Below are the statements of financial position as at 31st December 2020 of four entities, all of
Question:
Below are the statements of financial position as at 31st December 2020 of four entities, all of whom prepare their financial statements in accordance with International Accounting Standards:
Non current assets | Hendrix | Mozart | Fitgerald | Reno |
Property, plant and equipment | 18,400 | 12,400 | 4,100 | 1,400 |
Investments | 9,000 | 5,500 | ||
27,400 | 17,900 | 4,100 | 1,400 | |
Curent asset | ||||
inventories | 6,800 | 6,200 | 3,600 | 200 |
trade receivebles | 3,200 | 1,500 | 2,400 | 100 |
bank | 600 | 200 | 500 | 150 |
10600 | 7900 | 6500 | 450 | |
Total asset | 38000 | 25800 | 10600 | 1850 |
equity | ||||
Ordinary shares of RM 0.25 | 10,000 | 5,000 | 3,000 | 250 |
Share premium | 7,000 | 2,000 | ||
Retained earnings | 8,000 | 7,600 | 4,600 | 400 |
25,000 | 14,600 | 7,600 | 650 | |
Non current liabilities | ||||
7% loan notes | 6,000 | 7,000 | 1,000 | 500 |
Current liabilities | ||||
bank | 350 | |||
trade payables | 5,700 | 3,250 | 1,350 | 250 |
income tax | 1,300 | 950 | 650 | 100 |
7,000 | 4,200 | 2,000 | 700 | |
Total Equities | 38,000 | 25,800 | 10,600 | 1,850 |
The following information is available:
and
(i) Hendrix acquired 12 million shares in Mozart on 1 January 2016 for RM 8,500,000 when Mozart’s retained earnings were RM 4,500,000.
(ii) Mozart acquired 8.4 million shares in Fitzgerald on 1 January 2019 for RM 5,500,000 when Fitzgerald’s retained earnings were RM 1,500,000.
(iii) Hendrix acquired 200,000 shares in Reno on 1 January 2020 the date Reno was incorporated.
(iv) When Hendrix acquired its shareholding in Mozart it was deemed that Mozart’s property, plant and equipment exceeded its book value by RM 600,000. The excess of fair value over book value was attributed to property owned by Mozart. At the date of acquisition this property had a remaining useful life of 20 years. Mozart’s accounting policy is to depreciate property over its useful economic life.
(v)No fair value adjustments were required in respect of assets and liabilities for any of the other acquisitions.
(vi) During the period from 1 January 2020 to 31 December 2020, Mozart sold goods to Hendrix for RM 790,000 at a mark-up of 30% on cost. The value of these goods included in closing inventories is RM 390,000.
(vii) Following an impairment review it was decided the goodwill in Mozart should be impaired by 12%. The goodwill in Fitzgerald is unchanged.
Required:
a) Explain why the net assets of subsidiary companies are included at acquisition at their fair (current) value in the consolidated statement of financial position. How is this consistent when most of the parent’s assets are carried at historical cost? (6 marks)
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott