Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
100%
The statements of comprehensive income for Alicante plc. London plc. and Madrid plc. for the year ended 31 October 2020 are as follows:
Statements of comprehensive income for the year ended 31 October 2020
Alicante
London
Madrid
£ 000
£ 000
£ 000
Sales
135,000
77,000
66,500
Cost of sales
45,000
32,000
24,000
Gross profit
90,000
45,000
42,500
Expenses
23,500
26,600
37,000
Dividends received
6,850
N/A
3,000
Profit before tax
73,350
18,400
8,500
Corporate Taxation
20,350
8,750
3,500
Profit for the year
53,000
9,650
5,000
Dividends paid in year
26,000
5,250
2,000
The following information is also relevant:
Alicante plc. acquired 60% of the shares in London plc. on 1 November 2016 for a cash consideration of £51,500,000. The balance on the retained earnings of London plc. was £45,000,000 and the balance on the general reserve of London plc. was £20,000,000 on that date.
Alicante plc. also acquired 30% of the shares in Madrid plc. on 1 November 2017. The balance on Madrid plc.’s retained earnings was £12,500,000 and the general reserve of Madrid plc. was £2,000,000 on that date. There was a revaluation on Madrid Plc.’s net assets on that date and this revaluation has been adjusted in the statements.
During the year Alicante plc. sold London plc. goods for £7,000,000 which included a mark-up of 40%. Fifty-five percent (55%) of these goods were still in inventory at the end of the year.
As at 31 October 2020, goodwill impaired by 20%, and the Method 1 is used to calculate the goodwill.
During the year, the corporate taxation expense at Alicante plc. has been overestimated by £1,500,000, and this has not been adjusted.
You Are Required To:
a). Prepare Alicante plc.’s consolidated statement of comprehensive income for the year to 31 October 2020. All workings should be shown. (Note: The non-controlling interest should not be charged with its proportion of the unrealized profit when calculating the consolidated profit attributable to non-controlling shareholders.)
b). IFRS 10 and also IAS 28 detail the criteria for determining whether a company should be considered a subsidiary or an associated. A key issue is the distinction between significant influence and control. You are required to critically evaluate the effectiveness of these criteria and discuss the usefulness of consolidated financial statements to shareholders and investors.
c). The criteria for determining the extent of goodwill upon the acquisition of a subsidiary follows two different approaches. Method 2 in the consolidation uses the fair value measurement approach. You are required to critically evaluate the fair value approach of measuring goodwill.
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