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371 Pedantic

Pedantic acquired 60% of Sophistic on April 1, 20X8 by exchanging two of its shares for every three shares in Sophistic. According to the financial statements provided for both entities for the year ended September 30, 20X8: - Pedantic recognized revenue of $85,000 and net income of $9,000, while Sophistic recognized revenue of $42,000 and net income of $3,000. - As of September 30, 20X8, Pedantic reported total assets of $56,600 including property, plant and equipment of $40,600, while Sophistic reported total assets of $19,200 including property, plant and equipment of $12,600.

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abdirahman farah Abdi
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247 views2 pages

371 Pedantic

Pedantic acquired 60% of Sophistic on April 1, 20X8 by exchanging two of its shares for every three shares in Sophistic. According to the financial statements provided for both entities for the year ended September 30, 20X8: - Pedantic recognized revenue of $85,000 and net income of $9,000, while Sophistic recognized revenue of $42,000 and net income of $3,000. - As of September 30, 20X8, Pedantic reported total assets of $56,600 including property, plant and equipment of $40,600, while Sophistic reported total assets of $19,200 including property, plant and equipment of $12,600.

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abdirahman farah Abdi
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371 PEDANTIC

PEDANTIC On 1 April 20X8, Pedantic acquired 60% of the equity share capital of
Sophistic in a share exchange of two shares in Pedantic for three shares in
Sophistic. The issue of shares has not yet been recorded by Pedantic. At the date of
acquisition shares in Pedantic had a market value of $6 each. Below are the
summarized draft financial statements of both entities.
Statement of profit or loss for the year ended 30 September 20X8.
Pedantic Sophistic
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
––––––– ––––––
Gross profit 22,000 10,000
Operating expenses (8,300) (5,600)
––––––– –––––––
Profit before tax 13,700 4,400
Income tax expense (4,700) (1,400)
––––––– –––––––
Profit for the year 9,000 3,000

Statements of financial position as at 30 September 20X8.


Assets
Non-current assets
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
––––––– –––––––
Total assets 56,600 19,200
Equity and liabilities:
Equity shares of $1 each 10,000 4,000
Retained earnings 35,400 6,500
––––––– –––––––
45,400 10,500
non-current liabilities 10% loan notes 3,000 4,000
Current liabilities 8,200 4,700
––––––– –––––––
Total equity and liabilities 56,600 19,200
Abdirahman Farah
The following information is relevant:
(i) At the date of acquisition, the fair values of Sophistic’s assets were equal to
their carrying amounts with the exception of an item of plant, which had a fair
value of $2 million in excess of its carrying amount. It had a remaining life of five
years at that date [straight-line depreciation is used]. Sophistic has not adjusted the
carrying amount of its plant as a result of the fair value exercise.
(ii) Sales from Sophistic to Pedantic in the post-acquisition period were $8 million.
Sophistic made a mark-up on cost of 40% on these sales. Pedantic had sold $5.2
million (at cost to Pedantic) of these goods by 30 September 20X8.
(iii) Other than where indicated, statement of profit or loss items are deemed to
accrue evenly on a time basis.
(iv) Sophistic’s trade receivables at 30 September 20X8 include $600,000 due
from Pedantic which did not agree with Pedantic’s corresponding trade payable.
This was due to cash in transit of $200,000 from Pedantic to Sophistic. Both
entities have positive bank balances.
(v) Pedantic has a policy of accounting for any non-controlling interest at fair
value. The fair value of the non-controlling interest at the acquisition date was $5.9
million. Consolidated goodwill was impaired by $1 million at 30 September 20X8.
Required:
(a) Prepare the consolidated statement of profit or loss for Pedantic for the year
ended 30 September 20X8.
(b) Prepare the consolidated statement of financial position for Pedantic as at 30
September 20X8.

Abdirahman Farah

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