QUESTION TWO

On 1 October 2010, Pythias secured a majority equity shareholding in Sara on the following terms: an immediate payment of K4 per share on 1 October 2010 and a further amount deferred until 1 October 2011 of K5.4 million. The immediate payment has been recorded in Pythiass financial statements, but the deferred payment has not been recorded. Pythiass cost of capital is 8% per annum. On 1 February 2011, Pythias also acquired 25% of the equity shares of Austin paying K10 million in cash.

The summarised statements of financial position of the three companies at 30 September 2011 are:

Pythias Sara Austin

Assets K000 K000 K000

Non-current assets

Property, plant and equipment 40,000 31,000 30,000

Intangible assets 7,500

Investments Sara (8 million shares at K4 each) 32,000

Austin 10,000 nil nil

89,500 31,000 30,000

Current assets

Inventory 11,200 8,400 10,000

Trade receivables 7,400 5,300 5,000

Bank 3,400 nil 2,000

Total assets 111,500 44,700 47,000

Equity and liabilities

Equity Equity shares of K1 each 50,000 10,000 10,000

Retained earnings at 1 October 2010 25,700 12,000 31,800

for year ended 30 September 2011 9,200 6,000 1,200

84,900 28,000 43,000

Non-current liabilities

Deferred tax 15,000 8,000 1,000

Current liabilities

Bank nil 2,500 nil

Trade payables 11,600 6,200 3,000

Total equity and liabilities 111,500 44,700 47,000

The following information is relevant:

(i) Pythiass policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose the directors of Pythias considered a share price for Sara of K3.50 per share to be appropriate.

(ii) At the date of acquisition, the fair values of Saras property, plant and equipment was equal to its carrying amount with the exception of Saras plant which had a fair value of K4 million above its carrying amount. At that date the plant had a remaining life of four years. Sara uses straight-line depreciation for plant assuming a nil residual value. Also at the date of acquisition, Pythias valued Saras customer relationships as a customer base intangible asset at fair value of K3 million. Sara has not accounted for this asset. Trading relationships with Saras customers last on average for six years.

(iii) At 30 September 2011, Saras inventory included goods bought from Pythias (at cost to Sara) of K2.6 million. Pythias had marked up these goods by 30% on cost. Pythiass agreed current account balance owed by Sara at 30 September 2011 was K1.3 million.

(iv)Impairment tests were carried out on 30 September 2011 which concluded that consolidated goodwill was not impaired, but, due to disappointing earnings, the value of the investment in Austin was impaired by K2.5 million.

(v) Assume all profits accrue evenly through the year.

Required:

Prepare the consolidated statement of financial position for Pythias as at 30 September 2011. (25 marks)