On 1 April 20X8, Pedantic acquired 60% of the equity share capital of Sophistic in a share exchange of two shares in Pedantic for three shares in Sophistic. At that date the retained earnings of Sophistic were $5 million. The issue of shares has not yet been recorded by Pedantic. At the date of acquisition shares in Pedantic had a market value of $6 each. Below are the summarized draft statements of financial position of both companies.
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8 |
|
|
|
Pedantic |
Sophistic |
Assets |
$'000 |
$'000 |
Non-current assets |
|
|
Property, plant and equipment |
40,600 |
12,600 |
Current assets |
16,000 |
6,600 |
Total assets |
56,600 |
19,200 |
Equity and liabilities |
|
|
Equity shares of $1 each |
10,000 |
4,000 |
Retained earnings |
35,400 |
6,500 |
|
45,400 |
10,500 |
Non-current liabilities |
|
|
10% loan notes |
3,000 |
4,000 |
Current liabilities |
8,200 |
4,700 |
Total equity and liabilities |
56,600 |
19,200 |
The following information is relevant.
- At the date of acquisition, the fair values of Sophistic's assets were equal to their carrying amounts with the exception of an item of plant, which had a fair value of $2 million in excess of its carrying amount. It had a remaining life of five years at that date (straight-line depreciation is used). Sophistic has not adjusted the carrying amount of its plant as a result of the fair value exercise.
- Sales from Sophistic to Pedantic in the post acquisition period were $8 million. Sophistic made a mark up on cost of 40% on these sales. Pedantic had sold $5.2 million (at cost to Pedantic) of these goods by 30 September 20X8.
- Sophistic's trade receivables at 30 September 20X8 include $600,000 due from Pedantic which did not agree with Pedantic's corresponding trade payable. This was due to cash in transit of $200,000 from Pedantic to Sophistic. Both companies have positive bank balances.
- Pedantic has a policy of accounting for any non-controlling interest at full fair value. The fair value of the non-controlling interest in Sophistic at the date of acquisition was estimated to be $5.9 million. Consolidated goodwill was not impaired at 30 September 20X8.
Requirements:
Prepare the consolidated statement of financial position for Pedantic as at 30 September 20X8.
Pedantic has been approached by a potential new customer, Trilby, to supply it with a substantial quantity of goods on three months credit terms. Pedantic is concerned at the risk that such a large order represents in the current difficult economic climate, especially as Pedantic's normal credit terms are only one month's credit. To support its application for credit, Trilby has sent Pedantic a copy of Tradhat's most recent audited consolidated financial statements. Trilby is a wholly-owned subsidiary within the Tradhat group. Tradhat's consolidated financial statements show a strong statement of financial position including healthy liquidity ratios.
Comment on the importance that Pedantic should attach to Tradhat's consolidated financial statements when deciding on whether to grant credit terms to Trilby.
Answers submitted
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