QUESTION 11 Gallilea purchased the following equity investments: On 1 January 2019: 70% of the issued share capital of Ghent. The acquisition was through a share exchange of four shares in Gallilea for every five shares in Ghent. The market price of Gallilea's shares at 1 January 2019 was 3 per share. Gallilea also agreed to pay the shareholders of Ghent 1.20 per share on 1 January 2021. Gallilea's cost of capital is 10% per annum On 1 April 2019: 6.75 million shares in Pursal paying 2.80 per share in cash immediately assuming significant influence over the investee. The summarised statements of profit or loss for the three companies for the year ended 30 September 2019 are: Nil (a) Gallilea Ghent Pursal 000 000 000 Revenue 112,000 40,000 46,000 Cost of sales (73,000) (34,000) (21,000) Gross profit/(loss) 39,000 6,000 25,000 Other income 720 Nil Distribution costs (5,000) (3,000) (4,500) Administrative expenses (7,800) (7,000) (8,500) Finance costs (1.400) (1.000) Nil Profit / (loss) before tax 25,520 (5,000) 12,000 Income tax (expense) / credit (5,200) 1.000 (3.000) Profit / (loss) for the period 20,320 (4,000) 9,000 The following information is relevant: The other income of Gallilea includes a dividend of 4p per share paid by Ghent on 31 March 2019. (b) The details of Ghent's and Pursal's share capital and reserves at 1 October 2018 were: Ghent Pursal '000 '000 Equity shares of 1 each 18,000 22,500 Retained earnings 21,000 36,000 (c) A fair value exercise was carried out at the date of acquisition of Ghent as follows: Carrying amount Fair value Remaining life (straight line) 000 000 Land 17,000 20,000 not applicable Plant 31,000 34,000 three years The fair values have not been reflected in Ghent's financial statements. Plant depreciation is included in cost of sales. Ghent also had a contingent liability which Gallilea correctly estimated to have a fair value of 280,000 at 1 January 2019. This value had not changed by 30 September 2019. CONTINUED (d) Gallilea's policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose the directors of Gallilea considered a share price for Ghent of 2.80 per share to be appropriate. No fair value adjustments were required on the acquisition of Pursal. (e) (1) (9) In the nine months to 30 September 2019 Gallilea sold goods to Ghent at a selling price of 20 million. Gallilea made a profit of cost plus 20% on these sales. 6 million (at cost to Ghent) of these goods were still in the inventories of Ghent at 30 September 2019. Impairment tests for Ghent were conducted on 30 September 2019. They concluded that the goodwill of Ghent should be written down by 1.2 million (to be treated as an administrative expense). All trading profits and losses are deemed to accrue evenly throughout the year. (h) Required: (0) Calculate the goodwill arising on the acquisition of Ghent at 1 January 2019, (48 marks) (1) Prepare the consolidated statement of profit or loss for the Gallilea Group for the year ended 30 September 2019. (72 marks) Work to the nearest 000. (Total 120 marks)
