DEF Ltd. acquired 100% ordinary shares of 100 each of XYZ Ltd. on 1st October 20X1. On 31st March, 20X2 the summarised Balance Sheets of the two…

ANSWERS OF PART – II: DESCRIPTIVE QUESTIONS 1. Consolidated Balance Sheet of DEF Ltd. and its subsidiary, XYZ Ltd. as at 31st March, 20X2 Particulars Note No. I. Assets (1) Non-current assets (i) Property Plant & Equipment 1 86,00,000 (2) Current Assets (i) Inventories 2 17,14,000 (ii) Financial Assets (a) Trade Receivables 3 9,98,000 (b) Cash & Cash equivalents 4 2,25,000 Total Assets 1,15,37,000 II. Equity and Liabilities (1) Equity (i) Equity Share Capital 5 50,00,000 (ii) Other Equity 6 49,92,000 (2) Current Liabilities (i) Financial Liabilities (a) Trade Payables 7 7,45,000 (b) Short term borrowings 8 8,00,000 Total Equity & Liabilities 1,15,37,000 Notes to Accounts 1. Property Plant & Equipment Land & Building 43,00,000 Plant & Machinery 43,00,000 86,00,000 2. Inventories DEF Ltd. 12,00,000 XYZ Ltd. 5,14,000 17,14,000 3. Trade Receivables DEF Ltd. 5,98,000 XYZ Ltd. 4,00,000 9,98,000 4. Cash & Cash equivalents DEF Ltd. 1,45,000 XYZ Ltd. 80,000 2,25,000 7. Trade payable DEF Ltd. 4,71,000 XYZ Ltd. 2,74,000 7,45,000 8. Shorter-term borrowings Bank overdraft 8,00,000 Statement of Changes in Equity: 1. Equity share Capital Balance at the beginning of the reporting period Changes in Equity share capital during the year Balance at the end of the reporting period 50,00,000 0 50,00,000 2. Other Equity Share application money pending allotment Equity component of compound financial instrument Reserves & Surplus Total Capital reserve Retained Earnings Other Reserves Balance at the beginning 24,00,000 24,00,000 Total comprehensive income for the year 5,72,000 5,72,000 Dividends (2,00,000) (2,00,000) Total comprehensive income attributable to parent 3,35,000 3,35,000 Gain on Bargain purchase 18,85,000 18,85,000 Balance at the end of reporting period 18,85,000 7,07,000 24,00,000 49,92,000 It is assumed that there exists no clear evidence for classifying the acquisition of the subsidiary as a bargain purchase and, hence, the bargain purchase gain has been recognized directly in capital reserve. If, however, there exists such a clear evidence, the bargain purchase gain would be recognized in other comprehensive income and then accumulated in capital reserve. In both the cases, closing balance of capital reserve will be - 18,85,000. Working Notes: 1. Adjustments of Fair Value The Plant & Machinery of XYZ Ltd. would stand in the books at 14,25,000 on 1st October, 20X1, considering only six months' depreciation on 15,00,000 total depreciation being - 1,50,000. The value put on the assets being - 20,00,000 there is an appreciation to the extent of 5,75,000. 2. Acquisition date profits of XYZ Ltd. Reserves on 1.4.20X1 10,00,000 Profit & Loss Account Balance on 1.4.20X1 3,00,000 Profit for 20X2: Total - 8,20,000 less - 1,00,000 (3,00,000 – 2,00,000) i.e.7,20,000; for 6 months i.e. up to 1.10.20X1 3,60,000 Total Appreciation including machinery appreciation (10,00,000 – 1,50,000 + 5,75,000 – 1,00,000) 16,25,000 Share of DEF Ltd. 32,85,000 3. Post-acquisition profits of XYZ Ltd. Profit after 1.10.20X1 [8,20,000-1,00,000]x 6/12 3,60,000 Less: 10% depreciation on 20,00,000 for 6 months less depreciation already charged for 2nd half of 20X1-20X2 on 15,00,000 (1,00,000-75,000) (25,000) Share of DEF Ltd. 3,35,000 4. Consolidated total comprehensive income DEF Ltd. Retained earnings on 31.3.20X2 5,72,000 Less: Retained earnings as on 1.4.20X1 (0) Profits for the year 20X1-20X2 5,72,000 Less: Elimination of intra-group dividend (2,00,000) Adjusted profit for the year XYZ Ltd. 3,72,000 Adjusted profit attributable to DEF Ltd. (W.N.3) 3,35,000 Consolidated profit or loss for the year 7,07,000 5. No Non-controlling Interest as 100% shares of XYZ Ltd. are held by DEF Ltd. 6. Gain on Bargain Purchase Amount paid for 34,00,000 20,000 shares Par value of shares 20,00,000 DEF Ltd.'s share in acquisition date profits of XYZ Ltd. 32,85,000 (52,85,000) Gain on Bargain Purchase 18,85,000 7. Value of Plant & Machinery DEF Ltd. 24,00,000 XYZ Ltd. 13,50,000 Add: Appreciation on 1.10. 20X1 5,75,000 19,25,000 Add: Depreciation for 2nd half charged on pre-revalued value 75,000 Less: Depreciation on 20,00,000 for 6 months (1,00,000) 19,00,000 43,00,000 8. Consolidated retained earnings DEF Ltd. XYZ Ltd. Total As given 5,72,000 8,20,000 13,92,000 Consolidation Adjustments: (i) Elimination of pre-acquisition element [3,00,000 + 3,60,000] 0 (6,60,000) (6,60,000) (ii) Elimination of intra-group dividend (2,00,000) 2,00,000 0 (iii) Impact of fair value adjustments 0 (25,000) (25,000) Adjusted retained earnings consolidated 3,72,000 3,35,000 7,07,000 Assumptions: Investment in XYZ Ltd is carried at cost in the separate financial statements of DEF Ltd.Appreciation of 10lakhs in land & buildings is entirely attributable to land element only.Depreciation on plant and machinery is on WDV method.Acquisition-date fair value adjustment to inventories of XYZ Ltd. existing at the balance sheet date does not result in need for any write-down.