On 1 January 2012, VM Ltd acquired 18m of the equity shares of GR Ltd in a share exchange in which VM Ltd issued two new shares for every three shares it acquired in GR Ltd. This gave VM Ltd a holding of 90%. Additionally, on 31 December 2012, VM Ltd will pay the shareholders of GR Ltd GHS1.76 per share acquired. VM Ltd’s cost of capital is 10% per annum.
At the date of acquisition, shares in VM Ltd and GR Ltd had market prices of GHS6.50 and GHS2.50 each respectively.
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2012.
Equity as at 1 October 2011
Stated capital 120,000 30,000
Income surplus 108,000 70,000
The following information is relevant:
(i) At the date of acquisition the fair values of GR Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:
1. An item of plant had a fair value of GHS3.6million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
2. GR Ltd had a contingent liability which VM Ltd estimated to have a fair value of GHS900, 000. This has not changed as at 30 September 2012.
GR Ltd has not incorporated these fair value changes into its financial statements.
(ii) VM’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, GR Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.
(iii) Sales from VM Ltd to GR Ltd throughout the year ended 30 September 2012 had consistently been GHS1.6million per month. VM Ltd made a mark-up of 25% on these sales. GR Ltd had GHS3million of these goods in inventory as at 30 September 2012.
(iv) VM Ltd’s investment income is a dividend received from its investment in a 40% owned associate which it has held for several years. The underlying earnings for the associate for the year ended 30 September 2012 were GHS4million.
(v) Although GR Ltd has been profitable since its acquisition by VM Ltd, the market for GR Ltd’s product has been badly hit in recent months and VM Ltd had calculated that the goodwill has been impaired by GHS4million as at 30 September 2012.
Required:
(a) Calculate the goodwill on acquisition of GR. (5 marks)
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(b) Prepare the consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012. (15 marks)
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