AG311 Advanced Financial Reporting
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Department of Accounting and Finance
AG311 Advanced Financial Reporting
2022
Question 1
On 1 July 20X1 McCarney plc and Donaldson plc each acquired 50% of Armstrong plc. The consideration paid by Donaldson plc consisted of cash of $8 per share and also a 1 for 20 share exchange when the share price of Donaldson plc was $10 each. McCarney plc also paid $8 per share for their interest but did not issue any shares to the original shareholders of Armstrong plc. The ordinary shares of Armstrong plc have one voting right each.
Following the acquisition, Donaldson had the contractual right to appoint 68% of the board of Armstrong with the remaining 32% appointed by McCarney plc.
McCarney had veto rights over any amendments to the articles of incorporation of Armstrong and also over the appointment of the auditors.
McCarney plc and Donaldson plc each appoint one member to Armstrong’s senior management team.
It is the senior management team at Donaldson plc who make key decisions regarding the development of Armstrong’s new products, its main revenue streams, and the main markets it will operate in.
Required:
(a) Explain if Donaldson should be considered the acquirer of Armstrong plc
(10 marks)
The summarised statements of financial position of Hodgson, Booth, and Taylor at 30 September 20X8 are shown below:
|
|
Hodgson $000 |
Booth $000 |
Taylor $000 |
|
Non-current assets Property, plant and equipment Investments
Current Assets Total Assets
|
14,000 10,000 24,000
6,000 30,000 |
7,500 - 7,500
3,000 10,500
|
3,000 - 3,000
1,500 4,500
|
|
|
|
|
|
|
Equity and liabilities Ordinary shares ($1 ordinary shares) Retained earnings
Non-current liabilities Current liabilities
Total equity and liabilities |
10,000 7,500 17,500 8,000 4,500
30,000
|
1,000 5,500 6,500 1,250 2,750
3,070
|
500 2,500 3,000 500 1,000
4,500
|
|
The following information is also relevant: 1. Hodgson acquired 75% of the equity share capital of Booth several years ago, paying $5 million in cash. At this time the balance on Booth’s retained earnings was $3 million. · Hodgson acquired 30% of the equity share capital of Taylor on 1 October 20X6, paying $75,000 in cash. At 1 October 20X6 the balance on Taylor’s retained earnings was $1.5 million · During the year, Hodgson sold goods to Taylor for $1 million at a mark-up of 25%. At the year end, Taylor still help one quarter of these goods in inventory. · As a result of trading, Hodgson was owed $250,000 by Taylor at the reporting date. This agrees with the amount included in Taylor’s payables. · At 30 September 20X8, it was determined that the investment in the associate was impaired by $35,000 · Non-controlling interests are valued using the fair value method. The fair value of the non-controlling interest in Booth at the date of acquisition was $1.6 million. Required: (b) Prepare the consolidated statement of financial position for the Hodgson Group as at 30 September 20X8. (35 marks) Total: [45 marks] |
Question 2.
A company issues 0% loan notes at their nominal value of $40,000. The loan notes are repayable at a premium of $11,800 after 3 years. The effective rate of interest is 9%
Required:
(a) What amount will be recorded as a financial liability when the loan notes are issued?
(2 marks)
(b) What amount will be shown in the statement of profit or loss and statement of financial position for years 1-3?
(8 marks)
(c) On 1 April 20X1, a company issued 40,000 $1 redeemable preference shares with a coupon rate of 8% at par. They are redeemable at a large premium which gives them an effective interest rate of 12% per annum.How would these redeemable preference shares appear in the financial statements for the years ending 31 March 20X2 and 31 March 20X3?
(5 marks)
Total: [15 marks]
Question 3.
Stewart, a public limited company, operates in the retail sector.
On 1 May 2019, Stewart acquired 70% of the equity interest in McDonald, a public limited company. The purchase consideration comprised cash of £94 million. The fair value of the identifiable net assets recognised by McDonald was £120 million excluding the patent below. The identifiable net assets of McDonald included a patent which had a fair value of £4million. This had not been recognised in the financial statements of McDonald. The patent had a remaining useful term of four years to run at the acquisition date. The retained earnings of McDonald were £49million and other components of equity were £3 million at the acquisition date. The remaining excess of the fair value of the net assets is due to an increase in the vlaue of land. The share capital of McDonald was £38million at acquisition and there have been no shares issued since acquisition. The fair value of the non-controlling interest at acquisition was 46 million.
McDonald is located in a foreign country and also operates in the retail sector. The income of McDonald is demoninated in Kealeys. McDonald’s sales price is determined by local supply and demand. McDonald pays 40% of its costs in dollars with the remainder being incurred locally and settled in Kealeys. McDonald’s management has a considerable degree of autonomy in carrying out the operations of McDonald and is not reliant on the parent.
Required:
(a) Discuss and apply the principles to determine the functional currency of McDonald
(10 marks)
(b) Calculate the goodwill arising on the acquisition of McDonald
(7 marks)
(c) Calculate the fair value adjustment needed to ensure McDonald’s assets are recorded at fair value in the group accounts
(8 marks)
Total: [25 marks]
Question 4.
Environmental reporting isn’t currently mandatory, but many organisations chose to disclose environmental information. Explain why an organisation may choose to voluntarily disclose environmental information
(15 marks)
2022-08-27