Question

On 1 October 2012, Paradigm acquired 75% of Strata’s equity shares by means of share exchange of two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has not recorded any of the purchase consideration, although it does have other 10% loan notes already in issue. The market value of Paradigm’s shares at 1 October 2012 was $2 each.

The summarised statements of financial position of the two companies as at 31 March 2013 are:

	Paradigm		Strata
ASSETS	$000		$000
Non-current assets
Property, plant and equipment	47,400		25,500
Financial asset: equity investments (notes (i) and (iv))	7,500		3,200
	54,900		28,700
Current assets
Inventory (note (ii))	20,400		8,400
Trade receivables (note (iii))	14,800		9,000
Bank	2,100		nil
Total assets	92,200		46,100
EQUITY AND LIABILITIES
Equity
Equity shares of $1 each	40,000		20,000
Retained earnings/(losses) – at 1 April 2012	19,200		(4,000)
- for year ended 31 March 2013	7,400		8,000
	66,600		24,000
Non-current liabilities
10% loan notes	8,000		nil
Current liabilities
Trade payables (note (iii))	17,600		13,000
Bank overdraft	nil		9,100
Total equity and liabilities	92,200		46,100

The following information is relevant:

1. At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the pre-and post-acquisition split of Strata’s profit for the year ended 31 March 2013.

Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets which were equal to their carrying amount (including Strata’s financial asset equity investments) with the exception of an item of plant which had a fair value of $3 million below its carrying amount. The plant had a remaining economic life of three years at 1 October 2012.

Paradigm’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, a share price for Strata of $1.20 each is representative of the fair value of the shares held by the non-controlling interest.

2. Each month since acquisition, Paradigm’s sales to Strata were consistently $4.6 million. Paradigm had marked these up by 15% on cost. Strata had one month’s supply ($4.6 million) of these goods in inventory at 31 March 2013. Paradigm’s normal mark-up (to third party customers) is 40%.
3. Strata’s current account balance with Paradigm at 31 March 2013 was $2.8 million, which did not agree with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata on 28 March 2013, which was not received by Paradigm until 3 April 2013.
4. The financial asset equity investments of Paradigm and Strata are carried at their fair values as at 1 April 2012. As at 31 March 2013, these had fair values of $7.1 million and $3.9 million respectively.
5. There were no impairment losses within the group during the year ended 31 March 2013.

Required:

Prepare the consolidate statement of financial position for Paradigm as at 31 March 2013.

Answer 1

Ques 1
Assets	$’000	$’000
Non-current assets:
Property, plant and equipment (47,400 + 25,500 – 3,000 fair value + 500 depreciation)		70,400
Goodwill (w (i))		8,500
Financial asset: equity investments (7,100 + 3,900)		11,000
		89,900
Current assets
Inventory (20,400 + 8,400 – 600 URP (w (ii)))	28,200
Trade receivables (14,800 + 9,000 – 3,700 intra-group (w (iii)))	20,100
Bank (2,100 + 900 CIT (w (iii)))	3,000	51,300
Total assets		141,200
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of $1 each (40,000 + 6,000 (w (i)))		46,000
Share premium (w (i))	6,000
Retained earnings (w (iv))	34,000	40,000
		86,000
Non-controlling interest (w (v))		8,800
Total equity		94,800
Non-current liabilities
10% loan notes (8,000 + 1,500 (w (i)))		9,500
Current liabilities
Trade payables (17,600 + 13,000 – 2,800 intra-group (w (iii)))	27,800
Bank overdraft	9,100	36,900
Total equity and liabilities		141,200

(i)          Goodwill in Strata
Controlling interest
Share exchange ((20,000 x 75%) x 2/5 x $2)		12,000
10% loan notes (15,000 x 100/1,000)		1,500
Non-controlling interest (20,000 x 25% x $1·20)		6,000
		19,500
Equity shares	20,000
Pre-acquisition retained losses:
– at 1 April 2012	(4,000)
– 1 April to 30 September 2012	(2,000)
Fair value adjustment – plant	(3,000)	(11,000)
Goodwill arising on acquisition		8,500
The market value of the shares issued of $12 million would be recorded: $6 million share capital and $6 million share premium as the shares have a nominal value of $1 each and their issue value was $2 each
			(ii) Unrealised profit (URP) in inventory Strata’s inventory (from Paradigm) at 31 March 2013 is $4.6 million (one month’s supply). At a mark-up on cost of 15%, there would be $600,000 of URP (4,600 * 15/115) in the inventory.
(iii)
Intra-group current accounts
Current account balance of Strata per question	2,800
Cash-in-transit (CIT) not yet received by Paradigm	900
Current account balance of Paradigm	3,700
(iv)
Consolidated retained earnings
Paradigm’s retained earnings (19,200 + 7,400)	26,600
Strata’s post-acquisition profit (11,200 * 75%)	8,400
URP in inventory (w (ii))	(600)
Loss on equity investments (7,500 – 7,100)	(400)
	34,000
The adjusted post-acquisition profits of Strata are:
As reported for the year	8,000
Add pre-acquisition losses	2,000
Gain on equity investments (3,900 – 3,200)	700
Adjustment for over depreciation on fair value of plant (3,000 x 6/36 months)	500
	11,200
(v)
Fair value on acquisition (w (i))	6,000
Post-acquisition profit (11,200 * 25%)	2,800
Non controlling interest	8,800