QUESTION 3

(a) On 1 January 2020, Kayangan acquired 90% of the equity share capital of Gemai in a share exchange in which Kayangan issued two new shares for every three shares it acquired in Gemai. Additionally, on 31 December 2020, Kayangan will pay the shareholders of Gemai RM 1.76 per share acquired. Kayangan's cost of capital is 10% per annum. At the date of acquisition, shares in Kayangan and Gemai had a stock market value of RM 6.50 and RM 2.50 each, respectively.

Equity as at 1 October 2019 for Gemai is RM 10 million, while the retained earnings were RM 35 million. Earning for the year ended 30 September 2020 is RM 6.2 million (include post acquisition period).

At the date of acquisition, the fair values of Gemai's assets were equal to their carrying amounts with the exception of two items:

An item of plant had a fair value of RM 1.8 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.

Gemai had a contingent liability which Kayangan estimated to have a fair value of RM 450,000. This has not changed as at 30 September 2020. Gemai has not incorporated these fair value changes into its financial statements.

Required:

Calculate the consolidated goodwill at the date of acquisition of Gemai.

(15 marks)

(b) The carrying amount of a subsidiary's leased property will be subject to review as part of the fair value exercise on acquisition and may be subject to review in subsequent periods

Required:

Explain how a fair value increase of a subsidiary's leased property on acquisition should be treated in the consolidated financial statements; and how any subsequent increase in the carrying amount of the leased property might be treated in the consolidated financial statements.

(10 marks)