HB ltd has been experiencing dwindling sales in its business operations due to competitions from other agents dealing in communication equipment. On 1 January 2006, HB Ltd decided to diversify its operations to the information technology (IT) industry by acquiring SL Ltd, a company dealing in the manufacture of IT equipment and software design.

The summarized financial statements of HB Ltd and SL Ltd were as follows:

Income statement for the year ended 30September 2006

	HB Ltd	SL LTd
	Sh"000"	Sh"000"
Revenue	60,000	24,000
Cost of sales	(42,000.0)	(20,000.0)
Gross profit	18,000	4,000
Other income:
Interest received	75	-
Dividend received	400	-
	(18,475)	(4000)
Expenses:
Distribution costs	(3,500.0)	(100.0)
Administrative expenses	(2,500.0)	(100.0)
Finance costs	-	(200.0)
Profit before tax	12,475	3,600.0
Income tax expense	(3,000.0)	(600.0)
Profit after tax	9,475.0	3,000.0

Statement of financial position as at 30 September 2006

	HB Ltd	SL LTd
	Sh"000"	Sh"000"
Non current assets:
Property, plant and equipment	19,320	8000
Investments	11,280	-
	30,600	8000
Current assets:
Inventories	5000	3000
Account receivables	4200	3400
Cash at bank	5800	1600
	15000	8000
Total assets	45,600	16,000
Equity and liabilities:
Ordinary shares of sh.10 each	10000	2000
Retained earnings	25600	8400
	35600	10400
Non current liability
10% debentures	-	2000
Current liabilities
Account payable	7,500	3,200
Current tax	2500	400

10,000 3,600

Total equity and liabilities 45,600 16,000

Additional information:

1. HB ltd acquired 80% of ordinary share capital of SL ltd for sh. 10,280,000 and also acquired half of the 10% debentures in the company.
2. The fair value of the assets of SL Ltd at the date of acquisition were the same as their book values except for plant whose fair value were more by sh. 3.2 million. As at 1 January 2006, the plant had a remaining useful life of four years. SL Ltd depreciates plant on straight line basis on cost.
3. During the post-acquisition period, HB Ltd sold goods to SL Ltd for sh 12 million. These goods had a cost HB Ltd sh 9 million. Subsequently, SL Ltd sold some of the goods purchased from HB at sh 10 million for 15 million.
4. On 30 June 2006, HB Ltd and SL Ltd paid dividends of sh 1000,000 and 500,000 respectively.
5. Included in the account receivables and payables is sh 750,000 being the amount SL Ltd owed HB Ltd.
6. Goodwill is considered to be impaired by 25% as at September 2006. Goodwill impairment is classified as an administrative expense by the group company.

Required

1. Group Income statement for the year ended 30 September 2006. (14 marks)
2. Group Statement of financial position as at 30 September 2006. (10 marks)

Answer rating: 100% (QA)

Balance sheet Date 30th September 2006 Shares Acquistion Date 1st January 2006 Pre Acquistion Period 1st October 2005 to 31st December 2005 3 Months P... View the full answer