On 1 October 2019, H Limited acquired 80% of the ordinary shares in S Limited when the retained earnings of S Limited
were Sh.5,335 million. On the same date, H Limited acquired 40% of the ordinary shares in A Limited paying Sh.16 per share.
The acquisition of the ordinary shares in S Limited was through a share exchange of one ordinary share in H Limited for
every two shares in S Limited. The market prices of H Limited's and S Limited's shares as at the date of acquisition were
Sh.30 and Sh.18 per share respectively.
In addition, H Limited agreed to pay a further amount of Sh.25 per acquired share in S Limited on 1 October 2021.
H Limited's cost of capital is 10% per annum and one shilling receivable in two years' time has a present value of 83 cents.
H Limited has not yet recorded the consideration on acquisition of the ordinary shares in S Limited.
The draft financial statements of thè group companies are as follows:
Statement of profit or loss for the year ended 31 March 2020:
| H Limited | S Limited | A Limited |
| Sh. "million" | Sh. "million" | Sh. "million" |
| Revenuе | 25,200 | 18,000 | 6,000 |
| Cost of sales | (15,120) | (12,000)
| (4,800) |
| Gross profit | 10,080 | 6,000 | 1,200 |
| Distribution costs | (1,344) | (840) | (600) |
| Administrative expenses | (2,196) | (1,080 | (1,320) |
| Investment income (interest and dividend) | 330 | - | - |
| Finance costs | (220) | (150) | - |
| Profit/loss before tax | 6,650 | 3,930 | (720) |
| Income tax expense/relief | (1,800) | (1,200) | 120 |
| Profit/loss for the year | 4,850 | 2.730 | (600) |
Statement of financial position as at 31 March 2020:
| H Limited | S Limited | A Limited |
| Assets | Sh."million" | Sh."million" | Sh."million" |
| Non-current assets: | | | |
| Property, plant and equipment | 25,000 | 16,300 | 6,000 |
| Investment in A Ltd. | 1,920 | -
| - |
| Financial asset | 250 | - | - |
| 27,170 | 16,300 | 6,000 |
| Current assets: | | | |
| Inventory | 6,700 | 6,000 | 3,300 |
| Trade receivables | 4,150 | 1,000 | 2,000 |
| Cash and cash equivalents | 1,980 | 400 | 100 |
| 12,830 | 7,400 | 5,400 |
| Total assets | 40,000
| 43,700 | 11,400 |
| Equity and liabilities: | | | |
| Equity: | | | |
| Ordinary shares of Sh.10 each | 8,000 | 5,000 | 3,000 |
| Share premium | 4,000 | 2,500 | - |
| Retained earnings | 12,100 | 6,700 | 3,600 |
| 24,100 | 14,200 | 6,600 |
| Non-current liabilities: | | | |
| 8% loan notes | 7,600 | 2,000 | - |
| Current liabilities: | | | |
| Trade payables | 5,500 | 5,200 | 3,100 |
| Current tax payable | 2,800 | 2,300 | 1,700 |
| 8,300 | 7,500 | 4,800 |
| Total equity and liabilities | 40,000 | 40,000 | 11,400 |
Additional information:
| 1. | At the date of acquisition, the fair values of S Limited's identifiable net assets approximated their book values with the exception of an item of plant which had a fair value of Sh.200 million above its carrying value. The plant had a remaining useful life of 10 years (straight-line depreciation) at the date of acquisition. Depreciation on plant is classified as part of cost of sales. The fair value of the plant has not been reflected in S Limited's financial statements. No fair value adjustments were required on the acquisition of A Limited. In addition, at the date of acquisition, S Limited had an internally generated brand which the directors of H Limited believed to have a fair value of Sh.300 million. The brand had an estimated useful life of 6 years. Amortisation charge is classified as an administrative expense. |
| 2. | Immediately after acquisition of S Limited, H Limited invested Sh.250 million in an 8% loan note of S Limited. All interest accruing to 31 March 2020 had been accounted for by both entities. S Limited also had other loans in issue as at 31 March 2020. |
| 3. | After the acquisition, S Limited sold goods to H Limited for Sh.500 million. S Limited had marked up these goods at 25% above their cost. H Limited had 30% of these goods in its inventory as at 31 March 2020. |
| 4. | H Limited's policy is to value the non-controlling interest of S Limited at its fair value at the date of acquisition. For this purpose, the market price of S Limited's shares at the date of acquisition is considered to be representative of the fair value. |
| 5. | Impairment tests were carried out on 31 March 2020 which concluded that due to poor trading performance, the investment in A Limited had been impaired to the extent of Sh.80 million. |
| 6. | SLimited paid dividends amounting to Sh.400 million before the year-end. |
| 7. | All incomes and expenses of the three companies are deemed to accrue evenly over the year unless as otherwise specified. |
| 8. | Other than the share exchange in the acquisition of the ordinary shares in S Limited, there was no other issue of ordinary shares by the group companies. |
Required:
(a) Consolidated statement of profit or loss for the year ended 31 March 2020.
(b) Consolidated statement of financial position as at 31 March 2020.
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