and it was sold for $12 million. The income tax rate applicable to Delta is 20%