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Homework answers / question archive / ACCO342 Financial Reporting Project Question 2 On 1 April 20X5, Princethorpe Co acquired 80% of the equity share capital of Stowe Co, gaining control from that date

ACCO342 Financial Reporting Project Question 2 On 1 April 20X5, Princethorpe Co acquired 80% of the equity share capital of Stowe Co, gaining control from that date

Accounting

ACCO342 Financial Reporting Project Question 2

On 1 April 20X5, Princethorpe Co acquired 80% of the equity share capital of Stowe Co, gaining control from that date. At the date of acquisition, shares in Stowe Co had a market value of $1.90 each. Princethorpe Co paid cash consideration of $2.25 per share purchased in Stowe Co. In addition to this, Princethorpe Co agreed to pay consideration of $0.15 per share on 31 March 20X6. Princethorpe Co has a cost of capital of 8% per annum.

Princethorpe Co has recorded the investment at the cost of the consideration paid in its individual financial statements

Below are the summarised draft financial statements of both companies.

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X5

 

Princethorpe Co

  $’000

Stowe Co

$’000

Revenue

156,500

75,000

Cost of sales

(114,500)

(63,450)

Gross profit

42,000

11,550

Distribution costs

(5,000)

(3,640)

Administrative expenses

(8,750)

(4,500)

Finance costs

(500)

-

Profit before tax

27,750

3,410

Income tax expense

(7,750)

(1,026)

Profit for the year

20,000

2,384

 

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5

 

Princethorpe Co

$’000

Stowe Co

$’000

ASSETS

 

 

Non-current assets

 

 

Property, plant and equipment (not i)

38,500

21,200

Investments

32,400

-

 

70,900

21,200

Current assets

 

 

Inventories (note(iii))

14,300

3,650

Trade receivables

10,700

7,000

Cash and cash equivalents

3,510

800

 

28,510

11,450

Total assets

99,410

32,650

 

 

Princethorpe Co

$'000

Stowe Co

$'000

EQUITY AND LIABILITIES

 

 

Equity

 

 

Equity shares of $1 each

20,000

18,000

Equity reserve – convertible loan

500

 

Retained earnings

63,150

8,750

 

83,650

26,750

Non-current liabilities

 

 

Convertible loan

4,500

 

Loan

1,800

-

Current liabilities

 

 

Trade payables

2,460

4,700

Current tax payable

7,000

1,200

 

9,460

5,900

Total equity and liabilities

99,410

32,650

 

The following information is relevant:

(i) At the date of acquisition, it was assessed that Stowe Co's main storage warehouse had a fair value of $5 million in excess of its carrying amount. Stowe Co has not incorporated the fair value increase on the warehouse into its financial statements. Additional depreciation charges (part of distribution expenses) of $80,000 would have arisen in the post-acquisition period to 31 December 20X5 had the fair value increase been recorded.

(ii) The goodwill which arose on the acquisition of Stowe Co has been impaired by $1 million as at 31 December 20X5. Goodwill impairment should be treated as an administrative expense.

(iii) Sales in the post-acquisition period to 31 December 20X5 from Princethorpe Co to Stowe Co throughout the year ended 31 December 20X5 were $800,000. Princethorpe Co applied a mark-up on cost of 20% to all of these sales. Stowe's closing inventory includes goods worth $360,000 (at cost to Stowe Co) is included in Stowe Co's inventory at 31 December 20X5 that had been supplied by Princethorpe Co in the post-acquisition period.

(iv) Princethorpe Co's policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Stowe Co's 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) The directors of Princethorpe Co believed the market had reacted favourably to its acquisition of Stowe and decided to issue new share capital whilst interest in the company was strong. On 31 October 20X5, Princethorpe Co issued an additional 5 million of ordinary shares at a premium of $0.50 per share. This issue has not yet been accounted for in the draft financial statements at 31 December 20X5.

(vi) Assume, that all items of income and expenditure accrue evenly throughout the year.

(Round any results to the nearest thousand.)

Required

(a) Calculate the goodwill arising on the acquisition of Stowe Co on 1 April 20X5.

(b) Prepare the consolidated statement of profit or loss for Princethorpe Co for the year ended 31 December 20X5 (you do not need to prepare the consolidated statement of other comprehensive income)

(c)  Princethorpe Co issued a convertible loan of $5 million on 1 December 20X95. The convertible loan has been correctly accounted for in Princethorpe Co's financial statements, and the finance cost calculated includes the effective interest on the loan pro-rata, as well as the interest cost on other debt. The coupon rate on the convertible loan is 6% (with the current market rate for loans of this type currently at 15%). In order to make the loan more attractive to potential investors, the conversion to equity in two years’ time will compensate for the low interest rate. It is proposed that the conversion will be at 2 shares for every $1 of loan stock held. The directors of Princethorpe Co cannot understand why the convertible loan stock has an impact on the EPS disclosures made.

(i) Calculate the basic EPS for Princethorpe Co at 31 December 20X5. (Show your answer to two decimal places.)

(ii) Calculate the diluted EPS for Princethorpe Co at 31 December 20X5. Tax rate is 30%.

(iii) Describe how IAS 32 Financial Instruments: Presentation and |AS 33 Earnings per Share require the impact of the convertible loan to be included in EPS disclosures.

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