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CASE STUDY OF ABC LTD AND XYZ LTD ABC Ltd made a takeover bid for all the issued voting shares of XYZ Ltd offering three ABC Ltd shares for every two...
CASE STUDY OF ABC LTD AND XYZ LTD
ABC Ltd made a takeover bid for all the issued voting shares of XYZ Ltd offering three ABC Ltd shares for every two XYZ Ltd shares. The offer from ABC Ltd was accepted by 90% of the shareholders of XYZ Ltd. The date control was obtained by ABC Ltd was deemed to be 1 January 20X7. The following information is available.
(a) Shareholders' equity of XYZ Ltd at balance date on 31 December 20X6:
$000
Share capital (200,000) shares 200
General reserve 300
Retained earnings 150
650
(b) Market value of each entity's shares at 1 January 20X7
ABC Ltd $3.20
XYZ Ltd $4.00
(c) In XYZ Ltd's accounting records, land was stated at $200,000 below its cost to the group. This is to be accounted for as a consolidation adjustment. Statements of comprehensive income and statements of financial position of ABC Ltd and XYZ Ltd for the year ended 31 December 20X8 are as follows:
Statements of Comprehensive Income
ABC Ltd XYZ Ltd
$000 $000
Sales 5000 2000
Cost of sales 2570 1025
Gross profit 2430 975
Dividend revenue 252 -
2682 975
Expenses 2057 300
Operating profit before tax 625 675
Income tax expense 280 260
Operating profit after tax 345 415
ABC Ltd XYZ Ltd
$000 $000
Retained earnings at 1.1.X8 294 200
Profit for the year 345 415
Interim dividend paid (100) (150)
Final dividend declared (160) (200)
Retained earnings at 31.12.X8 379 265
Statements of Financial Position
ABC Ltd XYZ Ltd
$000 $000
Assets
Current assets
Other current assets 385 395
Total current assets 385 395
Non-current assets
Property, plant and equipment 550 750
Investments 864 -
Total non-current assets 1414 750
Total assets 1799 1145
Liabilities
Current liabilities
Trade and other payables 60 180
Provision for final dividend 160 200
Total current liabilities 220 380
Total liabilities 220 380
Net assets 1579 765
Shareholder's equity
Share capital 1200 200
General reserve - 300
Retained earnings 379 265
Total equity 1579 765
Additional information
(a) ABC Ltd records dividend revenue in the accounting period when the cash is received.
(b) The final dividend declared by XYZ Ltd for the 20X7 year was $130,000 and it was paid on 1 March 20X8.
(c) Impairment losses for goodwill arising on acquisition had not been recognised in any of the previous years' consolidated financial statements. The directors of ABC Ltd are of the opinion an impairment loss of $10 000 will be recognised in relation to its investment in XYZ Ltd in the consolidated financial statements for the year ended 31 December 20X8.
(d) Inter-company sales for 20X8
Cost Sales Price
From ABC and XYZ $300 000 $500 000
From XYZ to ABC $200 000 $350 000
(e) In relation to the inventory sales in (d) above, inventory held by ABC Ltd and purchased from XYZ Ltd is as follows:
Cost Sales Price
i. As at 1 Jan 2008 $50 000 $120 000
ii. As at 31 Dec 2008 $75 000 $150 000
(f) The rate of company income tax is 30%.
(g) Assume the directors of ABC Ltd have adopted the full goodwill method.
Required:
(a) For the accounting records of ABC Ltd show the general journal entries to record:
i. the acquisition of the shares in XYZ Ltd on 1 January 20X7.
ii. the dividend received from XYZ in 20X8 but proposed by XYZ Ltd in 20X7; and
iii. the interim dividend received from XYZ Ltd in 20X8.
(3 marks)
(b) Prepare the consolidated financial statements at 31 December 20X8.
Show all consolidation journal entries and a worksheet and all workings for the calculation of NCI.
The consolidated financial statements should be presented in the same manner your textbook presents them.
(20 marks)
(c) Explain the partial and the full goodwill methods. In your discussion list the advantages and disadvantages of using each method. (2 marks)
