A company purchased assets worth 72,000. It issued fully paid-up
equity shares of 100 each. Give Journal Entries, if the shares were
issued at par.
Answers
Explanation:
Fundamentals Level – Skill Module, Paper F7 (IRL)
Financial Reporting (Irish) June 2008 Answers
1 (a) Cost of control in Sardonic: €’000 €’000
Consideration
Shares (18,000 x 2/3 x €5.75) 69,000
Deferred payment (18,000 x 2.42/1.21 (see below)) 36,000 ––––––––
105,000
Less
Equity shares 24,000
Pre-acquisition reserves:
At 1 April 2007 69,000
To date of acquisition (13,500 x 4/12) 4,500
Fair value adjustments (4,100 + 2,400) 6,500 ––––––––
104,000 x 75% (78,000) ––––––––
Goodwill 27,000
––––––––
€1 compounded for two years at 10% would be worth €1·21.
The acquisition of 18 million out of a total of 24 million equity shares is a 75% interest.
(b) Patronic Group
Consolidated profit and loss account for the year ended 31 March 2008
€’000 €’000
Turnover (150,000 + (78,000 x 8/12) – (1,250 x 8 months intra group)) 192,000
Cost of sales (w (i)) (119,100)
––––––––
Gross profit 72,900
Distribution costs (7,400 + (3,000 x 8/12)) (9,400)
Administrative expenses (12,500 + (6,000 x 8/12)) (16,500)
Amortisation of goodwill (27,000/9 years x 8/12) (2,000) ––––––––
Operating profit 45,000
Finance costs (w (ii)) (5,000)
Share of profit from associate (10,000 x 30%) 3,000 ––––––––
Profit before tax 43,000
Tax – group (10,400 + (3,600 x 8/12)) (12,800)
– associate (4,000 x 30%) (1,200) (14,000) –––––––– ––––––––
Profit after tax 29,000
Minority interest (w (iii)) (2,100) ––––––––
Profit for the year 26,900
––––––––
(c) An associate is defined by FRS 9 Associates and Joint Ventures as an investment over which an investor has significant
influence. There are several indicators of significant influence, but the most important are usually considered to be a holding
of 20% or more of the voting shares and board representation. Therefore it was reasonable to assume that the investment in
Acerbic (at 31 March 2008) represented an associate and was correctly accounted for under the equity accounting method.
The current position (from May 2008) is that although Patronic still owns 30% of Acerbic’s shares, Acerbic has become a
subsidiary of Spekulate as it has acquired 60% of Acerbic’s shares. Acerbic is now under the control of Spekulate (part of
the definition of being a subsidiary), therefore it is difficult to see how Patronic can now exert significant influence over
Acerbic. The fact that Patronic has lost its seat on Acerbic’s board seems to reinforce this point. In these circumstances the
investment in Acerbic falls to be treated under FRS 26 Financial Instruments: Recognition and Measurement. It will cease
to be equity accounted from the date of loss of significant influence. Its carrying amount at that date will be its initial
recognition value under FRS 26 and thereafter it will be carried at fair value.
Workings
(i) Cost of sales €’000 €’000
Patronic 94,000
Sardonic (51,000 x 8/12) 34,000
Intra group purchases (1,250 x 8 months) (10,000)
Additional depreciation: plant (2,400/ 4 years x 8/12) 400
property (per question) 200 600 ––––
Unrealised profit in stock (3,000 x 20/120) 500 ––––––––
119,100
––––––––
Note: for both sales and cost of sales, only the post acquisition intra group trading should be eliminated.
Answer:
Explanation:
A company purchased assets worth 72,000. It issued fully paid-up
equity shares of 100 each.
Journal entries
Shares A/c Dr. 72000 * 100 7200000
To Equity share capital A/c 7200000