Project #92814 - Question 1



1    On 1st 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 $3·50 each. Below are the summarised draft financial
       statements of both companies.

Statements of comprehensive income for the year ended 30th September 2010

Premier                      Sanford

$’000                        $’000

Revenue                                                                                                  92,500                       45,000

Cost of sales                                                                                              (70,500)                      (36,000)

Gross profit                                                                                                22,000                         9,000

Distribution costs                                                                                            (2,500)                       (1,200)

Administrative expenses                                                                                      (5,500)                       (2,400)

Finance costs                                                                                                   (100)                            nil

Profit before tax                                                                                            13,900                         5,400

Income tax expense                                                                                           (3,900)                       (1,500)

Profit for the year                                                                                           10,000                         3,900

Other comprehensive income:

Gain on revaluation of land (note (i))                                                                                 500                            nil

Total comprehensive income                                                                                  10,500                         3,900


Statements of financial position as at 30 September 2010


Non-current assets

Property, plant and equipment                                                                                25,500                       13,900

Investments                                                                                                 1,800                              nil

27,300                       13,900

Current assets                                                                                              12,500                         2,400

Total assets                                                                                                39,800                       16,300


Equity and liabilities


Equity shares of $1 each                                                                                      12,000                         5,000

Land revaluation reserve - 30 September 2010 (note (i))                                                              2,000                              nil

Other equity reserve - 30 September 2009 (note (iv))                                                                   500                            nil

Retained earnings                                                                                           12,300                         4,500

26,800                         9,500

Non-current liabilities

6% loan notes                                                                                                3,000                              nil

Current liabilities                                                                                           10,000                         6,800

Total equity and liabilities                                                                                    39,800                       16,300


The following information is relevant:

(i)      At the date of acquisition, the fair values of Sanford’s assets were equal to their carrying amounts with the
       exception of its property. This had a fair value of $1·2 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.





Premier’s group policy is to revalue all properties to current value at each year end. On 30 September 2010, the value of Sanford’s property was unchanged from its value at acquisition, but the land element of Premier’s 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 Sanford’s books.

(iv)  Premier’s 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)  Premier’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose
       Sanford’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.

(vi)  There has been no impairment of consolidated goodwill.



(a)  Prepare the consolidated statement of comprehensive income for Premier for the year ended 30 September

(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



Subject Business
Due By (Pacific Time) 11/11/2015 12:00 am
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