Fundamentals Level – Skills Module
Reading and planning: 15 minutes
Writing: 3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
Section A – This ONE question is compulsory and MUST be attempted
1 Parentis, a public listed company, acquired 600 million equity shares in Offspring on 1 April 2006. The purchase
consideration was made up of:
a share exchange of one share in Parentis for two shares in Offspring
the issue of $100 10% loan note for every 500 shares acquired; and
a deferred cash payment of 11 cents per share acquired payable on 1 April 2007.
Parentis has only recorded the issue of the loan notes. The value of each Parentis share at the date of acquisition was
75 cents and Parentis has a cost of capital of 10% per annum.
The balance sheets of the two companies at 31 March 2007 are shown below:
$ million $ million $ million $ million
Property, plant and equipment (note (i)) 640 340
Investments 120 nil
Intellectual property (note (ii)) nil 30
Inventory (note (iii)) 76 22
Trade receivables (note (iii)) 84 44
Bank nil 160 4 70
—- —- —- —-
Total assets 920 440
Equity and liabilities
Equity shares of 25 cents each 300 200
Retained earnings – 1 April 2006 210 120
– year ended 31 March 2007 90 300 20 140
—- —- —- —-
10% loan notes 120 20
Trade payables (note (iii)) 130 57
Current tax payable 45 23
Overdraft 25 200 nil 80
—- —- —- —-
Total equity and liabilities 920 440
The following information is relevant:
(i) At the date of acquisition the fair values of Offspring’s net assets were approximately equal to their carrying
amounts with the exception of its properties. These properties had a fair value of $40 million in excess of their
carrying amounts which would create additional depreciation of $2 million in the post acquisition period to
31 March 2007. The fair values have not been reflected in Offspring’s balance sheet.
(ii) The intellectual property is a system of encryption designed for internet use. Offspring has been advised that
government legislation (passed since acquisition) has now made this type of encryption illegal. Offspring will
receive $10 million in compensation from the government.
(iii) Offspring sold Parentis goods for $15 million in the post acquisition period. $5 million of these goods are included
in the inventory of Parentis at 31 March 2007. The profit made by Offspring on these sales was $6 million.
Offspring’s trade payable account (in the records of Parentis) of $7 million does not agree with Parentis’s trade
receivable account (in the records of Offspring) due to cash in transit of $4 million paid by Parentis.
(iv) Due to the impact of the above legislation, Parentis has concluded that the consolidated goodwill has been
impaired by $27 million.