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    PracticeACCAACCA FR — Financial Reporting Practice Exam 1Question 31
    Hard20 marksExtended Response
    Consolidated Financial StatementsConsolidationGoodwillPUPFair Value Adjustments

    ACCA · Question 31 · Consolidated Financial Statements

    SECTION C

    Nexus Holdings Co acquired 80% of the equity share capital of CyberDyne Co on 1 January 20X6. The consideration consisted of cash of $5,000,000 and the issue of 1 million shares in Nexus Holdings. The market value of Nexus shares on 1 January 20X6 was $3.50 per share.

    At the date of acquisition, the retained earnings of CyberDyne were $2,500,000 and its share capital was $1,000,000. The fair value of CyberDyne's identifiable net assets was equal to their carrying amounts, with the exception of a specialized patent which had a fair value $600,000 in excess of its carrying amount. The patent had a remaining useful life of 5 years at the acquisition date.

    Nexus Holdings measures Non-Controlling Interest (NCI) at fair value. The fair value of the 20% NCI at 1 January 20X6 was $1,800,000.

    During the year ended 31 December 20X6, CyberDyne sold goods to Nexus Holdings for $800,000 at a margin of 20%. Half of these goods remained in Nexus Holdings' inventory at the year-end.

    Goodwill was tested for impairment at 31 December 20X6 and was found to be impaired by 10%.

    Draft the calculation for the following items as they would appear in the Consolidated Statement of Financial Position of Nexus Group as at 31 December 20X6:

    1. Goodwill
    2. Provision for Unrealized Profit (PUP)
    3. The fair value adjustment and its subsequent amortization

    Show all workings clearly.

    How to approach this question

    Break the question down into the three requested parts. For Goodwill, use the standard formula: Consideration + NCI - Fair Value of Net Assets. Remember to include the share exchange in consideration and the FV adjustment in net assets. Deduct the 10% impairment. For PUP, calculate the remaining inventory value and apply the margin percentage. For the FV adjustment, calculate the annual amortization based on the 5-year life and deduct it from the initial adjustment.

    Full Answer

    Goodwill is calculated using the full goodwill method since NCI is measured at fair value. The consideration includes both cash and shares. The net assets at acquisition must include the fair value adjustment for the patent. The PUP is based on the goods remaining in inventory (50% of $800k) multiplied by the margin (20%). The fair value adjustment creates an intangible asset that must be amortized over its remaining 5-year life.

    Common mistakes

    Treating the 20% margin as a markup (20/120). Forgetting to amortize the fair value adjustment when calculating post-acquisition profits (though not explicitly asked for retained earnings here, it's a common error). Forgetting to impair the goodwill.
    Question 30All questionsQuestion 32

    Practice the full ACCA FR — Financial Reporting Practice Exam 1

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