On 1st April 2019 Pandar purchased 80% of the equity shares in Salva. The acquisition was through a share exchange of three shares in Pandar for every five shares in Salva. The market prices of Pandars and Salvas shares at 1st April 2019 were 6 and 3.20 respectively.

The summarised income statements for the two companies for the year ended 30th September 2019 are:

Pandar Salva

000 000

Revenue 210,000 150,000

Cost of sales (126,000) (100,000)

Gross profit 84,000 50,000

Distribution costs (11,200) (7,000)

Administrative expenses (18,300) (9,000)

Investment income (interest & dividends) 9,500

Finance costs (1,800) (3,000)

Profit before tax 62,200 31,000

Income tax (15,000) (10,000)

Profit for the year 47,200 21,000

The following information for the equity of the companies at 30th September 2019 is available:

000 000

Equity shares of 1 each 200,000 120,000

Share premium 300,000 Nil

Retained earnings 1st October 2018 40,000 152,000

Profit for the year ended 30th September 2019 47,200 21,000

Dividends paid (26th September 2019) Nil 8,000

The following information is relevant:

i.The fair values of the net assets of Salva at the date of acquisition were equal to their carrying amounts with the exception of an item of plant which had a carrying amount of 12 million and a fair value of 17 million. This plant had a remaining life of five years (straight line depreciation) at the date of acquisition of Salva. All depreciation is charged to cost of sales.

In addition, Salva owns the registration of a popular internet domain name. The registration, which had a negligible cost, has a five-year remaining life (at the date of acquisition). However, it is renewable indefinitely at a nominal cost. At the date of acquisition, the domain name was valued by a specialist company at 20 million.

The fair values of the plant and domain name have not been reflected in Salvas financial statements.

ii.Immediately after its acquisition of Salva, Pandar invested 50 million in an 8% loan note from Salva. All interest accruing to 30th September had been accounted for by both companies. Salva also has other loans in issue at 30th September 2019.

iii.Pandar has credited the whole of the dividend it received from Salva to investment income.

iv.After the acquisition, Pandar sold goods to Salva for 15 million on which Pandar made a gross profit margin of 20%. Salva had one third of these goods still in its inventory at 30th September 2019.

v.The non-controlling interest in Salva is to be valued at its (full) fair value at the date of acquisition. For this purpose, Salvas share price at that date can be taken to be indicative of the fair value of the shareholding of the non-controlling interest.

vi.The goodwill of Salva has not suffered any impairment.

All items in the above income statements are deemed to accrue evenly over the year unless otherwise indicated.

Required

a)Calculate the goodwill arising on the acquisition of Salva at 1st April 2019. Please justify your calculations.

[20 marks for calculations]

[10 marks for justifications]

b)Calculate the followings as per the consolidated income statement for Pandar Group ended 30th September 2019. Please justify your calculations.

i)Cost of sales [13 marks for calculations]

[7marks for justifications]

ii)The breakdown of profit for the year between parent company equity holder and non-controlling interest.

[6marks for calculations]

[4marks for justifications]

SECTION A QUESTION 1 On 1st April 2019 Pandar purchased 80% of the equity shares in Salva. The acquisition was through a share exchange of three shares in Pandar for every five shares in Salva. The market prices of Pandar's and Salva's shares at 1st April 2019 were 6 and 3.20 respectively. The summarised income statements for the two companies for the year ended 30 September 2019 are: Pandar Salva '000 '000 Revenue 210.000 150,000 Cost of sales (126,000) (100,000 50,000 Gross profit 84,000 Distribution costs Administrative expenses (11,200) (18,300) (7.000) (9,000) Investment income (interest & dividends) 9,500 Finance costs (1.800) (3,000) 31,000 Profit before tax 62,200 Income tax (15.000 (10,000) Profit for the year 47200 21,000 XRP The following information for the equity of the companies at 30th September 2019 is available: '000 '000 200,000 120,000 300,000 Nil Equity shares of 1 each Share premium Retained earnings 1st October 2018 Profit for the year ended 30th September 2019 Dividends paid (26th September 2019) 40,000 152,000 47,200 21,000 Nil 8,000 The following information is relevant: i. The fair values of the net assets of Salva at the date of acquisition were equal to their carrying amounts with the exception of an item of plant which had a carrying amount of E12 million and a fair value of 17 million. This plant had a remaining life of five years (straight line depreciation) at the date of acquisition of Salva. All depreciation is charged to cost of sales. In addition, Salva owns the registration of a popular internet domain name. The registration, which had a negligible cost, has I a five-year remaining life (at the date of acquisition). However, it is renewable indefinitely at a nominal cost. At the date of acquisition, the domain name was valued by a specialist company at 20 million. The fair values of the plant and domain name have not been reflected in Salva's financial statements. ii. Immediately after its acquisition of Salva. Pandar invested 50 million in an 8% loan note from Salva. All interest accruing to 30th September had been accounted for by both companies. Salva also has other loans in issue at 30th September 2019. iii. Pandar has credited the whole of the dividend it received from Salva to investment income. iv. After the acquisition, Pandar sold goods to Salva for 15 million on which Pandar made a gross profit margin of 20%. Salva had one third of these goods still in its inventory at 30th September 2019. The non-controlling interest in Salva is to be valued at its (full) fair value at the date of acquisition. For this purpose, Salva's share price at that date can be taken to be indicative of the fair value of the shareholding of the non-controlling interest. vi. The goodwill of Salva has not suffered any impairment. All items in the above income statements are deemed to accrue evenly over the year unless otherwise indicated. Required a) Calculate the goodwill arising on the acquisition of Salva at 1st April 2019. Please justify your calculations. [20 marks for calculations) [10 marks for justifications] b) Calculate the followings as per the consolidated income statement for Pandar Group ended 30th September 2019. Please justify your calculations. ID) Cost of sales [13 marks for calculations] [7marks for justifications] ii) The breakdown of profit for the year between parent company equity holder and non-controlling interest. [6marks for calculations] [4marks for justifications]