QUESTION ONE On 1 October 2017 Malingamoyo purchased 75% of the equity shares in Mwatipatso. The acquisition was through a share exchange of two shares in Malingamoyo for every three shares in Mwatipatso. The stock market price of Malingamoyo's shares at 1 October 2017 was K4 per share. The summarised statements of profit or loss and other comprehensive income for the two companies for the year ended 31 March 2018 are: Malingamoyo Mwatipatso K'000 K'000 Revenue 450,000 240,000 Cost of sales (260,000) (110,000) Gross profit 190,000 130,000 Distribution costs (23,600) (12,000) Administrative expenses (27,000) (23,000) Finance costs (1.500) (1.200) Profit before tax 137,900 93,800 Income tax expense (48.000) (27.800) Profit for the year 89,900 66,000 Other comprehensive income Gain on revaluation of land (note (1)) 2,500 1,000 Loss on fair value of investment in equity instrument (700) (400) 1.800 600 Total comprehensive income for the year 91,700 66,600 The equity of Mwatipatso at 1 April 2017 was: K'000 Equity shares of K1 each 160,000 Other equity reserve (re-investment in equity instrument) 2,200 Retained earnings 125,000 The following information is relevant: i. ii. Malingamoyo's policy is to revalue the group's land to market value at the end of each accounting period. Prior to its acquisition, Mwatipatso' land had been valued at historical cost. During the post-acquisition period Mwatipatso' land had increased in value over its value at the date of acquisition by K1 million. Mars has recognised the revaluation within its own financial statements. Immediately after the acquisition of Mwatipatso on 1 October 2017, Malingamoyo transferred an item of plant with a carrying amount of K4 million to Mwatipatso at an agreed value of K5 million. At this date the plant had a remaining life of two and half years. Malingamoyo had included the profit on this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of sales. Other equity reserve (re-investment in equity instrument) 2,200 Retained earnings 125,000 The following information is relevant: i. Malingamoyo's policy is to revalue the group's land to market value at the end of each accounting period. Prior to its acquisition, Mwatipatso' land had been valued at historical cost. During the post-acquisition period Mwatipatso' land had increased in value over its value at the date of acquisition by K1 million. Mars has recognised the revaluation within its own financial statements. ii. Immediately after the acquisition of Mwatipatso on 1 October 2017, Malingamoyo transferred an item of plant with a carrying amount of K4 million to Mwatipatso at an agreed value of K5 million. At this date the plant had a remaining life of two and half years. Malingamoyo had included the profit on this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of sales. iii. After the acquisition Mwatipatso sold goods to Malingamoyo for K40 million. These goods had cost Mwatipatso K30 million. K12 million of the goods sold remained in Malinga's closing inventory. iv. Malingamoyo's policy is to value the non-controlling interest of Mwatipatso at the date of acquisition at its fair value which the directors determined to be K100 million. The goodwill of Mwatipatso has not suffered any impairment. vi. All items in the above statements of profit or loss and other comprehensive income are deemed to accrue evenly over the year unless otherw indicated. V. Required (a) Calculate the goodwill on acquisition of Mwatipatso. (5 marks) (b) Prepare the consolidated statement of profit or loss and other comprehensive income of Malingamoyo for the year ended 31 March 2018. (20 marks)
