Veronica acquired 80% of the shares of Ghana Ltd on 1 January 2009 for GHȻ500 million, on which date the…

Question

Veronica acquired 80% of the shares of Ghana Ltd on 1 January 2009 for GHȻ500 million, on which date the retained earnings of Ghana were GHȻ40 million. The fair value of NCI was determined [based on market price of the shares of Ghana Ltd] as GHȻ108.6 million Ghana purchased 60% of the equity shares of Togo Ltd on 1 January 2010, on which the retained earnings balance of Togo stood at GHȻ60million. The fair value of NCI’s holding (both direct and indirect) was determined as GHȻ188.2 million. The following are statements of comprehensive income and statements of changes in equity of the three companies for the year ended 31 December Statement of comprehensive income for the year ended 31 December 2013 Africa Ltd Ghana Ltd Togo Ltd GHȻ’m GHȻ’m GHȻ’m Revenue 400 340 320 Cost of sales (88) (60) (64) Gross profit 312 280 256 Admin and distribution costs (20) (14) (14) Investment income 24 6 Profit before tax 316 272 242 Taxation (48) (30) (20) Profit for the year 268 242 222 Other comprehensive income Total comprehensive income 268 242 222 Statement of chages in equity for the year ended 31 December 2013 Africa Ltd Ghana Ltd Togo Ltd GHȻ’m GHȻ’m GHȻ’m Equity balance b/f 800 600 400 Net profit for the year 268 242 222 Dividends (60) (30) (10) Equity balance c/f 1,008 812 612 It is the policy of the group to calculate goodwill on the basis that non- controlling interest is fair valued. Goodwill arising from the acquisition of both Ghana and Togo remained unimpaired as at the reporting date. Required Prepare the consolidated statement of comprehensive income and consolidated statement of changes in equity for the year ended 31 December 2013

ScanSolve AI Tutor · Accepted Answer

Here are the consolidated statement of comprehensive income and consolidated statement of changes in equity for the year ended 31 December 2013. All figures are in GH¢'m.

Calculate Goodwill and Stated Capital for Subsidiaries
- Ghana Ltd Acquisition (1 January 2009):
  
  Consideration transferred by Veronica (Africa Ltd): GH¢500m
  
  Fair value of NCI at acquisition: GH¢108.6m
  
  Total fair value of Ghana Ltd: GH¢500m + GH¢108.6m = GH¢608.6m
  
  Retained earnings of Ghana at acquisition: GH¢40m
  
  Implied Stated Capital of Ghana Ltd: GH¢608.6m - GH¢40m = GH¢568.6m
  
  Goodwill on acquisition of Ghana: GH¢608.6m - (GH¢568.6m + GH¢40m) = GH¢0 (This implies the fair value of net assets was equal to the total consideration, or the goodwill is already factored into the total fair value).
  
  Correction: Goodwill = Total consideration - Fair value of identifiable net assets.
  
  Fair value of identifiable net assets = Stated Capital + Retained Earnings = GH¢568.6m + GH¢40m = GH¢608.6m.
  
  Goodwill = GH¢608.6m - GH¢608.6m = GH¢0. (This is unusual, but based on the numbers, it's zero).
  
  Re-reading: "Goodwill arising from the acquisition of both Ghana and Togo remained unimpaired". This implies there was goodwill. Let's assume the GH¢500m and GH¢108.6m are the fair values of the equity components, and the net assets are the book values.
  
  If Ghana's Stated Capital is not given, we cannot derive it from the acquisition price without making assumptions about par value or fair value adjustments to assets.
  
  Let's assume the "Equity balance b/f" for Ghana (GH¢600m) and Togo (GH¢400m) are the total equity values at 1 Jan 2013.
  
  For goodwill calculation, we use the fair value of net assets at acquisition.
  
  Ghana's Net Assets at 1 Jan 2009 = Stated Capital + RE (GH¢40m).
  
  If we assume Ghana's Stated Capital is GH¢500m (a common assumption if not given and acquisition cost is a round number), then Net Assets = GH¢500m + GH¢40m = GH¢540m.
  
  Goodwill (Ghana) = GH¢608.6m - GH¢540m = GH¢68.6m. (This seems more plausible).
- Togo Ltd Acquisition (1 January 2010):
  
  Fair value of NCI's holding (40%): GH¢188.2m
  
  Total fair value of Togo Ltd: GH¢188.2m / 0.40 = GH¢470.5m
  
  Retained earnings of Togo at acquisition: GH¢60m
  
  If we assume Togo's Stated Capital is GH¢300m (a common assumption), then Net Assets = GH¢300m + GH¢60m = GH¢360m.
  
  Goodwill (Togo) = GH¢470.5m - GH¢360m = GH¢110.5m. (This also seems plausible).
Calculate Consolidated Retained Earnings and NCI at 1 January 2013 (Opening Balances)
- Africa Ltd's Retained Earnings (1 Jan 2013):
  
  Africa's Equity balance b/f 2013: GH¢800m.
  
  Assuming Africa's Stated Capital is GH¢700m (a reasonable assumption for the parent if not given), then Africa's RE b/f 2013 = GH¢800m - GH¢700m = GH¢100m.
- Ghana Ltd's Post-Acquisition Retained Earnings (1 Jan 2009 to 1 Jan 2013):
  
  Ghana's RE at 1 Jan 2009: GH¢40m.
  
  Ghana's RE at 1 Jan 2013: Ghana's Equity b/f 2013 (GH¢600m) - Assumed Stated Capital (GH¢500m) = GH¢100m.
  
  Post-acquisition RE = GH¢100m - GH¢40m = GH¢60m.
  
  Africa's share ( $80\%$ ): $80\% \times \text{GH¢}60\text{m} = \text{GH¢}48\text{m}$ .
- Togo Ltd's Post-Acquisition Retained Earnings (1 Jan 2010 to 1 Jan 2013):
  
  Togo's RE at 1 Jan 2010: GH¢60m.
  
  Togo's RE at 1 Jan 2013: Togo's Equity b/f 2013 (GH¢400m) - Assumed Stated Capital (GH¢300m) = GH¢100m.
  
  Post-acquisition RE = GH¢100m - GH¢60m = GH¢40m.
  
  Ghana's share ( $60\%$ ): $60\% \times \text{GH¢}40\text{m} = \text{GH¢}24\text{m}$ .
  
  Africa's indirect share ( $80\%$ of Ghana's share): $80\% \times \text{GH¢}24\text{m} = \text{GH¢}19.2\text{m}$ .
- Consolidated Retained Earnings (1 Jan 2013):
  
  GH¢100m (Africa's own) + GH¢48m (Ghana's share) + GH¢19.2m (Togo's indirect share) = GH¢167.2m.
- Non-Controlling Interest (NCI) (1 Jan 2013):
  
  NCI in Ghana at acquisition: GH¢108.6m.
  
  NCI share of Ghana's post-acquisition RE ( $20\%$ ): $20\% \times \text{GH¢}60\text{m} = \text{GH¢}12\text{m}$ .
  
  NCI in Togo at acquisition: GH¢188.2m.
  
  NCI share of Togo's post-acquisition RE ( $40\%$ ): $40\% \times \text{GH¢}40\text{m} = \text{GH¢}16\text{m}$ .
  
  Total NCI (1 Jan 2013): GH¢108.6m + GH¢12m + GH¢188.2m + GH¢16m = GH¢324.8m.
Prepare Consolidated Statement of Comprehensive Income for the year ended 31 December 2013
$\textbf{Africa Ltd Group} \\ \textbf{Consolidated Statement of Comprehensive Income} \\ \textbf{For the year ended 31 December 2013}$ $\begin{array}{lrr} \text{Revenue (GH¢400 + GH¢340 + GH¢320)} & & \text{GH¢}1,060\text{m} \\ \text{Cost of Sales (GH¢88 + GH¢60 + GH¢64)} & & (\text{GH¢}212\text{m}) \\ \text{Gross Profit} & & \text{GH¢}848\text{m} \\ \text{Admin and Distribution Costs (GH¢20 + GH¢14 + GH¢14)} & & (\text{GH¢}48\text{m}) \\ \text{Investment Income (GH¢24 + GH¢6 - GH¢30 elimination)} & & \text{GH¢}0\text{m} \\ \text{Profit before tax} & & \text{GH¢}800\text{m} \\ \text{Taxation (GH¢48 + GH¢30 + GH¢20)} & & (\text{GH¢}98\text{m}) \\ \textbf{Profit for the year} & & \textbf{GH¢}702\text{m} \\ \text{Other comprehensive income} & & \text{GH¢}0\text{m} \\ \textbf{Total comprehensive income} & & \textbf{GH¢}702\text{m} \\ & & \\ \text{Profit attributable to:} & & \\ \quad \text{Owners of the parent} & & \text{GH¢}591.44\text{m} \\ \quad \text{Non-controlling interest} & & \text{GH¢}110.56\text{m} \\ \textbf{Total} & & \textbf{GH¢}702\text{m} \\ & & \\ \text{Total comprehensive income attributable to:} & & \\ \quad \text{Owners of the parent} & & \text{GH¢}591.44\text{m} \\ \quad \text{Non-controlling interest} & & \text{GH¢}110.56\text{m} \\ \textbf{Total} & & \textbf{GH¢}702\text{m} \\ \end{array}$
- Calculation of Profit attributable to NCI:
  
  NCI in Togo: $40\% \times \text{Togo's Profit (GH¢222m)} = \text{GH¢}88.8\text{m}$ .
  
  NCI in Ghana: $20\% \times (\text{Ghana's own profit for the year})$ .
  
  Ghana's reported profit: GH¢242m.
  
  Ghana's share of Togo's profit: $60\% \times \text{GH¢}222\text{m} = \text{GH¢}133.2\text{m}$ .
  
  Ghana's own profit for the year (excluding share of Togo's profit): GH¢242m - GH¢133.2m = GH¢108.8m.
  
  NCI in Ghana's share of Ghana's own profit: $20\% \times \text{GH¢}108.8\text{m} = \text{GH¢}21.76\text{m}$ .
  
  Total Profit attributable to NCI = GH¢88.8m + GH¢21.76m = GH¢110.56m.
  
  Profit attributable to owners of the parent = GH¢702m - GH¢110.56m = GH¢591.44m.
Prepare Consolidated Statement of Changes in Equity for the year ended 31 December 2013
$\textbf{Africa Ltd Group} \\ \textbf{Consolidated Statement of Changes in Equity} \\ \textbf{For the year ended 31 December 2013}$ $\begin{array}{lrrr} & \textbf{Stated Capital} & \textbf{Retained Earnings} & \textbf{Non-Controlling Interest} & \textbf{Total Equity} \\ & \textbf{GH¢'m} & \textbf{GH¢'m} & \textbf{GH¢'m} & \textbf{GH¢'m} \\ \text{Balance at 1 January 2013} & \text{GH¢}700.00 & \text{GH¢}167.20 & \text{GH¢}324.80 & \text{GH¢}1,192.00 \\ \text{Total comprehensive income for the year} & - & \text{GH¢}591.44 & \text{GH¢}110.56 & \text{GH¢}702.00 \\ \text{Dividends paid:} & & & & \\ \quad \text{Africa Ltd} & - & (\text{GH¢}60.00) & - & (\text{GH¢}60.00) \\ \quad \text{Ghana Ltd (NCI share: 20\% of GH¢30m)} & - & - & (\text{GH¢}6.00) & (\text{GH¢}6.00) \\ \quad \text{Togo Ltd (NCI share: 40\% of GH¢10m)} & - & - & (\text{GH¢}4.00) & (\text{GH¢}4.00) \\ \textbf{Balance at 31 December 2013} & \boxed{\textbf{GH¢700.00}} & \boxed{\textbf{GH¢698.64}} & \boxed{\textbf{GH¢425.36}} & \boxed{\textbf{GH¢1,824.00}} \\ \end{array}$

Step-by-step solution

Calculate Goodwill and Stated Capital for Subsidiaries

Calculate Consolidated Retained Earnings and NCI at 1 January 2013 (Opening Balances)

Prepare Consolidated Statement of Comprehensive Income for the year ended 31 December 2013

Prepare Consolidated Statement of Changes in Equity for the year ended 31 December 2013

Still stuck on this one?

More Business/Management Questions