Unit: Advanced Financial Reporting and Analysis
12 Questions| H Limited Sh. "million" | S Limited Sh. "million" | R Limited Sh. "million" | |
| Revenue | 4,275 | 2,515 | 1,730 |
| Cost of sales | (2,735) | (1,445) | (1,010) |
| Gross profit | 1,540 | 1,070 | 720 |
| Distribution costs | (305) | (195) | (90) |
| Administrative expenses | (370) | (235) | (120) |
| Profit from operations | 865 | 640 | 510 |
| Finance costs | (45) | (40) | (30) |
| Profit before tax | 820 | 600 | 480 |
| Income tax expense | (160) | (120) | (100) |
| Profit after tax for the year | 660 | 480 | 380 |
| Other comprehensive income: | |||
| Gain on property revaluation | 150 | 80 | - |
| Total comprehensive income | 810 | 560 | 380 |
| 1 | On 1 May 2017, H Limited acquired 75% of the ordinary shares of S Limited, a public limited entity. The purchase consideration was cash of Sh.560 million and the fair value of the identifiable net assets of S Limited was Sh.400 million as at that date. The fair value of non-controlling interest in S Limited as at the date of acquisition was Sh.240 million. H Limited wishes to use the "full goodwill" method for all acquisitions. The ordinary share capital and retained profit of S Limited as at the acquisition date were Sh.100 million and Sh.200 million respectively and there were no other reserves. The excess of the fair value of the identifiable net assets at acquisition is due to an increase in fair value of plant, which is depreciated on a straight-line basis and had a five-year remaining life as at the date of acquisition. |
| 2 | H Limited had acquired 80% of the ordinary shares of R Limited, on 1 May 2016. The purchase consideration was cash of Sh.600 million. R. Limited's identifiable net assets had a fair value of Sh.550 million which was equal to their carrying amounts. The non-controlling interest in R Limited had a fair value of Sh. 150 million at the date of acquisition. |
| 3 | On 1 November 2019, H Limited disposed of 30% of the ordinary shares of R. Limited for a consideration of Sh.375 million. R Limited's identifiable net assets were Sh.675 million and the non-controlling interest of R Limited had a carrying value of Sh.175 million at the date of disposal. The remaining equity interest in R Limited held by H Limited had a fair value of Sh. 575 million on 1 November 2019. After disposal, H Limited would exercise joint control over R Limited. The profits and losses of R Limited are deemed to accrue evenly over the year. |
| 4 | H Limited sold inventory to both S Limited and R Limited at a price of Sh.150 million and Sh.45 million respectively, in the month of October 2019. H Limited sells goods at a gross profit margin of 20% to group companies and third parties. At the year end, half of the inventory sold to S Limited remained unsold but the entire inventory sold to R. Limited had been transferred to third parties. |
| 5 | Goodwill arising on acquisitions has been tested for impairment annually and as at 30 April 2019, goodwill on acquisition of S Limited had reduced in value by i15% and as at 30 April 2020, had lost a further 5% of its original value No impairment had occurred in respect of goodwill on acquisition of R. Limited and the interest in R. Limited |
| Sh. "million" | |
| Carrying value of buildings | 2,000 |
| Fair value less costs to sell of the buildings | 1,720 |
| Other expected costs of closure | 390 |
| 1 | Year ended 31 December 2019: | ||
| Online store Sh."million | Retail outlet Sh."million | ||
| Revenue | 3,900 | 900 | |
| Cost of sales | (1,300) | (700) | |
| Gross profit | 2,600 | 200 | |
| Operating costs | (1,000) | (500) | |
| Profit before tax | 1,600 | (300) | |
| 2 | Year ended 31 December 2018: | ||
| Online store Sh."million | Retail outlet Sh."million | ||
| Revenue | 3,200 | 1,200 | |
| Cost of sales | (1,100) | (900) | |
| Gross profit | 2,100 | 300 | |
| Operating costs | (800) | (500) | |
| Profit before tax | 1,300 | (200) | |
| Assets | Sh."million" | Sh."million" |
| Non-current assets: | ||
| Tangible assets | 3,040 | |
| Intangible assets | 1,872 | |
| 4,912 | ||
| Current assets: | ||
| Inventory | 2,720 | |
| Accounts receivable | 3,104 | |
| Investment (market value Sh.896 million) | 352 | 6,176 |
| Total assets | 11,088 | |
| Capital and liabilities: | ||
| Share capital: | ||
| 240 million ordinary shares of Sh. 20 each | 4,800 | |
| 6%, 128 million cumulative preference shares of Sh.20 each | 2,560 | |
| 7,360 | ||
| Revenue reserve; | ||
| Accumulated losses | (2,624) | |
| Non-current liabilities: | ||
| 6% debentures | 2,400 | |
| 7,136 | ||
| Current liabilities: | ||
| Accounts payable | 1,600 | |
| Bank overdraft | 1,248 | |
| Debenture interest payable | 144 | |
| Accruals | 320 | |
| Directors loans | 640 | |
| 3,952 | ||
| Total capital and liabilities | 11,088 |
| 1 | Tangible assets comprised freehold property and plant valued at Sh.2,720 million and Sh.320 million respectively while the intangible assets comprised patents and goodwill valued at Sh.976 million and Sh.896 million respectively. Patents and goodwill are to be written off. An amount of Sh.480 million is to be written off inventory and Sh.374.4 million is to be provided for bad debts. The remaining freehold property is to be revalued at Sh.2,480 million. The investment was sold at the prevailing market value. |
| 2 | The 6% preference dividends are four years in arrears of which three-quarters are to be waived and ordinary shares are to be allocated at par for the balance. |
| 3 | The 6% preference shares are to be written down to Sh.15 each and the existing ordinary shares to Sh.4 cach. All the ordinary shares are to be consolidated into shares of Sh.20 each. The rate of dividend on preference shares is to be increased to 10%. |
| 4 | There are capital commitments amounting to Sh.2,400 million which are to be cancelled, on payment of 3%% of the contract price as a penalty |
| 5 | The 6% debenture holders were to have their interest paid in cash and to take over part of the freehold property (book value Sh.640 million) at a valuation of Sh.768 million in part payment of their holding. The 6% debenture holders are also to provide additional cash of Sh.832 million secured by a floating charge on the company's assets at an interest rate of 12% per annum. |
| 6 | The directors were to accept settlement of their loans as to 90% thereof by allotment of ordinary shares at par and as to 5% in cash. The balance of 5% was to be waived. |
| 7 | The trade payables were to be paid Sh.0.40 in every shilling to maintain and obtain an extension of the credit period. |
| 8 | The bank has sanctioned an overdraft limit of Sh.40 million to provide working capital. |
| Required | |
| (i) | The capital reduction account to record the scheme of capital re-organisation. |
| (ii) | The statement of financial position of Dynamic Ltd. as at 1 July 2019 immediately after effecting the scheme of reorganisation. |
| Sh."000" | |
| Interest income on plan assets | 16,500 |
| Employer contributions to plan | 550,000 |
| Current service cost | 600,000 |
| Interest on plan liability | 18,000 |
| Fair value of plan assets (31 December 2019) | 580,000 |
| Present value of plan obligations (31 December 2019) | 620,000 |
Want to join the discussion?
Log in to post comments and interact with tutors.
Login to Comment