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CITN Questions on goodwill on the acquisition and accounts consolidation

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 PlcJudo PlcEase Ltd.
 N’000N’000N’000
Revenue249,390138,86645,780
Cost of sales(140,760)(86,982)(21,364)
Gross profit108,63051,88424,416
Other income23,71513,7341,526
Operating expenses(48,960)(16,023)(10,682)
Operating profit83,38549,59515,260
Finance cost(13,770)(10,682)(4,578)
Profit before tax69,61538,91310,862
Income tax expense(16,065)(13,734)(2,289)
Profit for the year53,55025,1798,393
CITN Questions on goodwill on the acquisition and accounts consolidation

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’000N’000
Consideration 76m x 75% x ¾ x N4 171,000
Less: Ordinary share capital76,000 
Retained earnings68,670 
Fair value adjustments7,630 
 152,300 x 75% 
CITN Questions on goodwill on the acquisition and accounts consolidation
  (114,225)
Goodwill attributable to parent 56,775
Goodwill attributable NCI 1,526
Full goodwill 58,301
CITN Questions on goodwill on the acquisition and accounts consolidation

(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 profit154,868
Other income (w7)35,737
Operating expenses (w3)(61,168)
Operating profit129,437
Income from associate2,518
Interest expense and similar charges(24,452)
Profit before tax107,503
Income tax expense(29,799)
Profit for the period77,704
Other comprehensive income: 
Revaluation gain4,528
Total comprehensive income82,232
Profit for the year attribute to equity owners of the parent71,409
Non-controlling interest (w5)6,295
 77,704
Total comprehensive income attribute to: 
Equity owners of the parent74,792
Non-controlling interest (w6)7,440
 82,232
  
Workings:N’000
W1 Revenue: 
Shadow Plc249,390
Judo Plc138,866
Less management charges(3,815)
Intra-group sales(24,416)
 360,025
W2 Cost of sales: 
Shadow Plc140,760
Judo Plc86,982
Intra-group sales(24,416)
Unrealised profit on inventories (N9.156m x 25/125)1,831
 205,157
W3 Operating expenses: 
Shadow Plc48,960
Judo Plc16,023
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 W56,295
NCI in subsidiary’s OCI = (4.578m x 25%)1,145
 7,440
W7 Other income: 
As per draft – Shadow Plc23,715
Less: Intra-group dividends from: 
Judo N2.014m x 75%(1,511)
Ease N671,000 x 30%(201)
 22,003
Judo’s other income13,734
 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 N3.5031,500
Share of post-acquisition profit N(41.5m – 26m) x 30%4,650
Investment in Associate36,150
CITN Questions on goodwill on the acquisition and accounts consolidation

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.

Read Also:

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.

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