Question: Hasan BSC and Sumaya WLL

On 1 July 2020, Hasan BSC purchased 75% of the Equity shares in Sumaya WLL. The acquisition was through a share for share exchange where two shares in Hasan were given for every three shares in Sumaya. The stock market price of Hasan BSCs shares at 1 July 2020 was BHD4 per share.

The summarised statements of profit or loss and other comprehensive income for the two companies for the year ended 31 December 2020 are:

	Hasan	Sumaya
	BHD000	BHD000
Revenue	225,000.	120,000.
Cost of Sales	(130,000)	(55,000)
Gross Profit	95,000.	65,000.
Distribution Cost	(11,800)	(6,000)
Administrative Expense	(13,500)	(11,500)
Finance Costs	(750)	(600)
Profit before tax	68,950.	46,900.
Income tax expense	(24,000)	(13,900)
Profit for the year	44,950.	33,000.
Other comprehensive income
Gain on revaluation of land (Note 1)	1,250.	500.
Loss on fair value of equity financial asset investment	(350)	(200)
	900.	300.
Total comprehensive income for the year	45,850.	33,000.
The following information relating to the equity of the companies at 1 January 2020 (ie before the share exchange took place) is available.
	BHD000	BHD000
Equity shares of BHD1 each	125,000.	80,000.
Share Premium	50,000.	nil.
Revaluation surplus (land)	4,200.	nil.
Other equity reserves (re equity financial asset investments)	1,600.	1,400.
Retained earnings	45,000.	79,000.

Notes

The following information is relevant:

1. Hasan BSCs policy is to revalue the groups land to market value at the end of each accounting period. Prior to its acquisition Sumaya WLLs land had been valued at historical cost. During the post-acquisition period Sumaya WLLs land had increased in value over its value at the date of acquisition by BHD500,000. Sumaya WLL has recognised the revaluation within its own financial statements.

2. Immediately after the acquisition of Sumaya WLL on 1 July 2020, Hasan BSC transferred an item of plant with a carrying amount of BHD2 million to Sumaya WLL at an agreed value of BHD2.5 million. At this date, the plant had a remaining life of two-and-half years. Hasan BSC had included the profit of this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of sales.

3. After the acquisition, Sumaya WLL sold goods to Hasan BSC for BHD20 million. These goods had cost Sumaya WLL BHD15 million. BHD6 million of the goods sold remained in Hasan BSCs closing inventory.

4. Hasan BSCs policy is to value the non-controlling interest of Sumaya WLL at the date of acquisition at its fair value which the directors determined to be BD50 million.

5. The goodwill of Sumaya WLL has not suffered any impairment.

6. All items in the above statements of profit and the other comprehensive income are deemed to accrue evenly over the year unless otherwise indicated.

Required

(a) Explain why unrealised profits on intragroup transactions are eliminated in consolidated financial statements. (2 marks)

(b) Calculate the goodwill on acquisition. (2 marks)

(c) Prepare the consolidated statement of profit or loss and other comprehensive income of Hasan BSC for the year ended 31 December 2020. (8 marks)