Question 1

CASE STUDY

CONVEX Ltd. is a new company that was established on 1st January, 2020 to oversee the production of coronavirus vaccines for Ghana. On 1st July, 2020, CONVEX Ltd. acquired 75% shares in CONCAVE Ltd., a pharmaceutical company, to speed up the vaccine production. As a new graduate from UGBS, CONVEX Ltd. has employed you as their accountant. At a management meeting held, a number of issues were raised about how CONVEX Ltd. should deal with its transactions and investment in CONCAVE Ltd. and the need to conduct financial ratio analysis to determine the profitability and sustainability of CONCAVE Ltd. In a memo to management, provide your views on how the following issues should be addressed.

Issue A

At the meeting, executive members could not agree on whether CONVEX Ltd. should prepare and present both separate and consolidated financial statements. Some of the executive members raised issues that CONVEX Ltd. does not need to prepare consolidated financial statements because it is simply an investment made in CONCAVE Ltd. Again, others were of the view that CONVEX Ltd. is neither a public company nor is it in the process of filing financial statements for the purpose of issuing shares or debt to the public. 5 marks

Issue B

Assuming there is the need for CONVEX Ltd. to prepare consolidated financial statements and CONCAVE Ltd. has presented its separate financial statement to CONVEX Ltd., comment on how the following transactions between CONVEX Ltd. and CONCAVE Ltd. will be accounted for in the consolidated financial statements and explain to management the reason for the suggested treatment.

(a)At the date of acquisition, the fair value of all the assets of CONVEX Ltd. were the same as their carrying amounts with the exception of one of its equipment. This had a fair value of GH2 million. The book value of this equipment was GH1.6 million before the acquisition. As a result of the fair valuation, the useful life of the equipment has been reviewed to 10 years remaining life.

4 marks

(b) At the acquisition date, CONVEX Ltd. paid GH20 million cash and promised to pay additional GH2 million if the vaccine production is successful. However, the value of net assets of CONCAVE Ltd. was just GH16 million. 4 marks

(c)Within the year, CONVEX Ltd. sold pharmaceutical products worth GH8 million to CONCAVE Ltd. CONVEX Ltd. made a margin of 20% on these sales. CONCAVE Ltd. has sold 60% of these products to external parties by the end of the year.

4 marks

(d) Within the year, CONCAVE Ltd. acquired land for GH50,000 and sold it to CONVEX Ltd. for GH55,000. CONVEX Ltd. is in possession of the land as at the end of the year.

4 marks

Issue C

CONVEX Ltd. is planning to sell 30% of their shares to another company who wants to support local production of the vaccine. How will this transaction affects the preparation of CONVEX Ltd. financial statements for the next accounting period? 5 marks

Issue D

Assuming you have done the financial ratio analysis and you have realized that profitability is looking good but liquidity is not impressive and needs urgent attention. What do you think could be the problem with CONCAVE Ltd. that your company needs to help them address?