Tuesday 9 December 2008
ALL FIVE questions are compulsory and MUST be attempted
1 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. Below are the summarised draft financial statements
of both companies.
Income statements for the year ended 30 September 2008
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
Gross profit 22,000 10,000
Distribution costs (2,000) (2,000)
Administrative expenses (6,000) (3,200)
Finance costs (300) (400)
Profit before tax 13,700 4,400
Income tax expense (4,700) (1,400)
Profit for the year 9,000 3,000
Statements of financial position as at 30 September 2008
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
Total assets 56,600 19,200
Equity and liabilities
Equity shares of $1 each 10,000 4,000
Retained earnings 35,400 6,500
10% loan notes 3,000 4,000
Current liabilities 8,200 4,700
Total equity and liabilities 56,600 19,200
The following information is relevant:
(i) At the date of acquisition, the fair values of Sophistic’s 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 $5·2 million (at cost to Pedantic) of these goods by 30 September
(iii) Other than where indicated, income statement items are deemed to accrue evenly on a time basis.
(iv) Sophistic’s trade receivables at 30 September 2008 include $600,000 due from Pedantic which did not agree
with Pedantic’s corresponding trade payable. This was due to cash in transit of $200,000 from Pedantic to
Sophistic. Both companies have positive bank balances.
(v) Pedantic has a policy of accounting for any non-controlling interest at fair value. For this purpose the fair value
of the goodwill attributable to the non-controlling interest in Sophistic is $1·5 million. Consolidated goodwill was
not impaired at 30 September 2008.