Magnate Ltd., a public limited company, acquired 16 million (80%) of the 20 million ordinary shares of Sphere Ltd. on
1 January 2025. At the date of acquisition, the retained earnings of Sphere Ltd. stood at Sh.145 million.
The purchase consideration was settled as follows:
- An exchange of one (1) ordinary share in Magnate Ltd. for every four (4) ordinary shares acquired in Sphere Ltd.
The market price of a Magnate Ltd. share on 1 January 2025 was Sh.60. The par value of Magnate Ltd.'s shares is
Sh.10.
- A cash payment of Sh.121 million to be made on 1 January 2027 (two years after acquisition). Magnate Ltd.’s cost
of capital is 10% per annum.
No entries have been made in the books of Magnate Ltd. to reflect either the share exchange or the deferred consideration.
The draft statements of financial position for the two companies as at 31 December 2025 were as follows:
| Assets | Magnate Ltd. | Sphere Ltd. |
| Sh.“000” | Sh.“000” |
| Non-current assets: | | |
| Property, plant and equipment | 840,000 | 410,000 |
| Investments (at cost) | 110,000 | 45,000 |
| Current assets: | | |
| Inventories | 142,000 | 98,000 |
| Trade receivables | 115,000 | 82,000 |
| Bank balance | 43,000 | 15,000 |
| Total assets | 1,250,000 | 650,000 |
| Equity and liabilities | | |
| Ordinary share capital (Sh.10 par value) | 500,000 | 200,000 |
| Share premium | 150,000 | 50,000 |
| Retained earnings | 380,000 | 260,000 |
| Non-current liabilities: | | |
| 8% Loan notes | 100,000 | 60,000 |
| Current liabilities: | | |
| Trade payables | 120,000 | 80,000
|
| Total equity and liabilities | 1,250,000 | 650,000 |
Additional information:
1. At the date of acquisition, the fair value of Sphere Ltd.’s land was Sh.25 million in excess of its carrying amount.
This land is still held by Sphere Ltd., and the revaluation has not been recorded in its individual financial statements.
2. During the year, Magnate Ltd. sold goods to Sphere Ltd. for Sh.40 million. Magnate Ltd. applied a mark-up of 25%
on cost. At the year-end, three-quarters of these goods remained in Sphere Ltd.’s inventory.
3. On 31 December 2025, Sphere Ltd. sent a cheque for Sh.10 million to Magnate Ltd. to reduce its intercompany
trade payable. Magnate Ltd. did not receive or record this cheque until 4 January 2026.
4. Sphere Ltd. acquired a new machine on 1 July 2025 for Sh.40 million. The acquisition was financed through a short
term bank loan, which was incorrectly included in Sphere's trade payables.
5. It is the group's policy to measure the non-controlling interest at its fair value at the date of acquisition. The fair
value of the non-controlling interest in Sphere Ltd. on 1 January 2025 was estimated at Sh.95 million.
6. Goodwill was tested for impairment at the year-end and was found to have reduced in value by 10%.
7. At the date of acquisition, the plant and equipment of Sphere Ltd. had a fair value of Sh.20 million in excess of its
carrying amount. This plant had a remaining useful life of 5 years at 1 January 2025. Sphere Ltd. has not adjusted
its records to reflect this revaluation or the additional depreciation.
8. On 30 December 2025, Magnate Ltd. dispatched goods to Sphere Ltd. at an invoiced price of Sh.5 million. These
goods were not received by Sphere Ltd. until 5 January 2026 and were not included in its closing inventory. Magnate
applied the same 25% mark-up on these goods.
9. On 28 December 2025, Sphere Ltd. declared a final dividend of Sh.0.50 per share. Magnate Ltd. has not yet recorded
its share of this dividend in its individual financial statements.
10. Magnate Ltd. has not yet recorded the interest due on its 8% Loan notes for the year ended 31 December 2025.
Required:
(a) Calculate the goodwill on acquisition of Sphere Ltd.
(b) Prepare the consolidated statement of financial position for the Magnate Group as at 31 December 2025.
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