On 1 January 2014, Diamond ltd acquired 80% of the equity share capital of Gold ltd. The consideration was satisfied by a share exchange of two shares in Diamond ltd for every three acquired shares in Gold ltd. At the date of acquisition, shares in Diamond ltd and Gold ltd had a market value of R3 and R2.50 each respectively. Diamond ltd will also pay cash consideration of 27.5 cents on 1 January 2015 for each acquired share in Gold ltd. Diamond ltd has a cost of capital of 10% per annum. None of the consideration has been recorded by Diamond ltd. Below are the summarised draft financial statements of both companies.
Statements of profit or loss and other comprehensive income for the year ended 30 September 2014
Diamond Ltd Gold LTD
R'000 R'000
Revenue 62 600 30 000
Cost of Sales -45 800 -24 000
Gross Profit 16 800 6 000
Distribution cost -2 000 -1 200
Administrative expenses -3 500 -1 800
Finance Cost -200 0
Profit for the year 11 100 3 000
Income Tax Expense -3 100 -1 000
Profit for the year 8 000 2 000
Other comprehensive income:
Gain on revaluation of property (note (i)) 1 500 0
Total Comprehensive Income 9 500 2 000
Statements of financial position as at 30 September 2014
ASSETS
Non-current assets
Property, plant and equipment 18 700 13 900
Investment: 10% loan note from Subtrack (note (ii)) 1 000 0
19 700 13 900
Current Assets
Inventory (note (iii)) 4 300 1 200
rade receivables (note (iv)) 4 700 2 500
Bank 0 300
TotalAssets
Equity and Liabilities
Equity 10 000 9 000
Equity shares of R1 each 2 000 0
Revaluation surplus (note (i)) 6 300 3 500
18 300 12 500
Non-current liabilities
10% loan notes (note (ii)) 2 500 1 000
Current liabilities
Trade payable (note (iv)) 3 400 3 600
Bank 1 700 0
Current Tax payable 2 800 800
7 900 4 400
Total equity and liabilities 28 700 17 900
The following information is relevant:
(i) At the date of acquisition, the fair values of Gold Ltd.’s assets and liabilities were equal to their carrying amounts with the exception of Gold Ltd’s property, which had a fair value of R4 million above its carrying amount. For consolidation purposes, this led to an increase in depreciation charges (in cost of sales) of R100 000 in the post-acquisition period to 30 September 2014. Gold ltd has not incorporated the fair value property increase into its entity financial statements. The policy of the Diamond ltd group is to revalue all properties to fair value at each year end. On 30 September 2014, the increase in Diamond Ltd’s property has already been recorded, however, a
further increase of R600 000 in the value of Gold Ltd’s property since its value at acquisition and 30 September 2014 has not been recorded.
(ii) On 30 September 2014, Diamond ltd accepted a R1 million 10% loan note from Gold ltd.
Sales from Diamond ltd to Gold ltd throughout the year ended 30 September 2014 had consistently been R300 000 per month. Diamond ltd made a mark-up on cost of 25% on all these sales. R600 000 (at cost to Gold ltd) of Gold Ltd.’s inventory at 30 September 2014 had been supplied by Diamond ltd in the post-acquisition period.
(iii) Diamond ltd had a trade receivable balance owing from Gold ltd of R1.2 million as at 30 September 2014. This differed to the equivalent trade payable of Gold ltd due to a payment by Gold ltd of R400 000 made in September 2014 which did not clear Diamond Ltd.’s bank account until 4 October 2014. Diamond Ltd.’s policy for cash timing differences is to adjust the parent’s financial statements.
(iv) Diamond Ltd.’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Gold Ltd.’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.
(v) Due to recent adverse publicity concerning one of Gold Ltd.’s major product lines, the goodwill which arose on the acquisition of Gold ltd has been impaired by R500 000 as at 30 September 2014. Goodwill impairment should be treated as an administrative expense.
(vi) Assume, except where indicated otherwise, that all items of income and expenditure accrue evenly throughout the year.
REQUIRED:
a) Prepare the consolidated statement of profit or loss and other comprehensive income for Diamond ltd for the year ended 30 September 2014. (20)
b) Prepare the consolidated statement of financial position for Diamond ltd as at 30 September 2014. (24)
a) Consolidated statement of profit or loss and other comprehensive income for Diamond Ltd for the year ended 30 September 2014:
Revenue 62,600
Cost of Sales (45,800)
Gross Profit 16,800
Distribution cost (2,000)
Administrative expenses (3,500)
Finance Cost (200)
Profit before tax 11,100
Income Tax Expense (3,100)
Profit for the year 8,000
Gain on revaluation of property 1,500
Total Comprehensive Income 9,500
b) Consolidated statement of financial position for Diamond Ltd as at 30 September 2014:
ASSETS
Non-current assets:
Property, plant and equipment 18,700
Investment: 10% loan note from Subtrack 1,000
Current assets:
Inventory 4,300
Trade receivables 4,700
Bank 300
Total Assets 28,000
Equity and Liabilities
Equity:
Equity shares of R1 each 2,000
Revaluation surplus 6,300
Non-current liabilities:
10% loan notes 2,500
Current liabilities:
Trade payable 3,400
Bank 1,700
Current Tax payable 2,800
Total Equity and Liabilities 19,700
a) To prepare the consolidated statement of profit or loss and other comprehensive income for Diamond Ltd for the year ended 30 September 2014, we need to combine the financial information of Diamond Ltd and Gold Ltd.
Consolidated Statement of Profit or Loss and Other Comprehensive Income for Diamond Ltd for the Year Ended 30 September 2014:
Revenue:
Diamond Ltd - R62,600,000
Gold Ltd - R30,000,000
Total Revenue - R92,600,000
Cost of Sales:
Diamond Ltd - (R45,800,000)
Gold Ltd - (R24,000,000)
Total Cost of Sales - (R69,800,000)
Gross Profit:
Diamond Ltd - R16,800,000
Gold Ltd - R6,000,000
Total Gross Profit - R22,800,000
Distribution cost:
Diamond Ltd - (R2,000,000)
Gold Ltd - (R1,200,000)
Total Distribution cost - (R3,200,000)
Administrative expenses:
Diamond Ltd - (R3,500,000)
Gold Ltd - (R1,800,000)
Total Administrative expenses - (R5,300,000)
Finance Cost:
Diamond Ltd - (R200,000)
Gold Ltd - R0
Total Finance Cost - (R200,000)
Profit for the year before tax:
Diamond Ltd - R11,100,000
Gold Ltd - R3,000,000
Total Profit before tax - R14,100,000
Income Tax Expense:
Diamond Ltd - (R3,100,000)
Gold Ltd - (R1,000,000)
Total Income Tax Expense - (R4,100,000)
Profit for the year:
Diamond Ltd - R8,000,000
Gold Ltd - R2,000,000
Total Profit for the year - R10,000,000
Other comprehensive income:
Gain on revaluation of property:
Diamond Ltd - R1,500,000
Gold Ltd - R0
Total Gain on revaluation of property - R1,500,000
Total Comprehensive Income:
Diamond Ltd - R9,500,000
Gold Ltd - R2,000,000
Total Comprehensive Income - R11,500,000
b) To prepare the consolidated statement of financial position for Diamond Ltd as at 30 September 2014, we need to combine the financial information of Diamond Ltd and Gold Ltd.
Consolidated Statement of Financial Position for Diamond Ltd as at 30 September 2014:
Assets:
Non-current assets:
Property, plant and equipment:
Diamond Ltd - R18,700,000
Gold Ltd - R13,900,000
Total Property, plant and equipment - R32,600,000
Investment: 10% loan note from Subtrack:
Diamond Ltd - R1,000,000
Gold Ltd - R0
Total Investment - R1,000,000
Current Assets:
Inventory:
Diamond Ltd - R4,300,000
Gold Ltd - R1,200,000
Total Inventory - R5,500,000
Trade receivables:
Diamond Ltd - R4,700,000
Gold Ltd - R2,500,000
Total Trade receivables - R7,200,000
Bank:
Diamond Ltd - R0
Gold Ltd - R300,000
Total Bank - R300,000
Total Assets - R46,600,000
Equity and Liabilities:
Equity:
Diamond Ltd - R10,000,000
Gold Ltd - R9,000,000
Total Equity - R19,000,000
Equity shares of R1 each:
Diamond Ltd - R2,000,000
Gold Ltd - R0
Total Equity shares - R2,000,000
Revaluation surplus:
Diamond Ltd - R6,300,000
Gold Ltd - R3,500,000
Total Revaluation surplus - R9,800,000
Non-current liabilities:
10% loan notes:
Diamond Ltd - R2,500,000
Gold Ltd - R1,000,000
Total 10% loan notes - R3,500,000
Current liabilities:
Trade payable:
Diamond Ltd - R3,400,000
Gold Ltd - R3,600,000
Total Trade payable - R7,000,000
Bank:
Diamond Ltd - R1,700,000
Gold Ltd - R0
Total Bank - R1,700,000
Current Tax payable:
Diamond Ltd - R2,800,000
Gold Ltd - R800,000
Total Current Tax payable - R3,600,000
Total Equity and Liabilities - R46,600,000