Question
Set out below are the draft statements of profit or loss of Smiths and its subsidiary company Flowers for the year ended 31 December 20X7.
Set out below are the draft statements of profit or loss of Smiths and its subsidiary company Flowers for the year ended 31 December 20X7.
On 1 January 20X6 Smiths purchased 75,000 ordinary shares in Flowers from an issued share capital of 100,000 $1 ordinary shares.
Statements of profit or loss for the year ended 31 December 20X7
Smiths $000 | Flowers $000 | |
Revenue | 600 | 300 |
Cost of Sales | (360) | (140) |
Gross Profit | 240 | 160 |
Operating expenses | (93) | (45) |
Profit from operations | 147 | 115 |
Finance costs | (3) | |
Profit before tax | 147 | 112 |
Tax | (50) | (32) |
Profit for the year | 97 | 80 |
The following information is relevant:
- During the year Flowers sold goods to Smiths for $20,000, making a mark-up of one third. Only 20% of these goods were sold before the end of the year, the rest were still in inventory.
- Goodwill has been subject to an impairment review at the end of each year since acquisition and the review at the end of this year revealed another impairment of $5,000. The current impairment is to be recognized as an operating cost.
- At the date of acquisition, a fair value adjustment was made and this has resulted in an additional depreciation charge for the current year of $15,000. It is group policy that all depreciation is charged to cost of sales.
- Smith's values the non-controlling interests using the fair value method
Prepare the consolidated statement of profit or loss for the year ended 31 December 20X7. (20 marks) Show all working
Question 2
On April 1, 20x8 Phar acquired 90% of the Equity Shares of Star. Star retained profits at the date of acquisition were $ 2, 640,000.
Balance Sheet as at 31 March 20x9.
Phar | Star | |||
$000 | $000 | $000 | $000 | |
Non-Current Assets | ||||
PPE | 2,544 | 2,388 | ||
Intangible Software | - | 2,520 | ||
Investments-Equity in Star | 5, 036 | - | ||
Others | 214 | 252 | ||
7,794 | 5,160 | |||
Current Assets | ||||
Inventories | 863 | 672 | ||
Receivables | 629 | 394 | ||
Stars Current Account | 90 | - | ||
Cash | 24 | - | ||
1,606 | 1,066 | |||
9,400 | 6,226 | |||
Capital and Reserves | ||||
Equity shares of $1 each | 2,400 | 1,800 | ||
Share Premium | 2,400 | |||
Retained Earnings | 3,360 | 5,760 | 600 | 3,306 |
8,160 | 2,706 | 5,106 | ||
Non-Current Liabilities | ||||
Government Grants | 276 | 240 | ||
Current Liabilities | ||||
Trade Payables | 690 | 566 | ||
Phar current account | - | 72 | ||
Income Tax Payable | 274 | 210 | ||
Operating Overdraft | - | 32 | ||
964 | 880 | |||
9,400 | 6,226 |
The following information is relevant:
- Software of Star represents the depreciated cost of development of an integrated business accounting package. It was completed at a capitalized cost of $ 2, 880, 000 and went on sale on April 1, 20x8. Star directors are depreciating the software on a straight-line basis over an eight-year life i.e., $ 360, 000 per annum. However, the directors of Phar are of the opinion that a six-year life would be more appropriate as sale of business software rarely exceed this period.
- The inventory of Phar on March 31 20x9 contains goods at a transfer price of 30,000 that were supplied during the year by Star who had marked them up with a profit of 25% on cost.
- On March 31, 20x9 Star remitted to Phar a cash payment of $18,000. This was not received by Phar until early April.
Required
Prepare the consolidated Balance Sheet of Phar as at March 31, 20x9. (30 Marks) Show all working
Question 3
a) What is the definition of a subsidiary? (5 marks)
b) Must all the companies in the group apply the same accounting policies? (5 marks)
c) What are the two main reasons when subsidiaries should be excluded from consolidation? (5marks)
d) States two situations when intra-group profits can arise.? (5 marks)
e) What is Unrealized profit in consolidation of the financial statement and how it is treated in the account? (5 marks)
Question 4
Question 4a
CPL a manufacturing company, purchases a property for $1M on January 20x1 for its investment potential. The land element of the cost is believed to be $ 400,000 and the building element is expected to have a useful life of 50 years. At December 31, 20x1, local property indices suggest that fair value of the property has risen to $ 1.1M.
Required: Show how the property would be presented in the Financial Statements at December 31, 20x1 if CPL adopts:
(a) the cost model (15 Marks)
(b) the fair value models
Question 4b
A property was purchased on January 1 20x0 for $2 million (estimated depreciable amount $1 million-useful economic life 50 years) annual depreciation of $20,000 was charged from 20x0-20x4 inclusive and on January 1, 20x5 the carrying value of the property was $1.9 million. The property was revalued to $ 2.8 million on January 1, 2005 (estimated depreciable amount $1.35million-the estimated useful economic life was unchanged).
Required: Show the treatment of the revaluation surplus and compute the revised annual depreciation charge. (10 Marks)
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