Sunbeam Limited holds 85% of the shares of Stars Limited, and the group has a 31 December
Question:
Sunbeam Limited holds 85% of the shares of Stars Limited, and the group has a 31 December year-end. The following information for the financial year ending 31 December 2021 is available:
STATEMENT OF FINANCIAL POSITION
Sunbeam | Stars | |
ASSETS | R | R |
Property, plant and equipment | 678 000 | 523 470 |
Investment in Stars Limited: | ||
Ordinary shares at cost | 370 000 | - |
Preference shares at cost | 600 000 | - |
Loan to Sunbeam Limited | - | 150 000 |
Trade receivables | 235 000 | 88 500 |
Bank | 367 500 | 552 000 |
Inventory | 82 000 | 125 000 |
Total | 2 332 500 | 1 438 970 |
EQUITY AND LIABILITIES | Sunbeam R | Stars R |
Ordinary share capital (500 000 shares/150 000 shares) | 500 000 | 150 000 |
15% Preference share capital | - | 750 000 |
Retained earnings | 1 396 200 | 466 170 |
Loan from Stars Limited | 150 000 | - |
Trade payables | 215 000 | 44 500 |
Deferred tax | 71 300 | 28 300 |
Total | 2 332 500 | 1 438 970 |
STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME
Sunbeam R | Stars R | |
Revenue | 3 584 000 | 1 050 000 |
Cost of sales | (1 875 000) | (575 000) |
Gross profit | 1 709 000 | 475 000 |
Other income | 155 200 | 33 500 |
Other expenses | (587 600) | (152 300) |
Profit before tax | 1 276 600 | 356 200 |
Income tax expense | (348 200) | (90 220) |
Profit for the year | 928 400 | 265 980 |
STATEMENT OF CHANGES IN EQUITY
Retained Earnings | Sunbeam R | Stars R |
Balance as at 1 January 2021 | 557 800 | 387 690 |
Total profit for the year | 928 400 | 265 980 |
Ordinary dividend paid | (110 000) | (75 000) |
Preference dividend paid | - | (112 500) |
Balance as at 31 December 2021 | 1 396 200 | 466 170 |
Additional information:
• Sunbeam Limited acquired 127 500 ordinary shares in Stars Limited on 1 July 2019. On the acquisition date, Stars Limited had a retained earnings balance of R198 500.
• At the acquisition date, the assets and liabilities were considered fairly valued according to IFRS 3, except for a machine, which Sunbeam Limited considered to be undervalued by R100 000. The machine had a remaining useful life of 4.5 years on 1 July 2019.
• It is Sunbeam Limited's policy to measure any non-controlling interests in an acquiree as its proportionate share of the acquiree's identifiable net assets.
• On 1 January 2021, Sunbeam Limited subscribed to 40 000 preference shares that Stars Limited offered. Stars Limited issued 50 000 preference shares in total.
• Sunbeam Limited measures the investment in preference shares at its cost price. The preference share dividend payment has priority over that of the ordinary shareholders.
• At 31 December 2021, all the preference share dividends had been declared and paid.
• Since 1 July 2019, Sunbeam Limited has been purchasing all its goods from Stars Limited at a profit mark-up of 20% on the cost price of the goods. These goods are inventory in the records of Sunbeam Limited. The total sales from Stars Limited to Sunbeam Limited during the current financial year amounted to R525 000. Sunbeam Limited's inventory balance on 31 December 2020 amounted to R75 000.
• On 30 September 2021, Sunbeam Limited sold a vehicle to Stars Limited for R120 000. The carrying value of the vehicle was R105 000 on the date of the sale. Sunbeam Limited is not a trader of vehicles. On 30 September 2021, the vehicle's remaining useful life was estimated at 3 years with no residual value.
• Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%
REQUIRED:
The financial manager of Sunbeam Limited requested you to perform an impairment test on the goodwill recognised at the acquisition of the Stars Limited shares for the 31 December 2022 financial year. You can assume that goodwill has not been impaired since acquisition.
Sunbeam Limited determined the recoverable amount of Stars Limited to be R1 300 000 as at 31 December 2022. Stars Limited showed a profit after tax of R126 910, paid preference share dividends of R112 500, and ordinary share dividends of R0 for the 31 December 2022 financial year.
Calculate and prepare the pro-forma journal entry required to account for the impairment loss, if any, in the consolidated financial statements of the Sunbeam Limited Group as at 31 December 2022.
Auditing Assurance Services and Ethics in Australia an Integrated Approach
ISBN: 978-1442539365
9th edition
Authors: Alvin A Arens, Peter J. Best, Greg Shailer, Brenton Fiedler