Fundamentals Level – Skills Module
Financial Reporting (Malaysia)
Tuesday 10 June 2008
Time allowed Reading and planning: Writing:
15 minutes 3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Paper F7 (MYS)
ALL FIVE questions are compulsory and MUST be attempted 1 On 1 August 2007 Patronic purchased 18 million of a total of 24 million equity shares in Sardonic. The acquisition was through a share exchange of two shares in Patronic for every three shares in Sardonic. Both companies have shares with a par value of RM1 each. The market price of Patronic’s shares at 1 August 2007 was RM5·75 per share. Patronic will also pay in cash on 31 July 2009 (two years after acquisition) RM2·42 per acquired share of Sardonic. Patronic’s cost of capital is 10% per annum. The reserves of Sardonic on 1 April 2007 were RM69 million. Patronic has held an investment of 30% of the equity shares in Acerbic for many years. The summarised income statements for the three companies for the year ended 31 March 2008 are: Patronic RM’000 150,000 (94,000) –––––––– 56,000 (7,400) (12,500) (2,000) –––––––– 34,100 (10,400) –––––––– 23,700 –––––––– Sardonic RM’000 78,000 (51,000) ––––––– 27,000 (3,000) (6,000) (900) ––––––– 17,100 (3,600) ––––––– 13,500 ––––––– Acerbic RM’000 80,000 (60,000) ––––––– 20,000 (3,500) (6,500) nil ––––––– 10,000 (4,000) ––––––– 6,000 –––––––
Revenue Cost of sales Gross profit Distribution costs Administrative expenses Finance costs (note (ii)) Profit before tax Income tax expense Profit for the period The following information is relevant: (i)
The fair values of the net assets of Sardonic at the date of acquisition were equal to their carrying amounts with the exception of property and plant. Property and plant had fair values of RM4·1 million and RM2·4 million respectively in excess of their carrying amounts. The increase in the fair value of the property would create additional depreciation of RM200,000 in the consolidated financial statements in the post acquisition period to 31 March 2008 and the plant had a remaining life of four years (straight-line depreciation) at the date of acquisition of Sardonic. All depreciation is treated as part of cost of sales. The fair values have not been reflected in Sardonic’s financial statements. No fair value adjustments were required on the acquisition of Acerbic.
(ii) The finance costs of Patronic do not include the finance cost on the deferred consideration. (iii) Prior to its acquisition, Sardonic had been a good customer of Patronic. In the year to 31 March 2008, Patronic sold goods at a selling price of RM1·25 million per month to Sardonic both before and after its acquisition. Patronic made a profit of 20% on the cost of these sales. At 31 March 2008 Sardonic still held inventory of RM3 million (at cost to Sardonic) of goods purchased in the post acquisition period from Patronic. (iv) An impairment test on the goodwill of Sardonic conducted on 31 March 2008 concluded that it should be written down by RM2 million. The value of the investment in Acerbic was not impaired. (v) All items in the above income statements are deemed to accrue evenly over the year. (vi) Ignore deferred tax.
Required: (a) Calculate the goodwill arising on the acquisition of Sardonic at 1 August 2007. (6 marks)
(b) Prepare the consolidated income statement for the Patronic Group for the year ended 31 March 2008. Note: assume that the investment in Acerbic has been accounted for using the equity method since its acquisition. (15 marks) (c) At 31 March 2008, the other equity shares (70%) in Acerbic were owned by many separate...
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