INTERNATIONAL ACCOUNTING AND REPORTING
TUTORIAL 5
Memo, a public listed company, owns 75% of the ordinary share capital of Random, a limited company which is situated in a foreign country. Memo acquired Random on 1 May 2008 for CR120 million (Crowns) when the retained profits of Random were CR80 million. Random has not revalued its assets or issued any share capital since its acquisition by Memo. The following financial statements relate to Memo and Random:
Balance sheet at 30 April 2009
Memo Random
$’000 CR’000
Tangible non-current assets 297,000 146,000
Investment in Random 48,000 –
Loan to Random 5,000 –
Current assets 355,000 102,000
705,000 248,000
Capital and Reserves
Ordinary shares of $1/CR1 60,000 32,000
Share premium 50,000 20,000
Retained earnings 360,000 95,000
470,000 147,000
Non-current liabilities 30,000 41,000
Current liabilities 205,000 60,000
705,000 248,000
Income statement for the year ended 30 April 2009
Memo Random
$’000 CR’000
Revenue 200,000 142,000
Cost of sales 120,000 96,000
Gross profit 80,000 46,000
Distribution and administrative expenses 30,000 20,000
Operating profit 50,000 26,000
Interest receivable 4,000 –
Interest payable – 2,000
Profit before taxation 54,000 24,000
Taxation 20,000 9,000
Profit after tax 34,000 15,000
The following information is relevant to the preparation of the consolidated financial statements of Memo:
i. The directors wish to treat goodwill as a foreign currency asset. Goodwill has been subject to an impairment review as at 30 April 2009 and is deemed to be impaired by $2 million.
ii. On 1 February 2009, Memo sold raw materials $6 million to Random, making a profit of 20% on cost. At the year end, half of these raw materials were still in the inventory of Random, and the inter-company transactions have not been eliminated from the financial statements. The goods were recorded by Random at the exchange rate ruling on 1 February 2009. A payment of $6 million was made to Memo when the exchange rate was CR2.2 to $1. Any exchange gain or loss arising on the transaction is still held in the current liabilities of Random.
iii. Memo had made an interest free loan to Random of $5 million on 1 May 2008. The loan was repaid on 30 May 2009. Random had included the loan in non-current liabilities and had recorded it at the exchange rate 1 May 2008.
iv. The fair value of the net assets of Random at the date of acquisition is to be assumed to be the same as the carrying value
v. The following exchange rates are relevant to the financial statements:
30 April/1 May, 2008 2.5
1 November, 2008 2.6
1 February, 2009 2.0
30 April, 2009 2.1
Average rate for the year to 30 April, 2009 2.0
REQUIRED:
Prepare the consolidated income statement for the year ended 30 April 2009 and a consolidated balance sheet at that date using the closing rate method.
