ACCA · Question 32 · Preparation of Consolidated Financial Statements

Section C - Constructed Response 2

Global Logistics PLC (GL) acquired 80% of the equity shares of SubCo on 1 April 20X4. GL's financial year end is 31 December 20X4.

The consideration transferred consisted of:

• Cash paid on 1 April 20X4: $12,000,000
• Deferred cash payment of $5,000,000 payable on 1 April 20X5. GL's cost of capital is 10%. (Discount factor for 1 year at 10% is 0.909).
• Contingent consideration with a fair value of $2,000,000 at the acquisition date. By 31 December 20X4, the fair value of this contingent consideration had increased to $2,500,000 due to SubCo's better-than-expected performance.

At the acquisition date (1 April 20X4), SubCo's retained earnings were $6,000,000 and share capital was $2,000,000.
The fair value of SubCo's identifiable net assets was equal to their carrying amounts, with the exception of a warehouse. The warehouse had a carrying amount of $4,000,000 and a fair value of $5,000,000. The warehouse had a remaining useful life of 10 years at the acquisition date.

GL measures the non-controlling interest (NCI) at fair value. The fair value of the 20% NCI at the acquisition date was $3,500,000.

During the post-acquisition period, SubCo sold goods to GL for $1,500,000 at a mark-up of 25% on cost. At 31 December 20X4, GL still held $500,000 of these goods in inventory.

SubCo reported a profit after tax of $2,400,000 for the full year ended 31 December 20X4. Profits are assumed to accrue evenly throughout the year.

Required:
(a) Calculate the total goodwill arising on the acquisition of SubCo as at 1 April 20X4. (8 marks)
(b) Calculate the carrying amount of the NCI to be presented in the Consolidated Statement of Financial Position as at 31 December 20X4. (6 marks)
(c) Calculate the value of the Provision for Unrealized Profit (PURP) and explain how the contingent consideration increase of $500,000 is treated in the consolidated financial statements. (6 marks)