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    Sterling Co

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    umer syed
    - Sterling Co acquired 75% of Berthold Co in two transactions in 20X7 and 20X8 and will equity account for its share of Berthold Co's profit in its consolidated financial statements. - Sterling Co acquired a 30% interest in Malting Co in 20X8 and will apply the equity method to account for this investment in its individual and consolidated financial statements. - Sterling Co acquired Batch Co in 20X7 and decided to sell it in 20X9. It will classify Batch Co as a discontinued operation and measure the disposal group at fair value less costs to sell in its consolidated financial statements.

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    Sterling Co

    Uploaded by

    umer syed
    383 views2 pages
    - Sterling Co acquired 75% of Berthold Co in two transactions in 20X7 and 20X8 and will equity account for its share of Berthold Co's profit in its consolidated financial statements. - Sterling Co acquired a 30% interest in Malting Co in 20X8 and will apply the equity method to account for this investment in its individual and consolidated financial statements. - Sterling Co acquired Batch Co in 20X7 and decided to sell it in 20X9. It will classify Batch Co as a discontinued operation and measure the disposal group at fair value less costs to sell in its consolidated financial statements.

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    Sterling Co Question

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    - Sterling Co acquired 75% of Berthold Co in two transactions in 20X7 and 20X8 and will equity account for its share of Berthold Co's profit in its consolidated financial statements. - Sterling Co acquired a 30% interest in Malting Co in 20X8 and will apply the equity method to account for this investment in its individual and consolidated financial statements. - Sterling Co acquired Batch Co in 20X7 and decided to sell it in 20X9. It will classify Batch Co as a discontinued operation and measure the disposal group at fair value less costs to sell in its consolidated financial statements.

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    © All Rights Reserved
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    383 views2 pages

    Sterling Co

    Uploaded by

    umer syed
    - Sterling Co acquired 75% of Berthold Co in two transactions in 20X7 and 20X8 and will equity account for its share of Berthold Co's profit in its consolidated financial statements. - Sterling Co acquired a 30% interest in Malting Co in 20X8 and will apply the equity method to account for this investment in its individual and consolidated financial statements. - Sterling Co acquired Batch Co in 20X7 and decided to sell it in 20X9. It will classify Batch Co as a discontinued operation and measure the disposal group at fair value less costs to sell in its consolidated financial statements.

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    of 2

    Sterling Co

    Sterling Co is currently preparing its individual and consolidated financial statements for the year ended 31 March 20X9
    in accordance with International Financial Reporting Standards.

    The following exhibits, available on the left-hand side of the screen, provide information relevant to the question:

    1. Acquisition of Berthold Co - describes the purchase of 40% of Berthold Co on 1 January 20X7 and the further
    acquisition of 35% on 1 December 20X8.
    2. Investment in Malting Co - describes the purchase of 30% of Malting Co on 1 July 20X8.
    3. Batch Co: discontinued operation - describes the acquisition of Batch Co which Sterling Co decides to sell on 1
    January 20X9.

    This information should be used to answer the question requirements within your chosen response option(s).

    Acquisition of Berthold Co:


    Sterling Co paid $25 million for 40% of Berthold Co’s 10 million $1 ordinary shares on 1 January 20X7 when Berthold Co’s
    retained earnings were $18 million. Berthold Co has no other reserves. Sterling Co exercised significant influence over
    Berthold Co’s financial and operating policy decisions. A further 35% stake in Berthold Co was acquired on 1
    December 20X8 for $41 million, when the fair value of Berthold Co’s identifiable assets and liabilities was $55·3 million,
    and Berthold Co’s retained earnings were $42·3 million. The difference between the fair value of the identifiable
    assets and liabilities of Berthold Co and their carrying amounts related to non-depreciable land. The market price of
    Berthold Co’s shares just prior to 1 December 20X8 was $9·20 per share. Sterling Co measures non-controlling interest at
    fair value at the date of acquisition. Goodwill at 31 March 20X9 is not impaired. Berthold Co reported a profit for the
    year ended 31 March 20X9 of $11.1 million.

    Investment in Malting Co:


    On 1 July 20X8, Sterling Co paid cash of $2·5 million and issued loan notes with a nominal value of $1·1 million and a fair
    value of $1·3 million to acquire 30% of the equity interest of Malting Co. The remaining 70% of the equity in
    Malting Co is owned equally between two unrelated companies. All key operating decisions require unanimous
    consent of all three investing parties. Each of the three investing parties has the right to its share of the net assets of
    Malting Co via a contractual agreement. Malting Co reported a loss of $0·8m for the year ending 31 March 20X9 and a
    dividend was neither paid nor proposed. Because of the poor performance in the year, all three investing parties
    provided separate guarantees to Malting Co’s bank.

    Batch Co: Discontinued operation


    On 1 January 20X9, Sterling Co announced a plan to dispose of Batch Co, which operates in a significantly different
    business sector to the rest of the group. Sterling Co first acquired 70% of the equity shares in Batch Co on 1 January
    20X7 for consideration of $3·1 million when the fair value of the identifiable net assets acquired was $3·6 million. The
    ordinary share capital and retained earnings of Batch Co were $0·5 million and $2·1 million respectively. The
    excess of the fair value of the identifiable net assets was due to a building with an estimated useful life of 10 years at the
    acquisition date. The fair value of the non-controlling interest (NCI) in Batch Co was $0·9 million on 1 January 20X7.
    Sterling Co uses fair values to measure NCI. On 1 January 20X9, Batch Co reported retained earnings of $2·9
    million, with no change in ordinary share capital, or impairment of goodwill, since acquisition. Sterling Co decided
    to treat Batch Co as a disposal group held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
    Discontinued Operations. Assets and liabilities of Batch Co require no re measurement to meet applicable IFRS
    standards prior to restating as a disposal group, and the total fair value less costs to sell of the disposal group at 1
    January 20X9 was estimated to be $4·4 million.
    (a) Using exhibit 1:

    (i) explain how Berthold Co will be accounted for, including calculations, in Sterling Co’s consolidated Statement of
    Profit or Loss for the year ended 31 March 20X9; and (8 marks)

    (ii) Explain and show how the goodwill in Berthold Co would be calculated at 1 December 20X8. (6 marks)

    (b) Using exhibit 2, advise the directors of Sterling Co, with illustrative calculations, how the 30% investment in
    Malting Co should be accounted for in Sterling Co’s individual and consolidated financial statements. (7 marks)

    (c) Using exhibit 3, explain to the directors of Sterling Co how to account for Batch Co as a discontinued operation at
    1st January 20X9 in Sterling Co's consolidated financial statements. Your answer should include:

    • A calculation of the goodwill at 1 January 20X7; and

    • A calculation of how the investment in Batch Co should be measured prior to disposal. (9 marks)

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