CONSOLIDATION - PRACTICE QUESTIONS

Question 1: ARM Limited

On 1 August 2007 ARM purchased 18 million of a total of 24 million equity shares in AMK. The
acquisition was through a share exchange of two shares in ARM for every three shares in AMK.
Both companies have shares with a par value of $1 each. The market price of ARMs shares at 1
August 2007 was $5·75 per share. ARM will also pay in cash on 31 July 2009 (two years after
acquisition) $2·42 per acquired share of AMK. ARM’s cost of capital is 10% per annum. The
reserves of AMK on 1 April 2007 were $69 million.

The summarized income statements for the ARM and AMK for the year ended 31 March 2008
are:

ARM AMK
$’000 $’000
Revenue 150,000 78,000
Cost of sales (94,000) (51,000)
Gross profit 56,000 27,000
Distribution cost (7,400) (3,000)
Administrative expenses (12,500) (6,000)
Finance cost (2,000) (900)
Profit before tax 34,100 17,100
Income Tax (10,400) (3,600)
Profit for the period 23,700 13,500

The following information is relevant:

i. The fair values of the net assets of AMK at the date of acquisition were equal to their
carrying amounts with the exception of property and plant. Property and plant had fair
values of $4·1 million and $2·4 million respectively in excess of their carrying amounts.
The increase in the fair value of the property would create additional depreciation of
$200,000 in the consolidated financial statements in the post-acquisition period to 31
March 2008 and the plant had a remaining life of four years (straight-line depreciation) at
the date of acquisition of AMK. All depreciation is treated as part of cost of sales.

The fair values have not been reflected in AMK’s financial statements.

ii. The finance costs of ARM do not include the finance cost on the deferred consideration

iii. Prior to its acquisition, AMK had been a good customer of ARM. In the year to 31
March 2008, ARM sold goods at a selling price of $1·25 million per month to AMK both
before and after its acquisition. ARM made a profit of 20% on the cost of these sales. At
31 March 2008 AMK still held inventory of $3 million (at cost to AMK) of goods
purchased in the post-acquisition period from ARM.

iv. An impairment test on the goodwill of AMK conducted on 31 March 2008 concluded
that it should be written down by $2 million.
CONSOLIDATION - PRACTICE QUESTIONS

v. All items in the above income statements are deemed to accrue evenly over the year.

Required:

(a) Calculate the goodwill arising on the acquisition of AMK at 1 August 2007.

(b) Prepare the consolidated income statement for the ARM Group for the year
ended 31 March 2008.
CONSOLIDATION - PRACTICE QUESTIONS

Question 2: Pedantic
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 summarized draft financial statements of both companies.

Income statements for the year ended 30 September 2008:

Pedantic Sophistic
$’000 $’000
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
Gross profit 22,000 10,000
Distribution cost (2,000) (2,000)
Administrative expenses (6,000) (3,200)
Finance cost (300) (400)
Profit before tax 13,700 4,400
Income Tax (4,700) (1,400)
Profit for the period 9,000 3,000

Statements of financial position as at 30 September 2008:

Pedantic Sophistic
Assets $’000 $’000
Non-current assets
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
Total Assets 56,600 19,200

Equity and liabilities

Share Capital of $1 each 10,000 4,000
Retained earnings 35,400 6,500
45,400 10,500

Non-current liabilities
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.
CONSOLIDATION - PRACTICE QUESTIONS

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 2008.

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.

Required:

(a) Prepare the consolidated income statement for Pedantic for the year ended 30
September 2008.

(b) Prepare the consolidated statement of financial position for Pedantic as at 30

September 2008.
CONSOLIDATION - PRACTICE QUESTIONS

Question 3: Full VIP

Below are the summarized statements of financial position for two companies as at 31 March
2009:

Full VIP Less VIP

Assets $ million $ million
Non-current assets
Property, plant and equipment 597 320
Investments 268 -
865 320
Current assets
Inventory 142 160
Trade receivable 95 88
Cash and bank 8 22
245 270
Total Assets 1,110 590

Equity and liabilities

Share Capital of $1 each 500 145
Share premium 100 -
Retained earnings 130 260
730 405

Non-current liabilities
10% loan notes 180 20

Current liabilities 200 165

Total equity and liabilities 1,110 590

Notes:

1. Investment in Less VIP

On 1 April 2007 Full VIP acquired 116 million shares in Less VIP for an immediate cash
payment of $210 million and issued at par one 10% $100 loan note for every 200 shares
acquired. Less VIP’s retained earnings at the date of acquisition were $120 million.

2. Full VIP’s policy is to value non-controlling interests at their fair values. The directors of Full
VIP assessed the fair value of the non-controlling interest in Less VIP at the date of
acquisition to be $65 million.

3. At the date of acquisition, Less VIP owned a recently built property that was carried at its
(depreciated) construction cost of $62 million. The fair value of this property at the date of
acquisition was $82 million and it had an estimated remaining life of 20 years. For many years
Less VIP has been selling some of its products under the brand name of ‘Ek dum VIP’. At
the date of acquisition the directors of Full VIP valued this brand at $25 million with a
remaining life of 10 years. The brand is not included in Less VIP’s statement of financial
position.
CONSOLIDATION - PRACTICE QUESTIONS

The fair value of all other identifiable assets and liabilities of Less VIP were equal to their
carrying values at the date of its acquisition.

4. The inventory of Less VIP at 31 March 2009 includes goods supplied by Full VIP for $56
million (at selling price from Full VIP). Full VIP adds a mark-up of 40% on cost when
selling goods to Less VIP. There are no intra-group receivables or payables at 31 March
2009.

5. Less VIP sold equipment to Full VIP on 1st October 2008, having book value of $60 million
with a remaining useful life of 6 years at a price of $120 million.

Required:

Prepare the consolidated statement of financial position of Full VIP as at 31 March 2009.
CONSOLIDATION - PRACTICE QUESTIONS

Question 4: Chota Bheem Limited

On 1 April 2009 Chota Bheem Limited acquired 80% of Chutki Limited equity shares. Out
of these 80%, 75% shares are purchased from “Raj Kumari Indumati”. Chota bheem limited
has given 3 shares in Chota Bheem Limited for every 2 shares purchased from “Raj Kumari
Indumati”. The market prices of Chota bheem Limited and Chutki Limited shares at the
date of acquisition were Rs.3.20 and Rs.4.50 per share respectively.

In addition Chota Bheem Limited agreed to pay a further amount on 1 April 2010 to “Raj
Kumari Indumati” that was contingent upon the post-acquisition performance of Chutki
Limited. At the date of acquisition Chota Bheem Limited assessed the fair value of this
contingent consideration at Rs.4.2 million, but by 31 March 2010 it was clear that the actual
amount to be paid would be only Rs.2.7 million (ignore discounting). Chota bheem has
recorded the share exchange and provided for the initial estimate of Rs.4.2 million for the
contingent consideration.

Chota Bheem Limited purchased remaining 5% shares from “chotu or taklu” (Children of tun
tun mausi) for Rs.1.2 million.

Chota Bheem Limited only recorded contingent consideration.

Summarized statements of financial position as at 31 March, 2010 are:

Chota Bheem Chutki
Limited Limited
Assets Rs in “000” Rs in “000”
Non-current assets
Property, plant and equipment 49,500 24,500
Investment 4,200 -
53,700 24,500
Current assets
Inventory 38,800 9,000
Trade receivable 6,500 1,500
45,300 10,500
Total assets 99,000 35,000

Equity and liabilities

Share Capital of Rs. 1 each 25,000 8,000
Share premium 19,800 -
Retained earnings 27,200 17,500
72,000 25,500

Non-current liabilities
7% loan notes 14,500 2,000

Current liabilities
Contingent consideration 4,200 -
Other current liabilities 8,300 7,500
12,500 7,500
Total equity and liabilities 99,000 35,000
CONSOLIDATION - PRACTICE QUESTIONS

The following information is relevant:

i. At the date of acquisition the fair values of Chutki Limited’s property, plant and
equipment was equal to its carrying amount with the exception of Chutki Limited’s
factory which had a fair value of Rs. 2 million above its carrying amount. This requires
additional annual depreciation of Rs. 100,000 in the consolidated financial statements in
the post-acquisition period.

ii. Also at the date of acquisition, Chutki Limited had an intangible asset of Rs. 500,000 for
software in its statement of financial position. Chota Bheem’s directors (Jaggu Bandar,
Kalia and Mangal Singh) believed the software to have no recoverable value at the date
of acquisition and Chutki Limited wrote it off shortly after its acquisition.

iii. At 31 March 2010 Chota Bheem’s current account with Chutki Limited was Rs. 3.4
million (debit). This did not agree with the equivalent balance in Chutki Limited’s books
due to some goods-in-transit invoiced at Rs. 1.8 million that were sent by Chota Bheem
Limited on 28 March 2010, but had not been received by Chutki Limited until after the
year end. All the previous goods have been sold by Chutki Limited. Chota Bheem
Limited sold all these goods at cost plus 50%.

iv. Consolidated goodwill is impaired by 10% during the year.

v. Goodwill at 31 March, 2010 Rs. 13,860.

Required:

Prepare the consolidated statement of financial position.

CONSOLIDATION - PRACTICE QUESTIONS

Question 5: Chintu Limited

On January 1, 2017 “Chintu limited” acquired “Munni Limited” under following terms:

Immediate cash payment of Rs. 32,000 on January 1, 2017 and a further amount deferred till
January 1, 2018 of Rs. 5.4 million. Immediate payment has been recorded by Chintu limited but
the deferred payment has not been recorded. Chintu limited cost of capital is 8%.

The summarized statements of financial position of the Chintu and Munni Limited at December
31, 2017 are:

Chintu Munni
Limited Limited
Assets Rs in “000” Rs in “000”
Non-current assets
Property, plant and equipment 50,000 39,000
Intangible assets 7,500 -
Investment 32,000 -
89,500 39,000
Current assets
Inventory 11,200 8,400
Dividend receivable 6,400 -
Trade receivable 7,400 5,300
Bank 3,400 2,000
28,400 15,700
Total assets 117,900 54,700

Equity and liabilities

Share Capital of Rs. 1 each 50,000 12,000
Retained earnings 41,300 18,000
91,300 30,000

Non-current liabilities
7% loan notes 15,000 8,000

Current liabilities
Bank overdraft - 2,500
Dividend Payable - 8,000
Trade payable 11,600 6,200
11,600 16,700
Total equity and liabilities 117,900 54,700

The following information is relevant:

i. It is Chintu Limited’s policy to value NCI at proportionate share.

CONSOLIDATION - PRACTICE QUESTIONS

ii. Fair value of some assets was above its carrying amount at the date of acquisition, which
amounted to Rs. 4 million breakup of which are as follows:

Description % Remaining life

Land 25% N/A
Equipment 75% 4 years

iii. Also at the date of acquisition, Chintu Limited valued Munni’s limited customer
relationships as a customer base intangible asset at fair value of Rs. 3 million. Munni
Limited has not accounted for this asset. Trading relationships with Munni’s customers
last on average for 6 years.

iv. Goodwill is impaired by 10%.

v. Goodwill as at December 31, 2017 is Rs. 12,420

vi. 20% Bonus shares have been issued during the year by Munni Limited.

vii. Dividend has been declared by Munni Limited during the year.

Required:
Prepare consolidated statement of financial position of Chintu Limited.
CONSOLIDATION - PRACTICE QUESTIONS

Question 6: Lay and Dey Limited

Lay Dey
Assets Rs in million Rs in million
Non-current assets
Building 1,600 545
Plant and machinery 1,465 690
Investment in Dey 587 -
Current assets 2,068 780
5,720 2,015

Equity and liabilities

Share Capital of Rs. 10 each 980 495
Share premium 990 150
Retained earnings 3,150 210
5,120 855

Current liabilities 600 1,160

Total equity and liabilities 5,720 2,015

Relevant Information:

1. Lay acquired 27 million shares of Dey on 1 April 2016 at following consideration:

 Issuance of 20 million ordinary shares at premium of Rs. 2 each;
 Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10
million and legal expenses of Rs. 5 million.

The market value of each share of Lay and Dey on acquisition date was Rs. 25 and Rs. 11
respectively. At acquisition date, retained earnings of SL were Rs. 100 million.

2. The following table sets out those items whose fair value on the acquisition date was
different from their book value. These values have not been incorporated in Dey’s books of
account.

Description Book value Fair Value Status

Rs. In million Rs. In million
Building 250 170 Remaining life 20 years
Inventory 112 62 Inventory sold during the year
Provision for bad debts (15) (24) All receivable realized during the year

3. Upon acquisition of Dey, a contract for management services was also signed under which
Lay would provide various management services to Dey at an annual fee of Rs. 50 million
from the date of acquisition. The payment would be made in two equal installments payable
in arrears on 1 April and 1 October.
CONSOLIDATION - PRACTICE QUESTIONS

4. On 30 September 2016, Lay acquired a plant from Dey in exchange of a building which was
currently not in use of Lay. The details of plant and building are as follows:

Cost Accumulated Exchange Price*

Depreciation
------------ Rupees in million ----------
Building 240 130 120
Plant 200 80 120
*Equivalent to fair value

Remaining useful life of building is 10 years whereas, remaining useful life of plant is 5 years.

5. Dey Limited paid an interim cash dividend of 10% on 31 July 2016.

6. Lay Limited values non-controlling interest at the acquisition date at its fair value.

7. The following inter-company sales were made during the year ended 31 Dec, 2016:

Sales Included in buyers Profit %

closing stock
------------ Rupees in million ----------
Lay to Dey 120 20 30% on cost
Dey to Lay 80 32 15% on sale

8. Dey issued 10% bonus shares during the year.

9. Net Goodwill at 31 Dec, 2016 is Rs. 188.10 million

Requirement:
Balance Sheet banao Lay ki as at December 31, 2016.
CONSOLIDATION - PRACTICE QUESTIONS

Question 8: Salang and Malang

Following are the balances of Salang and Malang Limited for the year ended 30-june-2017:

Salang Limited Malang Limited

Debit Credit Debit Credit
------ Rs. In million ------
Sales - 2,060 - 1,524
Cost of sales 1,300 - 846 -
Selling and Administrative expenses 350 - 225 -
Investment income - 190 - 50
Gain on disposal of fixed assets- net - 35 - -
Taxation 80 - 60 -
Share capital ( Rs. 10 each ) - 3,500 - 2,600
Retained earnings as on 1-July-2016 - 1,996 - 441

Additional information:
1. Salang limited acquired 65% shares of Malang Limited on 1 September 2016 against the
following consideration:

i. Cash payment of Rs. 900 million.

ii. Issuance of shares having nominal value of Rs. 1,000 million.

The fair value of each share of Salang and Malang Limited on acquisition date was Rs. 16 and
Rs. 12 respectively.

At acquisition date, fair value of Malang’s net assets was equal to their book value except a
brand which had not been recognised by Malang Limited. Salang limited estimates that
benefit would be obtained from the brand for the next 10 years.

2. The incomes and expenses of Malang Limited had accrued evenly during the year except
investment income. The investment income is exempt from tax and had been recognised in
August 2016 and received in September 2016.

3. On 1 January 2017 Salang Limited sold a manufacturing plant having carrying value of Rs. 42
million to Malang Limited against cash consideration of Rs. 30 million. The plant had a
remaining useful life of 6 years on the date of disposal.

4. Both companies paid interim cash dividend at the rate of 5% in May 2017.

5. An impairment test carried out at year end has indicated that goodwill of Malang Limited has
been impaired by 10%.

6. Net goodwill as at June 30, 2017 is Rs. 310.95 million

CONSOLIDATION - PRACTICE QUESTIONS

7. On 1 February 2017 Malang Limited delivered goods having sale price of Rs. 100 million to
Salang Limited on ‘sale or return basis’. 40% of these goods were returned on 1 May 2017
and the remaining was accepted by Salang Limited. 20% of the goods accepted were included
in the closing inventory of Salang Limited. Malang Limited earned a profit of 33.33% on
cost.

8. Salang Limited measures NCI at fair value.

Requirement:
Consolidated P&L BANAO.
CONSOLIDATION - PRACTICE QUESTIONS

Question 9: Ek Tha Tiger

The summarized trial balances of Ek Tha Limited (ETL) and Tiger Limited (TL) as at 31
December 2015 are as follows:

Ek Tha Limited (ETL) Tiger Limited (TL)

Debit Credit Debit Credit
------ Rs. In million ------
Sales - 835 - 645
Cost of sales 525 - 396 -
Operating expenses 115 - 102 -
Investment Income - 25 -
Tax expense 65 - 48 -
Share capital (Rs. 10 each) - 600 - 250
Share premium - 150 - 60
Retained earnings as at 1 January 2015 - 265 - 179
Current liabilities - 115 - 105
Property, Plant and Equipment 390 - 350 -
Cost of investment 500 - -
Stock-in-trade 125 - 115 -
Trade receivable 140 - 125 -
Cash and bank 110 - 103 -
Dividend Receivable 20 - - -
1,990 1,990 1,239 1,239

Masley Masaail and Kaam ki Baatein:

1. On 1 May 2015, Ek Tha Limited (ETL) acquired 80% shares of Tiger Limited (TL).
Consideration comprised as follows:

i. Share for share exchange offer, 2 shares in Ek Tha Limited (ETL) for 4 shares in
Tiger Limited (TL). Market prince of Ek Tha Limited (ETL) is Rs.12 per share.
ii. Deferred consideration of Rs. 110 million after 1 year. Discount rate is 10%.
iii. Cash consideration 280.

TL has not recognised the value of brand in its books of account. At the date of
acquisition, the fair value of brand was assessed at Rs. 45 million. The remaining useful
life of the brand was estimated as 15 years.

2. Fair value exercise of TL at the date of acquisition carried on by a third party Padmavati
Limited which is on the panel of SBP all assets and liabilities were equal to their carrying
amount except as mentioned in “point 1” or as follows:

Particulars Fair Value Carrying Amount

Plant 50 20
Land 15 20

Remaining useful life of plant is 5 year.

3. Ek Tha Limited (ETL) charged Rs. 2.5 million monthly to Tiger Limited (TL) for
management services provided from the date of acquisition and has credited it to
operating expenses.
CONSOLIDATION - PRACTICE QUESTIONS

4. On 1 October 2015, Tiger Limited (TL) sold a machine to Ek Tha Limited (ETL) for Rs.
24 million. The machine had been purchased on 1 October 2013 for Rs. 26 million. On
the date of acquisition the machine was assessed as having a useful life of ten years
and that estimate has not changed. Gain on disposal was erroneously credited to sales
account.

5. During the year Ek Tha Limited (ETL) sold goods to Tiger Limited (TL) worth Rs.20
million at a markup of 20% for further manufacturing. Tiger Limited (TL) processed
goods at a cost of Rs. 5 million and sold it back to Ek Tha Limited (ETL) at a margin of
25%. 40% goods are sold by Ek Tha Limited (ETL).

6. Ek Tha Limited (ETL) purchased machinery from Raam Leela Limited on March 1, 2015
at a cost of Rs. 20 million which was wrongly expensed out by the ETL in Operating
Expenses. At the date of acquisition the economic life and useful life was assessed to be
10 years and 5 years respectively.

7. It may be assumed that profits of both companies had accrued evenly during the year

8. Ek Tha Limited (ETL) stock count was carried out by firm of external auditors which
revealed that stock was understated by Rs. 8 million.

9. Tiger Limited (TL) declared 10% interim cash dividend on June 30, 2015.

10. Net Goodwill as at December 31, 2015 is Rs. 23.76.

Required:
Aakhri baar Class mein Bana k dikhao:
1. Consolidated Profit and Loss
2. Consolidated Balance Sheet