Question

On 1 January, 2020, King Ltd acquired 75% of the equity shares of Queen Ltd by means of an immediate share exchange and a cash payment of GH₵2 per share. It was further agreed that the cash payment will be due on 1 January, 2025. King Ltd has recorded the share exchange, but is yet to record the cash consideration. The cost of capital of King Ltd is 20% per annum. The summarized statements of financial position of the two companies as at 31 December 2017 are:

ASSETS
Non-Current Assets: Property, Plant & Equipment Investments:
Queen Ltd
Loan Notes
Other investments
King Ltd GHȻ '000
164,300
40,000 7,500 6,000
217,800
Queen Ltd GHȻ'000
85,500
85,500
31,200 16,500
1,800 135,000
30,000 -
54,000
24,000 108,000
12,000 -
15,000
Current Assets
Inventory 41,700 Trade Receivables 34,200 Bank 2,700
Total Assets
Equity and Liabilities:
Stated Capital
Capital Surplus
Income Surplus (at 31/12/2016) For the year ended 31/12/2017
Non-current Liabilities: 25% loan notes Deferred Tax
Current Liabilities
296,400
75,000 52,800 48,600 42,000
218,400
36,000 13,500 28,500
The following information is relevant
At the date of acquisition, King Ltd conducted a fair value exercise on Queen Ltd.’s net assets which were equal to their carrying amounts except the following: An item of a plant had a fair value of GH₵9million above its carrying amount. At the date of acquisition, it had a remaining economic useful life of five (5) years. Ignore deferred tax implications. King Ltd’s policy is to value non-controlling interest as the proportionate of the net assets. An impairment test at the year-end showed that goodwill had suffered a loss of GH₵4,000,000.
Required:
Show only the 5 basic workings needed to prepare the consolidated financial statements

Answer 1

To prepare consolidated financial statements, calculations for goodwill, fair value adjustment of assets, non-controlling interest, present value of deferred cash payment, and goodwill impairment are required.

Step-by-step explanation:

To prepare the consolidated financial statements of King Ltd after acquiring Queen Ltd, there are five basic workings we need to consider:

1. Calculation of the goodwill on acquisition.
2. Determination of the fair value adjustment for the revaluation of the plant of Queen Ltd.
3. Measurement of the non-controlling interest at the proportionate share of the acquiree’s net identifiable assets.
4. Recognition and measurement of the deferred consideration using the present value technique due to the deferred cash payment.
5. Calculation of the impairment of the goodwill.

Specifically, to calculate the deferred consideration, we would need to discount the future cash payment of GH₵2 per share, which is due on January 1, 2025, back to its present value at the cost of capital of 20% per annum as of the acquisition date, January 1, 2020. Also, the fair value of the plant, which is GH₵9 million above its carrying amount, should be amortized over its remaining useful life of five years and the adjustment should be made for these five years post-acquisition. Lastly, the impairment loss of GH₵4,000,000 would be recognized in the consolidated financial statements.