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ALL FIVE questions are compulsory and MUST be attempted

On 1 April 2008, Pedantic acquired 60% of the equity share capital of Sophistic in a share exchange of two shares
in Pedantic for three shares in Sophistic. 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. Pedantic also incurred directly related acquisition costs
of 300,000 which are included in administrative expenses. Below are the summarised draft financial statements of
both companies.
Profit and loss accounts for the year ended 30 September 2008

Turnover
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Finance costs
Profit before tax
Taxation
Profit for the year
Balance sheets as at 30 September 2008
Fixed assets
Tangible assets
Current assets
Creditors: amounts falling due within one year
Creditors: amounts falling due after more than one year
10% loan notes

Capital and reserves


Equity shares of 1 each
Profit and loss account

Pedantic
000
85,000
(63,000)

22,000
(2,000)
(6,000)

14,000
(300)

13,700
(4,700)

9,000

Sophistic
000
42,000
(32,000)

10,000
(2,000)
(3,200)

4,800
(400)

4,400
(1,400)

3,000

40,600

12,600

16,000
(8,200)

6,600
(4,700)

(3,000)

45,400

(4,000)

10,500

10,000
35,400

45,400

4,000
6,500

10,500

The following information is relevant:


(i)

At the date of acquisition, the fair values of Sophistics 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.

(ii) 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 52 million (at cost to Pedantic) of these goods by 30 September
2008.
(iii) Other than where indicated, profit and loss account items are deemed to accrue evenly on a time basis.
(iv) Sophistics trade debtors at 30 September 2008 include 600,000 due from Pedantic which did not agree with
Pedantics corresponding trade creditor. This was due to cash in transit of 200,000 from Pedantic to Sophistic.
Both companies have positive bank balances.
(v) Consolidated goodwill has an indefinite life and has not been impaired at 30 September 2008.

Required:
(a) Prepare the consolidated profit and loss account for Pedantic for the year ended 30 September 2008.
(9 marks)
(b) Prepare the consolidated balance sheet for Pedantic as at 30 September 2008.

(16 marks)
(25 marks)

[P.T.O.

ALL FIVE questions are compulsory and MUST be attempted


1

On 1 June 2010, Premier acquired 80% of the equity share capital of Sanford. The consideration consisted of two
elements: a share exchange of three shares in Premier for every five acquired shares in Sanford and the issue of a
$100 6% loan note for every 500 shares acquired in Sanford. The share issue has not yet been recorded by Premier,
but the issue of the loan notes has been recorded. At the date of acquisition shares in Premier had a market value of
$5 each and the shares of Sanford had a stock market price of $350 each. Below are the summarised draft financial
statements of both companies.
Statements of comprehensive income for the year ended 30 September 2010
Premier
$000
Revenue
92,500
Cost of sales
(70,500)

Gross profit
22,000
Distribution costs
(2,500)
Administrative expenses
(5,500)
Finance costs
(100)

Profit before tax


13,900
Income tax expense
(3,900)

Profit for the year


10,000
Other comprehensive income:
Gain on revaluation of land (note (i))
500

Total comprehensive income


10,500

Statements of financial position as at 30 September 2010


Assets
Non-current assets
Property, plant and equipment
Investments
Current assets
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Land revaluation reserve 30 September 2010 (note (i))
Other equity reserve 30 September 2009 (note (iv))
Retained earnings
Non-current liabilities
6% loan notes
Current liabilities
Total equity and liabilities

Sanford
$000
45,000
(36,000)

9,000
(1,200)
(2,400)
nil

5,400
(1,500)

3,900
nil

3,900

25,500
1,800

27,300
12,500

39,800

13,900
nil

13,900
2,400

16,300

12,000
2,000
500
12,300

26,800

5,000
nil
nil
4,500

9,500

3,000

nil

10,000

39,800

6,800

16,300

The following information is relevant:


(i)

At the date of acquisition, the fair values of Sanfords assets were equal to their carrying amounts with the
exception of its property. This had a fair value of $12 million below its carrying amount. This would lead to a
reduction of the depreciation charge (in cost of sales) of $50,000 in the post-acquisition period. Sanford has not
incorporated this value change into its entity financial statements.

Premiers group policy is to revalue all properties to current value at each year end. On 30 September 2010, the
value of Sanfords property was unchanged from its value at acquisition, but the land element of Premiers property
had increased in value by $500,000 as shown in other comprehensive income.
(ii) Sales from Sanford to Premier throughout the year ended 30 September 2010 had consistently been $1 million
per month. Sanford made a mark-up on cost of 25% on these sales. Premier had $2 million (at cost to Premier)
of inventory that had been supplied in the post-acquisition period by Sanford as at 30 September 2010.
(iii) Premier had a trade payable balance owing to Sanford of $350,000 as at 30 September 2010. This agreed with
the corresponding receivable in Sanfords books.
(iv) Premiers investments include some available-for-sale investments that have increased in value by $300,000
during the year. The other equity reserve relates to these investments and is based on their value as at
30 September 2009. There were no acquisitions or disposals of any of these investments during the year ended
30 September 2010.
(v) Premiers policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose
Sanfords share price at that date can be deemed to be representative of the fair value of the shares held by the
non-controlling interest.
(vi) There has been no impairment of consolidated goodwill.
Required:
(a) Prepare the consolidated statement of comprehensive income for Premier for the year ended 30 September
2010.
(b) Prepare the consolidated statement of financial position for Premier as at 30 September 2010.
The following mark allocation is provided as guidance for this question:
(a) 9 marks
(b) 16 marks
(25 marks)

[P.T.O.

ALL FIVE questions are compulsory and MUST be attempted


1

(a) On 1 October 2012, Paradigm acquired 75% of Stratas equity shares by means of a share exchange of two new
shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of
Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has not recorded any of the
purchase consideration, although it does have other 10% loan notes already in issue.
The market value of Paradigms shares at 1 October 2012 was $2 each.
The summarised statements of financial position of the two companies as at 31 March 2013 are:
Assets
Non-current assets
Property, plant and equipment
Financial asset: equity investments (notes (i) and (iv))
Current assets
Inventory (note (ii))
Trade receivables (note (iii))
Bank
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Retained earnings/(losses) at 1 April 2012
for year ended 31 March 2013
Non-current liabilities
10% loan notes
Current liabilities
Trade payables (note (iii))
Bank overdraft
Total equity and liabilities

Paradigm
$000

Strata
$000

47,400
7,500

54,900

25,500
3,200

28,700

20,400
14,800
2,100

92,200

8,400
9,000
nil

46,100

40,000
19,200
7,400

66,600

20,000
(4,000)
8,000

24,000

8,000

nil

17,600
nil

92,200

13,000
9,100

46,100

The following information is relevant:


(i)

At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a
net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the
pre- and post-acquisition split of Stratas profit for the year ended 31 March 2013.
Also at the date of acquisition, Paradigm conducted a fair value exercise on Stratas net assets which were
equal to their carrying amounts (including Stratas financial asset equity investments) with the exception of
an item of plant which had a fair value of $3 million below its carrying amount. The plant had a remaining
economic life of three years at 1 October 2012.
Paradigms policy is to value the non-controlling interest at fair value at the date of acquisition. For this
purpose, a share price for Strata of $120 each is representative of the fair value of the shares held by the
non-controlling interest.

(ii) Each month since acquisition, Paradigms sales to Strata were consistently $46 million. Paradigm had
marked these up by 15% on cost. Strata had one months supply ($46 million) of these goods in inventory
at 31 March 2013. Paradigms normal mark-up (to third party customers) is 40%.
(iii) Stratas current account balance with Paradigm at 31 March 2013 was $28 million, which did not agree
with Paradigms equivalent receivable due to a payment of $900,000 made by Strata on 28 March 2013,
which was not received by Paradigm until 3 April 2013.
2

(iv) The financial asset equity investments of Paradigm and Strata are carried at their fair values as at 1 April
2012. As at 31 March 2013, these had fair values of $71 million and $39 million respectively.
(v) There were no impairment losses within the group during the year ended 31 March 2013.
Required:
Prepare the consolidated statement of financial position for Paradigm as at 31 March 2013.

(20 marks)

(b) Paradigm has a strategy of buying struggling businesses, reversing their decline and then selling them on at a
profit within a short period of time. Paradigm is hoping to do this with Strata.
Required:
As an adviser to a prospective purchaser of Strata, explain any concerns you would raise about basing an
investment decision on the information available in Paradigms consolidated financial statements and
Stratas entity financial statements.
(5 marks)
(25 marks)

[P.T.O.

ALL FIVE questions are compulsory and MUST be attempted


1

On 1 April 2013, Polestar acquired 75% of the equity share capital of Southstar. Southstar had been experiencing
difficult trading conditions and making significant losses. In allowing for Southstars difficulties, Polestar made an
immediate cash payment of only $150 per share. In addition, Polestar will pay a further amount in cash on
30 September 2014 if Southstar returns to profitability by that date. The value of this contingent consideration at the
date of acquisition was estimated to be $18 million, but at 30 September 2013 in the light of continuing losses, its
value was estimated at only $15 million. The contingent consideration has not been recorded by Polestar. Overall,
the directors of Polestar expect the acquisition to be a bargain purchase leading to negative goodwill.
At the date of acquisition shares in Southstar had a listed market price of $120 each.
Below are the summarised draft financial statements of both companies.
Statements of profit or loss for the year ended 30 September 2013

Revenue
Cost of sales
Gross profit (loss)
Distribution costs
Administrative expenses
Finance costs
Profit (loss) before tax
Income tax (expense)/relief
Profit (loss) for the year

Polestar
$000
110,000
(88,000)

22,000
(3,000)
(5,250)
(250)

13,500
(3,500)

10,000

Southstar
$000
66,000
(67,200)

(1,200)
(2,000)
(2,400)
nil

(5,600)
1,000

(4,600)

41,000
16,000

57,000
16,500

73,500

21,000
nil

21,000
4,800

25,800

30,000
28,500

58,500
15,000

73,500

6,000
12,000

18,000
7,800

25,800

Statements of financial position as at 30 September 2013


Assets
Non-current assets
Property, plant and equipment
Financial asset: equity investments (note (iii))
Current assets
Total assets
Equity and liabilities
Equity
Equity shares of 50 cents each
Retained earnings
Current liabilities
Total equity and liabilities
The following information is relevant:
(i)

At the date of acquisition, the fair values of Southstars assets were equal to their carrying amounts with the
exception of a leased property. This had a fair value of $2 million above its carrying amount and a remaining
lease term of 10 years at that date. All depreciation is included in cost of sales.

(ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 2013. Southstar processed all
of these materials incurring additional direct costs of $14 million and sold them back to Polestar in August 2013
for $9 million. At 30 September 2013 Polestar had $15 million of these goods still in inventory. There were no
other intra-group sales.
2

(iii) Polestar has recorded its investment in Southstar at the cost of the immediate cash payment; other equity
investments are carried at fair value through profit or loss as at 1 October 2012. The other equity investments
have fallen in value by $200,000 during the year ended 30 September 2013.
(iv) Polestars policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose,
Southstars share price at that date can be deemed to be representative of the fair value of the shares held by the
non-controlling interest.
(v) All items in the above statements of profit or loss are deemed to accrue evenly over the year unless otherwise
indicated.
Required:
(a) Prepare the consolidated statement of profit or loss for Polestar for the year ended 30 September 2013.
(b) Prepare the consolidated statement of financial position for Polestar as at 30 September 2013.
The following mark allocation is provided as guidance for this question:
(a) 14 marks
(b) 11 marks
(25 marks)

[P.T.O.