CITN Questions on goodwill on the acquisition and accounts consolidation

CITN Questions on goodwill on the acquisition and accounts consolidation – These are consolidated financial statements-related questions and answers. The questions are to teach and test candidates’ knowledge of the computation of goodwill arising from the acquisition of subsidiaries.
Furthermore, we think it’s an opportunity for you to also learn and be tested on your ‘ ability to prepare a consolidated statement of comprehensive income. Especially concerning the treatment of investment in an associate and the computation of the carrying amount of the investment in the associate.

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CITN Questions on goodwill on the acquisition and accounts consolidation

The Questions:

Shadow Plc. prepares its financial statements to September 30, each year.

On October 1, 2015 Shadow Plc. purchased 75% of the issued share capital of Judo Plc. by issuing three (3) ordinary shares in Shadow Plc. for every four (4) shares in Judo Plc. The market value of Shadow Plc’s shares at October 1, 2015 was N4.00 per share. At the date of acquisition, Judo Plc. had N76million ordinary shares at N1 each and retained earnings of N68.67million.

On April 1, 2016, Shadow Plc. acquired 30% of the shares of Ease Ltd. for N3.50 each. The retained earnings of Ease Ltd. at the date of acquisition were N26million. Ease Ltd. issued share capital at April 1, 2016 was 30million ordinary shares at N1.00 each.

Shadow Plc. has the right to appoint two of the five directors of Ease Ltd. The remaining shares in Ease Ltd. are owned principally by three other investors, each of which has one director on the board of Ease Ltd.

The draft statements of comprehensive income for the three companies for the year ended September 30, 2019 are as follows:

	Shadow Plc	Judo Plc	Ease Ltd.
	N’000	N’000	N’000
Revenue	249,390	138,866	45,780
Cost of sales	(140,760)	(86,982)	(21,364)
Gross profit	108,630	51,884	24,416
Other income	23,715	13,734	1,526
Operating expenses	(48,960)	(16,023)	(10,682)
Operating profit	83,385	49,595	15,260
Finance cost	(13,770)	(10,682)	(4,578)
Profit before tax	69,615	38,913	10,862
Income tax expense	(16,065)	(13,734)	(2,289)
Profit for the year	53,550	25,179	8,393

Here are relevant information:

1. The fair value of the net assets of Judo Plc. at the date of acquisition was equal to their carrying amount with the exception of land. The land had a fair value of N7.63million above its carrying amount and this has not changed since the date of acquisition.

Shadow Plc’s policy is to value non-controlling interests at fair value at the date of acquisition. At the date of acquisition, the goodwill attributable to non-controlling interest was N1.526million.

1. At September 30, 2019, the fair value of Judo Plc’s plant and machinery was N4.578million in excess of its carrying amount. The remaining useful life of these assets is four years and Judo Plc. has not reflected this fair value in its financial statements.

1. Sales by Shadow Plc. to Judo Plc. during the year ended September 30, 2019 amounted to N24.416million. The goods were sold at cost plus 25% mark-up. Judo Plc year end inventories include N9.156million in relation to the goods purchased from Shadow Plc.

1. Included in Judo Plc.’s operating expenses is an amount of N3.815 million in respect of management charges invoiced and included in revenue by Shadow Plc.

• During the reporting year ended September 30, 2019 Shadow, Judo and Ease paid dividends of N4.284million, N2.014million and N671,000.00 respectively. The dividends received by Shadow from its investment in Judo and Ease have been included in other income in the above draft statement of comprehensive income.

• The retained earnings of Ease Ltd as at September 30, 2019 were N41.5million.

• There had been no impairment losses on goodwill acquired in Judo Plc. and Ease Ltd. since the date of acquisition.

Required:

• Calculate the goodwill arising on the acquisition of Judo Plc.                       (7 Marks)

• Prepare the consolidated statement of comprehensive income for Shadow Plc. Group for the year ended September 30, 2019. (All figures should be to the nearest N’000).

(24 Marks)

• Explain with reasons, how the investment in Ease Ltd will be treated in the consolidated statement of financial position of Shadow Plc. Group and then, calculate the carrying amount of investment in Ease Ltd. as at September 30, 2019.

CITN Questions on goodwill on the acquisition and accounts consolidation

SOLUTION TO QUESTION 1

• Calculation of Goodwill Acquired in Judo Plc

(9 Marks)

(Total 40 Marks)

	N’000	N’000
Consideration 76m x 75% x ¾ x N4		171,000
Less: Ordinary share capital	76,000
Retained earnings	68,670
Fair value adjustments	7,630
	152,300 x 75%

		(114,225)
Goodwill attributable to parent		56,775
Goodwill attributable NCI		1,526
Full goodwill		58,301

(b)   Solution           

Shadow Plc Group consolidated statement of comprehensive income for the year ended September 30, 2019.

	N’000
Revenue (w1)	360,000
Cost of sales (w2)	(205,157)
Gross profit	154,868
Other income (w7)	35,737
Operating expenses (w3)	(61,168)
Operating profit	129,437
Income from associate	2,518
Interest expense and similar charges	(24,452)
Profit before tax	107,503
Income tax expense	(29,799)
Profit for the period	77,704
Other comprehensive income:
Revaluation gain	4,528
Total comprehensive income	82,232
Profit for the year attribute to equity owners of the parent	71,409
Non-controlling interest (w5)	6,295
	77,704
Total comprehensive income attribute to:
Equity owners of the parent	74,792
Non-controlling interest (w6)	7,440
	82,232
Workings:	N’000
W1 Revenue:
Shadow Plc	249,390
Judo Plc	138,866
Less management charges	(3,815)
Intra-group sales	(24,416)
	360,025
W2 Cost of sales:
Shadow Plc	140,760
Judo Plc	86,982
Intra-group sales	(24,416)
Unrealised profit on inventories (N9.156m x 25/125)	1,831
	205,157
W3 Operating expenses:
Shadow Plc	48,960
Judo Plc	16,023
Management charges	(3,815)

CITN Questions on goodwill on the acquisition and accounts consolidation

	61,168
W4 Income from associate: Ease Ltd
Profit after tax N8.393m x 30%	2,518
W5 Non-controlling interest in Shadow Plc:
N25.179m x 25%	6,295
W6 Non-controlling interest profit W5	6,295
NCI in subsidiary’s OCI = (4.578m x 25%)	1,145
	7,440
W7 Other income:
As per draft – Shadow Plc	23,715
Less: Intra-group dividends from:
Judo N2.014m x 75%	(1,511)
Ease N671,000 x 30%	(201)
	22,003
Judo’s other income	13,734
	35,737

• Shadow Plc acquired 30% of shares of Ease Ltd. An investment of 30% in another entity would normally indicate that the investor has a significant influence, but not control, of the entity’s activities.

The fact that Shadow Plc has the power to appoint two of the directors to the board tends to support the conclusion that it can exercise significant influence over Ease Ltd, Moreover, the fact that three other investors hold the remainder of the shares made it unlikely that another investor in Ease Ltd would be able to control the entity’s activities.

Shadow Plc will account for Ease Ltd as an associate using the equity method under IAS 28.

Carrying amount of investment in Ease Ltd as at September 30, 2019.

	N’000
Cost at acquisition date 30% x 30million x N3.50	31,500
Share of post-acquisition profit N(41.5m – 26m) x 30%	4,650
Investment in Associate	36,150

CITN Questions on goodwill on the acquisition and accounts consolidation

EXAMINER’S REPORT

• Part (a) of the question tests candidates’ knowledge of computation of goodwill arising on acquisition of subsidiary.
• Part (b) of the question tests the preparation of a consolidated statement of comprehensive income, while
• Part (c) of the question tests the treatment of investment in an associate and the computation of the carrying amount of the investment in the associate.

Our research shows that all the candidates attempted the question. But the examiner is of the opinion that candidates performances were poor.

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Candidates pitfalls were;

• Inability to compute goodwill,
• inability to correctly prepare the consolidated statement of comprehensive income.

Finally, on CITN Questions on goodwill on the acquisition and accounts consolidation, you are advised to pay more attention to the preparation of group accounts and to make use of the Institute’s study text for better performance in future examinations. If you bookmark this page you will have the follow-up questions and answers.