Question 24.Q3: P Co acquired all the shares in S Co one year ago when the r...
P Co acquired all the shares in S Co one year ago when the retained earnings of S Co stood at $10,000.
Draft statements of financial position for each company are as follows.
During the year S Co sold goods to P Co for $50,000, the profit to S Co being 20% of selling price. At the period end, 25% of these goods remained unsold in the inventories of P Co. At the same date, P Co owed S Co $12,000 for goods bought and this debt is included in the trade payables of P Co and the trade receivables of S Co.
Required
Prepare a draft consolidated statement of financial position for P Co.
| P Co | S Co | |||
| $ | $ | $ | $ | |
| Assets | ||||
| Non-current assets | ||||
| Tangible assets | 80,000 | 40,000 | ||
| Investment in S Co at cost | 46,000 | |||
| 126,000 | ||||
| Current assets | ||||
| Trade receivables | 30,000 | 25,000 | ||
| Inventories | 10,000 | 5,000 | ||
| 40,000 | 30,000 | |||
| Total assets | 166,000 | 70,000 | ||
| $ | $ | $ | $ | |
| Equity and liabilities | ||||
| Equity | ||||
| Ordinary shares of $1 each | 100,000 | 30,000 | ||
| Retained earnings | 45,000 | 22,000 | ||
| 145,000 | 52,000 | |||
| Current liabilities | ||||
| Trade payables | 21,000 | 18,000 | ||
| Total equity and liabilities | 166,000 | 70,000 | ||
P CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
| $ | $ | |
| Assets | ||
| Non-current assets | ||
| Tangible assets | 120,000 | |
| Goodwill (W1) | 6,000 | |
| 126,000 | ||
| Current assets | ||
| Trade receivables (30,000 + 25,000 – 12,000*) | 43,000 | |
| Inventories (10,000 + 5,000 – 2,500**(W2)) | 12,500 | |
| 55,500 | ||
| Total assets | 181,500 | |
| Equity and liabilities | ||
| Equity | ||
| Ordinary shares of $1 each | 100,000 | |
| Retained earnings (W3) | 54,500 | |
| 154,500 | ||
| Current liabilities | ||
| Trade payables (21,000 + 18,000 – 12,000*) | 27,000 | |
| Total equity and liabilities | 181,500 |
* To cancel the intra-group receivable and payable
** To remove the unrealised profit on items still in inventories
Workings
1 Goodwill
| $ | $ | |
| Fair value of consideration transferred | 46,000 | |
| Less net acquisition-date fair value of identifiable assets acquired and liabilities assumed: | ||
| Share capital | 30,000 | |
| Retained earnings at acquisition | 10,000 | |
| 40,000 | ||
| Goodwill | 6,000 |
2 Provision for unrealised profit
| $ | |
| Profit on intra-group sales (20% x $50,000) | 10,000 |
| Unrealised profit (25% x 10,000)* | 2,500 |
* 25% of the inventories from the intra-group sales remain in inventories at the year end,therefore the unrealised profit is 25% of the overall profit made on the intra-group sales. The rest of the profit from the intra-group sales is now realised as the inventories have been sold outside the group.
3 Retained earnings
| P Co | S Co | |
| $ | $ | |
| Per question | 45,000 | 22,000 |
| Adjustment (unrealised profit (W2)) | (2,500) | – |
| Pre-acquisition retained earnings | (10,000) | |
| 12,000 | ||
| Group share of post-acq’n ret’d earnings: | ||
| S Co (12,000 × 100%) | 12,000 | |
| Group retained earnings | 54,500 |