Mull plc acquired shares in two companies as follows:
Skye Ltd
Ordinary shares – 8 million acquired on 1 June 1996 for £4.50 each.
Preference shares – £500000 8% redeemable preference shares acquired, at par, on 1 June 1996. At the date of acquisition the retained profits of Skye Ltd were £10 million.
Arran Ltd
Ordinary shares – 1 million acquired on 1 June 1998 for £6 each.
At the date of acquisition the retained profits of Arran Ltd were £5 million and the revaluation reserve was £11 million.
The draft balance sheets for the above companies at 31 May 1999 show:
|
Mull plc |
Skye Ltd |
Arran Ltd |
|
|
£000 |
£000 |
£000 |
|
|
Fixed assets |
|||
|
Freehold property |
40000 |
20000 |
10000 |
|
Plant and equipment |
– |
– |
5700 |
|
Fixtures and fittings |
10500 |
5900 |
5200 |
|
Investment in Skye Ltd |
36500 |
– |
– |
|
Investment in Arran Ltd |
6000 |
– |
– |
|
93000 |
25900 |
20900 |
|
|
Current assets |
|||
|
Stock |
19000 |
13000 |
11000 |
|
Debtors |
22500 |
7000 |
10000 |
|
Cash in hand and at bank |
1000 |
570 |
780 |
|
42500 |
20570 |
21780 |
|
|
Creditors: amounts falling due within one year |
|||
|
Bank overdraft |
5600 |
– |
8400 |
|
Creditors |
18400 |
9600 |
7500 |
|
Corporation tax payable |
4000 |
5400 |
2300 |
|
Proposed dividends |
2000 |
1500 |
– |
|
30000 |
16500 |
18200 |
|
|
Net current assets |
12500 |
4070 |
3580 |
|
Net assets |
105500 |
29970 |
24480 |
|
Capital and reserves |
|||
|
Called up share capital |
|||
|
Ordinary shares of £1 each |
50000 |
10000 |
4000 |
|
8% Redeemable preference shares |
– |
2000 |
– |
|
Revaluation reserve |
10600 |
– |
11000 |
|
Profit and loss account |
44900 |
17970 |
9480 |
|
105500 |
29970 |
24480 |
Additional information
- Skye Ltd has continued to account for its assets at their book value though their fair values on 1 June 1996 were:
|
Freehold land |
– £2.5 million above book value |
|
Fixtures and fittings |
– £1.5 million below book value with an estimated remaining useful economic life of 5 years |
The fair values of all other assets and liabilities for both Skye Ltd and Arran Ltd approximated to their book values.
(2) Skye Ltd’s corporation tax payable at 31 May 1999 includes £1.4 million related to its
year ended 31 May 1996. The company had originally provided £500 000 as the estimated
liability as at 31 May 1996. Mull plc incorporated this estimate when establishing the fair values of Skye Ltd’s net assets on acquisition. However, following a protracted Inland Revenue investigation, the final liability was agreed on 31 May 1999 at £1.4 million, £900 000 higher than the estimate.
(3) Skye Ltd paid its preference dividend during the year. All proposed dividends relate to ordinary shares. Mull plc has not yet accounted for any dividends receivable.
(4) Any goodwill arising is amortised over 10 years on the straight line basis.
Requirements
(a) Prepare the consolidated balance sheet of Mull plc as at 31 May 1999.
Note: You are not required to produce any disclosure notes.
(b) Briefly explain your accounting treatment of items (1) and (2) above, referring to the provisions of FRS 7, Fair values in acquisition accounting, where appropriate.