The directors of Paint plc, a company in the specialist printing Industry, have recently adopted a policy of growing the company by acquiring shares in other allied companies.
Paint plc acquired 25% shareholding in Art Ltd for £2,000,000 on 1 April 2011. Paint plc also has a number of small investments in other printing and promotional companies but none of the shareholding exceed 5%
On 1 January 2011 Paint plc acquired 80,000 equity shares in Smooth Ltd and immediately appointed its representatives to be in a majority on the Board of Directors. This acquisition was finances by an immediate cash payment to the former shareholders of Smooth Ltd of £852,000.
A fair value exercise has been conducted on the non-current assets of Smooth Ltd during 2011 and the directors of Paint plc have agreed two variations, although these have not been recorded by Smooth Ltd (and the assets has not been disposed of by 31 December 2011):
- Land to decrease in value by £70,000
- Manufacturing plant to increase in value by £120,000. This plant is estimated to have a remaining useful life of four years from 1 January 2011, no residual value and depreciated using the straight line method
- The equity section of Smooth Ltd's Statement of Financial position at 31 December 2010( there was no issue of shares during 2011) was as follows:
|
|
£000
|
|
Equity shares of £2.00 each , fully paid
|
200
|
|
Share premium
|
80
|
|
Retained earnings
|
360
|
|
|
640
|
Additional information:
1. During 2011 Paint plc sold raw materials to Smooth Ltd at an invoice value of £1.5 million. At 31 December 2011 on third of the amount had not been paid by Smooth Ltd and £240,000 remained in Smooth Ltd's inventories. The raw materials had been transferred by Paint plc at mark-up on cost of 20%
2. The directors of Paint plc are concerned a the low profitability of Smooth Ltd as sales and profits fell significantly during 2011. They therefore wish to make an impairment charge of 30% of the goodwill on acquisition.
3. The value of the goodwill attributable to the NCI was £20,000.
4. Parent company has accounted for £160,000 interest received on 31/12/2011 from the subsidiary under Investment Income
The income statements for the year ended 31 December 2011 for the three companies are as follows
|
|
Paint plc
£000
|
Smooth Ltd
£000
|
Art Ltd
£000
|
|
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Investment income
Fiancé costs
Profit before tax
Income tax
Profit(loss) for the period
|
10,500
(7,400)
--------
3100
(900)
(500)
360
(300)
--------
1760
(700)
--------
1,060
---------
|
6,300
(4,100)
----------
2,200
(870)
NIL
NIL
(600)
---------
730
(400)
---------
330
---------
|
9,000
(3,500)
--------
5,500
(800)
(400)
NIL
(200)
--------
4,100
(900)
-------
3,200
--------
|
Required:
1. Calculate the goodwill arising on the acquisition of Smooth Ltd.
2. Calculate the carrying amount of the investment in Art Ltd at 31 December 2011.
3. Prepare the consolidated income statement for Paint plc for the year ended 31 December 2011 .