CONVEX Ltd. is a new company that was established on 1st January, 2020 to oversee theproduction of coronavirus vaccines for Ghana. On 1st July, 2020, CONVEX Ltd. acquired 75%shares in CONCAVE Ltd., a pharmaceutical company, to speed up the vaccine production. As anew graduate from UGBS, CONVEX Ltd. has employed you as their accountant. At a managementmeeting held, a number of issues were raised about how CONVEX Ltd. should deal with itstransactions and investment in CONCAVE Ltd. and the need to conduct financial ratio analysis todetermine the profitability and sustainability of CONCAVE Ltd. In a memo to management,provide your views on how the following issues should be addressed.
Issue A
At the meeting, executive members could not agree on whether CONVEX Ltd. should prepare andpresent both separate and consolidated financial statements. Some of the executive members raisedissues that CONVEX Ltd. does not need to prepare consolidated financial statements because it issimply an investment made in CONCAVE Ltd. Again, others were of the view that CONVEX Ltd.is neither a public company nor is it in the process of filing financial statements for the purpose ofissuing shares or debt to the public

Issue B
Assuming there is the need for CONVEX Ltd. to prepare consolidated financial statements andCONCAVE Ltd. has presented its separate financial statement to CONVEX Ltd., comment onhow the following transactions between CONVEX Ltd. and CONCAVE Ltd. will be accountedfor in the consolidated financial statements and explain to management the reason for thesuggested treatment

(a)At the date of acquisition, the fair value of all the assets of CONVEX Ltd. were the same astheir carrying amounts with the exception of one of its equipment. This had a fair value of GH¢2million.

The book value of this equipment was GH¢1.6 million before the acquisition. As a resultof the fair valuation, the useful life of the equipment has been reviewed to 10 years remaining life.

(b) At the acquisition date, CONVEX Ltd. paid GH¢20 million cash and promised to payadditional GH¢2 million if the vaccine production is successful. However, the value of net assetsof CONCAVE Ltd. was just GH¢16 million.

(c)Within the year, CONVEX Ltd. sold pharmaceutical products worth GH¢8 million toCONCAVE Ltd. CONVEX Ltd. made a margin of 20% on these sales. CONCAVE Ltd. has sold60% of these products to external parties by the end of the year

(d) Within the year, CONCAVE Ltd. acquired land for GH¢50,000 and sold it to CONVEX Ltd.for GH¢55,000. CONVEX Ltd. is in possession of the land as at the end of the year.

Issue C
CONVEX Ltd. is planning to sell 30% of their shares to another company who wants to supportlocal production of the vaccine. How will this transaction affects the preparation of CONVEX Ltd.financial statements for the next accounting period?

Issue D
Assuming you have done the financial ratio analysis and you have realized that profitability islooking good but liquidity is not impressive and needs urgent attention. What do you think couldbe the problem with CONCAVE Ltd. that your company needs to help them address?

Answer rating: 100% (QA)

Issue A In this question As per GAAP all majorityowned subsidiaries must be consolidated except the subsidiary is in legal reorganization or bankruptc... View the full answer