ABC Ltd made a takeover bid for all the issued voting shares of XYZ Ltd offering three ABC Ltd shares for every two XYZ Ltd shares.

CASE STUDY OF ABC LTD AND XYZ LTD

ABC Ltd made a takeover bid for all the issued voting shares of XYZ Ltd offering three ABC Ltd shares for every two XYZ Ltd shares. The offer from ABC Ltd was accepted by 90% of the shareholders of XYZ Ltd. The date control was obtained by ABC Ltd was deemed to be 1 January 20X7. The following information is available.

(a) Shareholders’ equity of XYZ Ltd at balance date on 31 December 20X6:

$000

Share capital (200,000) shares                                                         200

General reserve                                                                                    300

Retained earnings                                                                               150

650

(b) Market value of each entity’s shares at 1 January 20X7

ABC Ltd                                                                                                 $3.20

XYZ Ltd                                                                                                 $4.00

(c) In XYZ Ltd’s accounting records, land was stated at $200,000 below its cost to the group. This is to be accounted for as a consolidation adjustment. Statements of comprehensive income and statements of financial position of ABC Ltd and XYZ Ltd for the year ended 31 December 20X8 are as follows:

Statements of Comprehensive Income

                                                                            ABC Ltd                  XYZ Ltd

$000                   $000

Sales                                                                         5000                   2000

Cost of sales                                                            2570                   1025

Gross profit                                                              2430                    975

Dividend revenue                                                      252                        –

2682                    975

Expenses                                                                  2057                    300

Operating profit before tax                                       625                   675

Income tax expense                                                 280                     260

Operating profit after tax                                          345                     415

                                                                            ABC Ltd           XYZ Ltd

$000                 $000

Retained earnings at 1.1.X8                                    294                   200

Profit for the year                                                       345                   415

Interim dividend paid                                              (100)                 (150)

Final dividend declared                                         (160)                 (200)

Retained earnings at 31.12.X8                               379                   265

Statements of Financial Position

                                                                            ABC Ltd           XYZ Ltd

$000                 $000

Assets

Current assets

Other current assets                                       385                   395

Total current assets                                                  385                   395

Non-current assets

Property, plant and equipment                      550                   750

Investments                                                      864                        –

Total non-current assets                                        1414                   750

Total assets                                                              1799                 1145

Liabilities

Current liabilities

Trade and other payables                                 60                   180

Provision for final dividend                                      160                   200

Total current liabilities                                              220                   380

Total liabilities                                                            220                   380

Net assets                                                                1579                   765

Shareholder’s equity

Share capital                                                            1200                   200

General reserve                                                             –                   300

Retained earnings                                                    379                   265

Total equity                                                              1579                   765

Additional information

(a) ABC Ltd records dividend revenue in the accounting period when the cash is received.

(b) The final dividend declared by XYZ Ltd for the 20X7 year was $130,000 and it was paid on 1 March 20X8.

(c)  Impairment losses for goodwill arising on acquisition had not been recognised in any of the previous years’ consolidated financial statements. The directors of ABC Ltd are of the opinion an impairment loss of $10 000 will be recognised in relation to its investment in XYZ Ltd in the consolidated financial statements for the year ended 31 December 20X8.

(d) Inter-company sales for 20X8

        Cost         Sales Price

From ABC and XYZ                            $300 000            $500 000

From XYZ to ABC                               $200 000            $350 000

(e) In relation to the inventory sales in (d) above, inventory held by ABC Ltd and purchased from XYZ Ltd is as follows:

        Cost         Sales Price

i.       As at 1 Jan 2008                              $50 000            $120 000

ii.       As at 31 Dec 2008                           $75 000            $150 000

(f)   The rate of company income tax is 30%.

(g) Assume the directors of ABC Ltd have adopted the full goodwill method.

Required:

(a) For the accounting records of ABC Ltd show the general journal entries to record:

i.       the acquisition of the shares in XYZ Ltd on 1 January 20X7.

ii.       the dividend received from XYZ in 20X8 but proposed by XYZ Ltd in 20X7; and

iii.       the interim dividend received from XYZ Ltd in 20X8.

(3 marks)

(b) Prepare the consolidated financial statements at 31 December 20X8.

Show all consolidation journal entries and a worksheet and all workings for the calculation of NCI.

The consolidated financial statements should be presented in the same manner your textbook presents them.

(20 marks)

(c) Explain the partial and the full goodwill methods. In your discussion list the advantages and disadvantages of using each method. (2 marks)

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