(a) On 1 October 1999 Hepburn plc acquired 80% of the ordinary share capital of Salter Ltd by way of a share exchange. Hepburn plc issued five of its own shares for every two shares it acquired in Salter Ltd. The market value of Hepburn plc’s shares on 1 October 1999 was £3 each. The share issue has not yet been recorded in Hepburn plc’s books. The summarised financial statements of both companies are:
Profit and loss accounts: Year to 31 March 2000
|
Hepburn plc |
Salter Ltd |
|||
|
£000 |
£000 |
£000 |
£000 |
|
|
Turnover |
1200 |
1000 |
||
|
Cost of sales |
(650) |
660) |
||
|
Gross profit |
550 |
340 |
||
|
Operating expenses |
(120) |
(88) |
||
|
Debenture interest |
nil |
(12) |
||
|
Operating profit |
430 |
240 |
||
|
Taxation |
(100) |
(40) |
||
|
Profit after tax |
330 |
200 |
||
|
Dividends– interim |
(40) |
|||
|
– final |
(40) |
(80) |
nil |
|
|
Retained profit for the year |
250 |
200 |
||
|
Balance sheets: as at 31 March 2000 |
||||
|
Fixed Assets |
||||
|
Land and buildings |
400 |
150 |
||
|
Plant and Machinery |
220 |
510 |
||
|
Investments |
20 |
10 |
||
|
640 |
670 |
|||
|
Current Assets |
||||
|
Stock |
240 |
280 |
||
|
Debtors |
170 |
210 |
||
|
Bank |
20 |
40 |
||
|
c/f |
430 |
640 |
530 |
670 |
|
Creditors: amounts falling due within one year |
||||
|
Trade creditors |
170 |
155 |
||
|
Taxation |
50 |
45 |
||
|
Dividends |
40 |
nil |
||
|
(260) |
(200) |
|||
|
Net Current Assets |
170 |
330 |
||
|
810 |
1000 |
|||
|
Creditors: amounts falling due after more |
||||
|
than one year |
||||
|
8% Debentures |
nil |
(150) |
||
|
Net Assets |
810 |
850 |
||
|
Capital and Reserves |
||||
|
Ordinary shares of £1 each |
400 |
150 |
||
|
Profit and loss account |
410 |
700 |
||
|
810 |
850 |
|||
The following information is relevant:
(i) The fair values of Salter Ltd’s assets were equal to their book values with the exception of its land, which had fair value of £125 000 in excess of its book value at the date of acquisition.
(ii) In the post acquisition period Hepburn plc sold goods to Salter Ltd at a price of £100000, this was calculated to give a mark up on cost of 25% to Hepburn plc. Salter Ltd had half of these goods in stock at the year end.
(iii) Consolidated goodwill is to be written off as an operating expense over a five year life. Time apportionment should be used in the year of acquisition.
(iv) The current accounts of the two companies disagreed due to a cash remittance of £20 000 to Hepburn plc on 26 March 2000 not being received until after the year end. Before adjusting for this, Salter Ltd’s debtor balance in Hepburn plc’s books was £56000.
Required
Prepare a consolidated profit and loss account and balance sheet for Hepburn plc for the year to 31 March 2000.
(b) At the same date as Hepburn plc made the share exchange for Salter Ltd’s shares, it also acquired 6000 ‘A’ shares in Woodbridge Ltd for a cash payment of £20 000. The share capital of Woodbridge Ltd is made up of:
|
Ordinary voting A shares |
10000 |
|
Ordinary non voting B shares |
14000 |
All of Woodbridge Ltd’s equity shares are entitled to the same dividend rights; however during the year to 31 March 2000 Woodbridge Ltd made substantial losses and did not pay any dividends.
Hepburn plc has treated its investment in Woodbridge Ltd as an ordinary fixed asset investment on the basis that:
– it is only entitled to 25% of any dividends that Woodbridge Ltd may pay;
– it does not any have directors on the Board of Woodbridge Ltd; and
– it does not exert any influence over the operating policies or management of Woodbridge Ltd.
Required
Comment on the accounting treatment of Woodbridge Ltd by Hepburn plc’s directors and state how you believe the investment should be accounted for.