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Goodwill and Bargain Purchase Analysis

FAC3764 additional question to practice answer

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24 views13 pages

Goodwill and Bargain Purchase Analysis

FAC3764 additional question to practice answer

Uploaded by

rachelle.jacobs1014
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

QUESTION 1

Part A

The goodwill or gain on bargain purchase will be calculated the by acquirer on the date of acquisition as the
difference between:
(a) The sum/aggregate of:
(i) the consideration transferred
Consideration is measured at fair value on acquisition date
and
(ii) the amount of any non-controlling interests in the acquiree
(NCI should be measured at fair value at acquisition date or at their proportionate share of the identifiable
net assets at acquisition date)

and
(b) the net of the indentifiable assets acquired and liabilities assumed at acquisition date (i.e. equity)

If (a) the aggregate of consideration and NCI exceeds (b) the net identifiable assets acquired and liabilities
assumed, then the difference is called goodwill

If (b) the net identifiable assets acquired and liabilities assumed exceeds (a) the aggregate of consideration
transferred and NCI, then the difference is called gain on bargain purchase
QUESTION 1
Part B

Calculate the goodwill or gain on bargain purchase as at 30 June 2023


R

Consideration transferred 280 000


Plus: Non-controlling interests 41 311
(200 000 + 140 000 + 38 800(50 000(300 000 - 250 000) X 78.4%)
+ 3 600(5 000(80 000 - 75 000) X 73%) - 7 200(10 000(35 000 - 45
000) X 73%) = 375 200 X 11%
321 311
Less: Net assets acquired and liabilities assumed -375 550
Gain on bargain purchase -54 240
QUESTION 1
Part C

NGIZO LTD GROUP


CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2023

ASSETS R
Non-current assets 1 469 998
(644 280 + 995 988- 150 000- 280 000 + 50 000co(300 000- 250 000)- 15
000(125 000- 110 000) + 2 500((15 000/3) x 6/12) + 5 000co(80 000- 75 000)- 3
Property, plant and equipment 750 (5 000co/36(12 x 3) x 27) 1 249 018

(60 000 + 2 500[62 500(250 000(100 000 + 150 000) x 25%)- 60 000co] + 7 500(30
Investment in associate, Lela Ltd 000(180 000- 150 000co) x 25%) + 28 980(115 920 x 25%)- 3 000 (12 000 x 25%) 95 980
Goodwill
Other investments (100 000 + 25 000) 125 000
Deferred tax asset

Current assets 566 875


Trade and other receivables (115 QQQ + 45 QQQ- 18 750(125 QQQ X 15%)) 141 250
Cash and cash equivalents (78 000 + 85 000) 163 000
Inventory (180 000 + 87 000- 4 375(50 000 X 35/100 X 25%) 262 625

Total assets 2 036 873

Total
QUESTION 1
Part D

NGIZO LTD GROUP


CONSOLIDATED STATEMENT OF CHANGE IN EQUITY FOR THE YEAR ENDED 30 JUNE 2023

NCI
R
Balance as at 1 July 2022 79 346 See Analysis or Cl
Changes in equity for 2022
Total comprehensive income for the year: 22 466
2 2 � 6 6 See Analysis or C2
I
Profit for the year
.__ _ ...,
___ _ _ _ _
Other comprehensive income for the year
Dividend paid _ _0 (SO 000x 11%}
____- _5 _ 50
Balance as at 30 June 2023 96 312

Cl - Opening balance of NCI R


At acquistion date: co
NCI (165 000x 55%x R 4.90) 41 311

Since acquistion date:


Movement in retained earnings (480 000- 140 000) 340 000
Reversal of inventory re-measured at acquisition date, net after tax co 7 300
Additional depreciation on coffee roastery re-measured at acquisition date (5
OOOco/36x 15) - 2 083
1 April 2021- 30June 2021 = 3months
1 July 2021- 30June 2022 = 12months
Tax effect of additional depreciation on re-measurement of machine (coffee
roaster ) (2 083co x 27%) 563
Total movement in RE since acquisition date 345 779
NCl's share x 11% 38 036
C2 - NCl's share in current year profit of subsidiary
R
Profit for the year (given) 214 560
Additional depreciation on re-measurement of coffee roaster (5 000co/3} -1 667
Tax effect of additional depreciation on re-measurement of machine (coffee
roaster) {1 200co x 27%) 450
Unrealised profit on sale of machine (coffee grinder) {125 000 - 110 000} -15 000
Deffered tax implication on unrealised profit on sale of machine (15 000co x
27%} 4 050
Realisation of unrealised profit on sale of machine (15 000co/3 x 6/12) 2 500
Tax effect of realisation of unrealised profit on sale of machine {2 500co x
27%) -675
204 218
NCl's share x 11% 22 464
QUESTION 1
Part E

Deferred tax as recognised in the consolidated statement of financial position


Dr/(Cr)
R
Ngizo - Deferred tax liability -30 680
Phume - Deferred tax liability -47 428

Deferred tax liability - re-measurement of land (SO 000(300 000 - 250 000) x 21.6%) -10 800
Deferred tax liability - re-measurement of coffee roaster (machine) (5 000(80 000 - 75 000) x
27%) -1 350
Deferred tax asset - re-measurement of inventory (10 000(35 000 - 45 000) x 27%) 2 700

Reversal of deferred tax asset on re-measurement of inventory -2 700

Deferred tax on additional depreciation due to re-measurement of coffee roaster - PY [[(5


OOOco/36 x 27)] x 27%] 1 013

Deferred tax asset on unrealised profit on sale of coffee grinder (15 000(125 000 - 110 000) x
27%) 4 050
Reversal of deferred tax asset on unrealised profit that realised through the use of the coffee
grinder ((15 OOOco/3 x 6/12) x 27%) -675
Deferred tax asset on sale of asset to associate [(SO 000 x 35/100 x 25%) x 27%] 1 181

Deferred tax liability at year-end -84 689

Please note: You may ignore the Deferred tax amount given in the required of part (b) as it was based on
the previous tax rate.
Calculations
Cl - Analysis of owners equity of Phume Ltd Ngizo Ltd
89% 11%
100% 89% 11%
Total At Since NBB
At acquisition date - 1 April 2021 R R R R
Share capital 200 000 178 000 22 000
Retained earnings at acquisition date 140 000 124 600 15 400
Revaluation surplus - land {SO 000(300 000 - 250 000) x 78.4%) 39 200 34 888 4 312
Revaluation surplus - Machine Coffee roaster (5 000{80 000 - 75 000) x 73%) 3 650 3 249 402
Inventory {-10 000(35 000 - 45 000) x 73%) -7 300 -6 497 -803
375 550 334 240 41 311
I Gain on bargain purchase -54 240 -54 240 -
Investment in Ngizo Ltd 321 311 280 000 41311
NCI {{200 000 + 140 000 + 38 800 + 3 600 + 7 200) x 11%)

Since acquisition to the beginning of the current year 1 April 2016 - 30 June 2017 345 779 307 743 38 036
Retained earnings {480 000 - 140 000) 340 000 302 600 37 400
Reversal of inventory re-measured at acquisition date {3 600/3), net after tax co 7 300 6 497 803
Additional depreciation on coffee roastery re-measured at acquisition date -2 083 -1 500 -1 854 -229
1 April 2021 - 30 June 2021 = 3 months (S OOOco/36 x 15) 417 371 46
1 July 2021 - 30 June 2022 = 12 months 1 667 1 483.33 183
Tax effect of additional depreciation on re-measurement of machine (coffee roaster) (2
083co x 27%) 563 501 62

Current year - 1 July 2022 - 30 June 2023 204 218 181 754 22 466
Profit for the year (given) 214 560 190 958 23 602
Additional depreciation on re-measurement of coffee roaster (5 OOOco/3) -1 667 -1 217 -1 483 -183
Tax effect of additional depreciation on re-measurement of machine (coffee roaster) {1
200co x 27%) 450 401 50
Unrealised profit on sale of machine (coffee grinder) (125 000 - 110 000) -15 000 -10 950 -13 350 -1 650
Deffered tax implication on unrealised profit on sale of machine {15 OOOco x 28%) 4 050 3 605 446
Realisation of unrealised profit on sale of machine {15 OOOco/3 x 6/12) 2 500 1 825 2 225 275
Tax effect of realisation of unrealised profit on sale of machine {2 SOOco x 28%) -675 -601 -74

Dividend paid - 30 June 2023 -50 000 -44 500 -5 500


821 308 280 000 444 998 96 312
C2 - Analysis of owners equity of Lela Ltd
Ngizo Ltd
25 000/100 000 = 25% 100% 25% 25%
Total At Since CA
At acquisition date - 1 January 2019 R R R R
Share capital 100 000 25 000
Retained earnings 150 000 37 500
250 000 62 500
Gain on bargain purchase -2 500 -2 500
Investment in Lela Ltd (given) 247 500 60 000 60 000

Since acquisition to beginning of the current year 32 500 10 000 10 000


Gain on bargain purchase 2 500 2 500 2 500
Retained earnings 30 000 7 500 7 500

Current year 103145 25 786 28 980


Profit for the year 115 920 28 980 28 980
Unrealised profit on sale of inventory (SO 000 x 35/100) -17 500 - 4 375 -
Tax effect of unrealised profit on sale of inventory 4 725 -
1181 -

Dividend paid -12 000 - 3 000 -3 000


1 067 743 371145 7000 95 980

We cannot adjust both the "inventory" and "investment in associate" in the consolidated statement of financial position with the unrealised profit on the sale of
inventory as that would be double-counting. Only the inventory is adjusted.
PRO-FORMA JOURNAL ENTRIES (NOT REQUIRED) Debit Credit
R R

S1 Property, plant and equipment 55 000


Revaluation surplus 42 850
Deferred tax liability 12 150
Re-measurement of assets at acquisition date

S2 Share capital 200 000


Retained earnings 140 000
Revaluation surplus 42 850
Inventory 10 000
Investment in Phume Ltd 280 000
Non-controlling interests (340 000(200 000 + 140 000) x 11%) 41 311
Deferred tax 2 700
Gain on bargain purchase/Retained earnings since acquistion date 54 240
Elimination of at acquisition date equity

S3 Inventory 10 000
Retained earnings 7 300
Deferred tax 2 700
Reversal of fair value adjustment at acquisition date

S4 Retained earnings 1 521


Deferred tax 563
Accumulated depreciation 2 083
Additional depreciation on re-measurement of machine

ss Retained earnings 38 036


Non-controlling interests (SFP) 38 036
Allocation of Net's portion of the retained earnings since acquisition date

S6 Other expenses/Depreciation (3 600/3jr) 1 667


Accumulated depreciation 1 667
Additional depreciation on re-measurement of PPE

S7 Deferred tax liability (1 200 x 27%) 450


Income tax expense 450
Tax effect of additional depreciation on re-measurement of PPE

S8 Other income/Profit on sale of coffee grinder (125 000 - 110 000) 15 000
Property plant and equipment 15 000
Unrealised profit on sale of coffee grinder

S9 Deferred tax asset (15 000 x 27%) 4 050


Income tax expense 4 050
Tax effect of unrealised profit on sale of coffee grinder
S10 Accumulated depreciation (15 000/3x 6/12) 2 500
Other expenses 2 500
Realisation of unrealised profit through the use of coffee grinder

S11 Income tax expense ( 2 500 x 27%) 675


Deferred tax asset 675
Tax effect of realisation of unrealised profit through the use of coffee grinder

S12 NCI (SP/L) 224 66


NCI (SFP) 224 66
Allocation of Net's portion of the current year profit

S13 Other income/Dividend received (SO 000 x 89%) 44 500


NCI (SFP) 5 500
Dividend paid 50 000
Elimination of intragroup dividend paid

S14 Trade and other payables 18 750


Trade and other receivables 18 750
Elimination of intragroup balances

Al Investment in associate, Lela 2 500


Retained earnings 2 500
Recognition of gain on bargain purchase

A2 Investment in associate, Lela 7 500


Retained earnings 7 500
Recognition of associate's share in since acquisition retained earnings

A3 Investment in associate, Lela 28 980


Share in profit of associate, Lela 28 980
Recognition of associate's share in current year profit

A4 Share in profit of associate, Lela 4375


Inventory (SO 000 x35/100 x 25 %) 4375
Elimination of unrealised profit on sale of inventory

AS Deferred tax asset (4375 x 27%) 1181


Share in profit of associate 1181
Tax effect of elimination of unrealised profit on sale of inventory

A6 Other income 3000


Investment in associate, Lela 3000
Elimination of intragroup dividend received
QUESTION 1
Ngizo LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2023
R
Revenue
Cost of sales
Gross profit
Other income
Share in profit of associate 25 786
Other expenses
Finance charges
Profit before tax
Income tax expense
PROFIT FOR THE YEAR 481305

Other comprehensive income


Items that will not be reclassified to profit or loss:
Other comprehensive income for the year, net of tax
Fair value adjustment on investments in equity instruments, net after tax
Share of other comprehensive income of joint venture
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 481305

Profit attributable to:


Owners of the parent 458 839
Non-controlling interests 22 466
481305

Total comprehensive income attributable to:


Owners of the parent 458 839
Non-controlling interests 22 466
481305
Ngizo LTD GROUP
CONSOLIDATED STATEMENT OF CHANGE IN EQUITY FOR THE YEAR ENDED 30 JUNE 2023
Total equity
attributable to
Retained owners' of the Total
Share capital earnings parent NCI equity
R R R R R

Balance as at 1 July 2017 2 50 000 1121983 1371983 79346 1451329


Total comprehensive income for the year:
Acquisition of subsidiary
Profit for the year 458 839 458 839 22 466 4813 05
Other comprehensive income
Dividends paid -100 000 -100 000 - 5 500 -105 500
Balance at 30 June 2018 250 000 1 480 822 1 730 822 96 312 1 827 134
Ngizo LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2023
R
ASSETS
Non-current assets 1 46 9 9 98
Property, plant and equipment 1 249 018
Investment in associate, Lela Ltd 95 980
Other investments 125 000

Current assets 56 6 875


Trade and other receivables 141 250
Cash and cash equivalents 163 000
Inventory 262 625

Total assets 2 036 873

EQUITY AND LIABILITIES


Equity attributable to owners of the parent 1 730822
Share capital 250 000
Retained earnings 1 480 822
Non-controlling interests 96 312
Total equity 1827134

!
Non-current liabilities 84 689
Deferred tax liability 84 689

I
Current liabilities 125 050
Trade and other creditors 125 050

Total equity and liabilities 2 036 873

Common questions

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Goodwill arises when the consideration and NCI paid for a company exceed the fair value of identified net assets. It reflects the premium paid for anticipated future benefits. Conversely, a gain on a bargain purchase arises when the fair value of identified net assets exceeds the consideration and NCI, indicating the acquirer paid less than what the assets are worth .

Non-controlling interest (NCI) is included in the calculation of goodwill by being added to the fair value of the consideration transferred. It represents the portion of net assets not owned by the parent company, and it must be measured at fair value or at the proportionate share of the identifiable net assets .

The equity method is used to adjust the fair value of investments in associate companies, where the investment is initially recorded at cost and subsequently adjusted for the investor’s share of the associate’s profit or loss. This impacts equity by increasing (with profit) or decreasing (with loss) the investment value on the balance sheet .

Goodwill is calculated on the date of acquisition as the amount by which the aggregate of the consideration transferred and non-controlling interest (NCI) exceeds the net of identified assets acquired and liabilities assumed. Conversely, a gain on a bargain purchase occurs if the net identifiable assets acquired and liabilities assumed exceed the aggregate of consideration transferred and NCI .

The revaluation surplus on land affects the NCI calculation by adjusting the net assets’ value attributed to non-controlling interests. It increases the fair value of net assets at the acquisition date, thus increasing the NCI if calculated based on the fair value method, which results in an increase in the equity allocation to minority shareholders .

Deferred tax liabilities arising from re-measured asset values during an acquisition reflect the future tax obligations on the differences between the book values and tax bases of re-valued assets. This ensures accurate future tax payments reflect the re-evaluated asset values, influencing cash flow forecasting and financial integrity .

Goodwill impairment might occur when the carrying amount of goodwill exceeds its recoverable amount, indicating that the premium paid for future benefits is not justifiable by the current performance and prospects of the acquired assets or business unit, leading to financial losses being recognized .

A gain on bargain purchase impacts the acquiring company's financial statements as an immediate recognition of income, reflecting a reduction in the acquisition cost compared to the fair value of acquired net assets. This is recorded under 'other income' in the profit or loss account, potentially improving profitability metrics and affecting perceptions of the company's deal-making effectiveness .

Reversal of unrealised profit on intra-group sales removes profit elements not realized externally. This adjustment corrects overstatements in profit and inventory values to reflect true group earnings post-consolidation, ensuring no profit is recognized until a sale outside the group occurs .

Additional depreciation due to the re-measurement of a coffee roaster machine reduces the carrying amount of the asset over time, impacting profit through lower earnings before interest and tax (EBIT) and reducing deferred tax liabilities by generating tax deductions. It reflects accurate asset usage and financial reporting .

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