Novak Ltd has acquired 45% of ordinary shares in Spetz Ltd. Another investor has a 10%...

 

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Novak Ltd has acquired 45% of ordinary shares in Spetz Ltd. Another investor has a 10% shareholding in Spetz Ltd whilst the remaining voting rights are held by thousands of shareholders, none of whom individually hold more than 1% of the voting rights. Novak Ltd holds convertible debt instrument that, as at 30 September 2021, are convertible into ordinary shares of Spetz Ltd at a price of $ 9 per share. At 30 September 2021, the shares of Spetz Ltd trade at $ 8.80 per share. Novak Ltd would hold 60% of the voting rights in Spetz Ltd if Novak Ltd exercise its right to convert the debt. Both companies operate in same industries and would benefit from synergies. Discuss how Novak Ltd's investment in the ordinary shares of Spetz Ltd should be treated in the consolidated financial statements for the year ended 30 September 2021. [ 10 Marks] Question 2 (40 Marks) The extract of statement of financial position for the year ended 31 December 2020 for Paul Ltd and Sam Ltd are as follows: Extract of statement of financial position for the year ended 31 December 2020 Equity and liabilities Equity Share capital ($ 1 Each) Share premium Retained earnings Liabilities Non current liabilities Paul Ltd $ 325,000 200,000 175,000 125,000 Sam Ltd $ 280,875 225,000 50,000 Current liabilities 100,000 10,000 On 01 January 2020, Paul Ltd acquired 224,700 ordinary shares of Sam Ltd and as a result Paul Ltd holds 80% shares in Sam Ltd. The purchase consideration was as follows: 2 • Cash paid $ 250,000 • A deferred cash settlement to be paid in three years' time of $ 400,000 • By an exchange of three shares in Paul Ltd for every five shares in Sam Ltd. The market price of Paul Ltd share at the date of acquisition was $2.5 and the market price of each Sam Ltd share at the date of acquisition was $ 3.25 Legal fees associated with the acquisition were $ 75,000. The discount rate of Paul Ltd is 12 %. (a) Calculate the fair value consideration (Costs of investment) transferred to acquire control of Sam Ltd at the date of acquisition. Your answer should include a brief explanation if any of the above issue(s) is/are not required to be accounted in your working(s). [ 10 Marks] On the acquisition date, the retained earnings of Sam Ltd stood at $ 75,000 and share capital was $280,875. Sam Ltd holds a patent which has not been recognized in its financial statements. The directors of Paul Ltd are of the opinion that the patent should be accounted. The patent had a fair value of $ 225,000 and a remaining term four years to go as from the date of acquisition. The carrying value of Property and Plant was in excess by $ 60,000 on the acquisition date. Property and Plant had a lifetime of three years at the acquisition date. Included within the intangible assets of Sam Ltd (at the acquisition and reporting date) is Included within the intangible assets of Sam Ltd (at the acquisition and reporting date) is goodwill of $ 5,000 which arose on the purchase of the trade and assets of a sole-trader business. (b) Calculate the net assets of Sam Ltd at the date of acquisition (01 January 2020) and at the reporting date (31 December 2020). [ 10 Marks] Goodwill has been impaired by $ 20,000 at the reporting date (31 December 2020). (c) Calculate the goodwill using the proportion method at the date of acquisition (01 January 2020). [5 marks] (d) Calculate the non-controlling interest (NCI) as at 31 December 2020. [2 marks] Paul Ltd has recently appointed an accountant, Mr J. Smith, following the resignation of the previous group accountant. When Mr. J. Smith was preparing the group accounts for the year ended 31 December 2020, he found that only the cash consideration of $ 250,000 has been accounted. The par value of each ordinary share for Paul Ltd is $ 1. 3 [ 3 Marks] (e) Calculate the group retained earnings as at 31 December 2020. (f) Prepare an extract of equity (Ordinary shares, Share premium, Retained earnings and NCI) and liabilities section of the consolidated statement of financial position as at 31 December 2020 showing clearly how the deferred payment and shares exchange should be accounted. [ 10 Marks] Novak Ltd has acquired 45% of ordinary shares in Spetz Ltd. Another investor has a 10% shareholding in Spetz Ltd whilst the remaining voting rights are held by thousands of shareholders, none of whom individually hold more than 1% of the voting rights. Novak Ltd holds convertible debt instrument that, as at 30 September 2021, are convertible into ordinary shares of Spetz Ltd at a price of $ 9 per share. At 30 September 2021, the shares of Spetz Ltd trade at $ 8.80 per share. Novak Ltd would hold 60% of the voting rights in Spetz Ltd if Novak Ltd exercise its right to convert the debt. Both companies operate in same industries and would benefit from synergies. Discuss how Novak Ltd's investment in the ordinary shares of Spetz Ltd should be treated in the consolidated financial statements for the year ended 30 September 2021. [ 10 Marks] Question 2 (40 Marks) The extract of statement of financial position for the year ended 31 December 2020 for Paul Ltd and Sam Ltd are as follows: Extract of statement of financial position for the year ended 31 December 2020 Equity and liabilities Equity Share capital ($ 1 Each) Share premium Retained earnings Liabilities Non current liabilities Paul Ltd $ 325,000 200,000 175,000 125,000 Sam Ltd $ 280,875 225,000 50,000 Current liabilities 100,000 10,000 On 01 January 2020, Paul Ltd acquired 224,700 ordinary shares of Sam Ltd and as a result Paul Ltd holds 80% shares in Sam Ltd. The purchase consideration was as follows: 2 • Cash paid $ 250,000 • A deferred cash settlement to be paid in three years' time of $ 400,000 • By an exchange of three shares in Paul Ltd for every five shares in Sam Ltd. The market price of Paul Ltd share at the date of acquisition was $2.5 and the market price of each Sam Ltd share at the date of acquisition was $ 3.25 Legal fees associated with the acquisition were $ 75,000. The discount rate of Paul Ltd is 12 %. (a) Calculate the fair value consideration (Costs of investment) transferred to acquire control of Sam Ltd at the date of acquisition. Your answer should include a brief explanation if any of the above issue(s) is/are not required to be accounted in your working(s). [ 10 Marks] On the acquisition date, the retained earnings of Sam Ltd stood at $ 75,000 and share capital was $280,875. Sam Ltd holds a patent which has not been recognized in its financial statements. The directors of Paul Ltd are of the opinion that the patent should be accounted. The patent had a fair value of $ 225,000 and a remaining term four years to go as from the date of acquisition. The carrying value of Property and Plant was in excess by $ 60,000 on the acquisition date. Property and Plant had a lifetime of three years at the acquisition date. Included within the intangible assets of Sam Ltd (at the acquisition and reporting date) is Included within the intangible assets of Sam Ltd (at the acquisition and reporting date) is goodwill of $ 5,000 which arose on the purchase of the trade and assets of a sole-trader business. (b) Calculate the net assets of Sam Ltd at the date of acquisition (01 January 2020) and at the reporting date (31 December 2020). [ 10 Marks] Goodwill has been impaired by $ 20,000 at the reporting date (31 December 2020). (c) Calculate the goodwill using the proportion method at the date of acquisition (01 January 2020). [5 marks] (d) Calculate the non-controlling interest (NCI) as at 31 December 2020. [2 marks] Paul Ltd has recently appointed an accountant, Mr J. Smith, following the resignation of the previous group accountant. When Mr. J. Smith was preparing the group accounts for the year ended 31 December 2020, he found that only the cash consideration of $ 250,000 has been accounted. The par value of each ordinary share for Paul Ltd is $ 1. 3 [ 3 Marks] (e) Calculate the group retained earnings as at 31 December 2020. (f) Prepare an extract of equity (Ordinary shares, Share premium, Retained earnings and NCI) and liabilities section of the consolidated statement of financial position as at 31 December 2020 showing clearly how the deferred payment and shares exchange should be accounted. [ 10 Marks]

Answer rating: 100% (QA)

1 As mentioned in this case Novak Ltd has acquired 45 of the ordinary shares in spetz Ltd So Novak Ltd is not a parent company to a spetz Ltd at this ... View the full answer