ACG-2100-MW PRINCIPLES OF ACCOUNTING AND FINANCE

ASSIGNMENT 1
WEEK 2

INSTRUCTIONS TO STUDENTS
This Assignment carries 30% of your final grade. Please read carefully and answer ALL
questions which carry equal marks.

Expected Level of Student work

Marking Criteria
General Presentation / Structure and Cohesion 20%
Citation and References Style 20%
Content Quality/Critical Analysis / Rational 50%
Academic Writing - Grammar 'Spelling 10%
Total 100%
EXERCISE 1
Polly acquired 75% of the shares in Sunny on 1 January 2007 when Sunny had retained
earnings of $15,000. The market price of Sunny’s shares at the date of acquisition was $1.60.
Polly values non-controlling interest at fair value at the date of acquisition. Goodwill is not
impaired.
The statements of financial position of Polly and Sunny at 31 December 20X7 were as
follows:
Polly Sunny
$ $
Property, plant and equipment 60,000 50,000
Shares in S 68,000 –
128,000 50,000
Current assets 52,000 35,000
180,000 85,000
Share capital – $1 shares 100,000 50,000
Retained earnings 70,000 25,000
170,000 75,000
Current liabilities 10,000 10,000
180,000 85,000

Required:
Prepare the consolidated statement of financial position of the P Group.
Note: Show all workings
Total Marks 30
EXERCISE 2
Pirate Co acquired 75% of the ordinary shares of Silly Co on 1 September 20X5. At that date
the fair value of Silly Co's non-current assets was $23,000 greater than their net book value,
and the balance of retained earnings was $21,000. The statements of financial position of both
companies at 31 August 20X6 are given below. Silly Co has not incorporated any revaluation
in its books of account.
PIRATE CO
STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6
$ $
Assets
Non-current assets
Tangible assets 63,000
Investment in S Co at cost 51,000
114,000
Current assets 82,000
Total assets 196,000
Equity and liabilities
Equity
Ordinary shares of $1 each 80,000
Retained earnings 96,000
176,000
Current liabilities 20,000
Total equity and liabilities 196,000

SILLY CO
STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6
$ $
Assets
Tangible non-current assets 28,000
Current assets 43,000
Total assets 71,000
Equity and liabilities
Equity
Ordinary shares of $1 each 20,000
Retained earnings 41,000
61,000
Current liabilities 10,000
Total equity and liabilities 71,000
If Silly Co had revalued its non-current assets at 1 September 20X5, an addition of $3,000
would have been made to the depreciation charged to profit or loss for 20X5/X6. It is the
group's policy to value the non-controlling interest at acquisition at its proportionate share of
the fair value of the subsidiary's net assets.
Required
Prepare Pirate Co's consolidated statement of financial position as at 31 August 20X6.
Note: Show all workings
Total Marks 30
EXERCISE 3
Margory Inc, a public limited company, is currently planning to acquire and sell interests in
other entities and has asked for advice on the impact of IFRS 3 (Revised) Business
combinations. The company is particularly concerned about the impact on earnings, net assets
and goodwill at the acquisition date and any ongoing earnings impact that the revised
standards may have.
The company is considering purchasing additional shares in an associate, Jockey, a public
limited company. The holding will increase from 30% stake to 70% stake by offering the
shareholders of Jockey cash and shares in Margory Inc. Margory Inc anticipates that it will
pay $5 million in transaction costs to lawyers and bankers. Jockey had previously been the
subject of a management buyout. In order that the current management shareholders may
remain in the business, Margory Inc is going to offer them share options in Jockey subject to
them remaining in employment for two years after the acquisition. Additionally, Margory Inc
will offer the same shareholders, shares in the holding company which are contingent upon a
certain level of profitability being achieved by Jockey. Each shareholder will receive shares
of the holding company up to a value of $50,000, if Jockey achieves a predetermined rate of
return on capital employed for the next two years.
Jockey has several marketing-related intangible assets that are used primarily in marketing or
promotion of its products. These include trade names, internet domain names and non-
competition agreements. These are not currently recognised in Jockey's financial statements.
Margory Inc does not wish to measure the non-controlling interest in subsidiaries on the basis
of the proportionate interest in the identifiable net assets, but wishes to use the 'full goodwill'
method on the transaction. Margory Inc is unsure as to whether this method is mandatory, or
what the effects are of recognising 'full goodwill'. Additionally, the company is unsure as to
whether the nature of the consideration would affect the calculation of goodwill.
To finance the acquisition of Jockey, Margory Inc intends to dispose of a partial interest in
two subsidiaries. Margory Inc will retain control of the first subsidiary but will sell the
controlling interest in the second subsidiary which will become an associate. Because of its
plans to change the overall structure of the business, Margory Inc wishes to recognise a re-
organisation provision at the date of the business combination.

Required
Discuss the principles and the nature of the accounting treatment of the above plans
under International Financial Reporting Standards setting out any impact that IFRS 3
(Revised) Business combinations might have on the earnings and net assets of the group.

Total Marks 40
END OF QUESTION PAPER