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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.

  1. 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.
  2. 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.
  3. 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.
  4. 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:

a

Prepare the consolidated statement of financial position for Pedantic as at 30 September 20X8.

Marks: 16
b

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. 

Marks: 4

Answers submitted

Created by Ref Marking Action
Runa Akter's picture
Runa Akter
11/13/2020 - 06:12
a
10136
16
MD.Sabuj Sarker nil's picture
MD.Sabuj Sarker nil
11/07/2020 - 21:14
a
10050
16
Runa Akter's picture
Runa Akter
11/06/2020 - 07:15
a
10034
16
MD.Sabuj Sarker nil's picture
MD.Sabuj Sarker nil
11/05/2020 - 23:16
a
10032
16
Francis Satia's picture
Francis Satia
10/13/2020 - 17:51
a
9796
16
Francis Satia's picture
Francis Satia
10/13/2020 - 17:50
a
9794
16
Kamrul Hasan's picture
Kamrul Hasan
09/04/2020 - 07:51
a
9594
16
Kamrul Hasan's picture
Kamrul Hasan
08/29/2020 - 16:11
a
9544
16
Kamrul Hasan's picture
Kamrul Hasan
08/22/2020 - 19:42
a
9490
16
Kamrul Hasan's picture
Kamrul Hasan
08/19/2020 - 10:42
a
9430
16
Kamrul Hasan's picture
Kamrul Hasan
08/17/2020 - 11:51
a
9410
16
Naima Husne Jahan's picture
Naima Husne Jahan
08/10/2020 - 00:26
a
9340
16
Md. Sojib Khan's picture
Md. Sojib Khan
06/30/2020 - 10:53
a
9260
16
Md. Sojib Khan's picture
Md. Sojib Khan
06/30/2020 - 11:22
b
9262
4
Md. Tariful Mursalin Rifat's picture
Md. Tariful Mur...
06/22/2020 - 20:27
a
5002
16
Md. Tariful Mursalin Rifat's picture
Md. Tariful Mur...
06/22/2020 - 20:28
b
5024
4
Lokonath Debnath's picture
Lokonath Debnath
11/18/2019 - 16:26
a
8054
16