On 1 October 2020, Vanguard Ltd acquired 75% of Jupiter Ltd’s
equity shares by means of share exchange of two new shares in
Vanguard Ltd for every five acquired shares in Jupiter. In
addition, Vanguard issued to the shareholders of Jupiter a €100 10%
loan note for every 1,000 shares it acquired in Jupiter. Vanguard
has not recorded any of the purchase consideration, although it
does have other 10% loan notes already in issue. The market
value of Vanguard’s shares at 1 October 2020 was €2 each. The
summarised statements of financial position of the two companies as
at 31 March 2021 are:
- Question 1 On 1 October 2020 Vanguard Ltd Acquired 75 Of Jupiter Ltd S Equity Shares By Means Of Share Exchange Of Two 1 (13.82 KiB) Viewed 47 times
1) At the date of acquisition (1 October 2020), Jupiter has a
negative balance on revenue reserves of €6 million. Also at the
date of acquisition, Vanguard conducted a fair value exercise on
Jupiter’s net assets which were equal to their carrying amount
(including Jupiter’s financial assets equity investment) with the
exception of an item of plant which had a fair value of €3 million
below its carrying amount. The plant had a remaining economic life
of three years at 1 October 2020 and depreciation is charged on a
straight-line basis
2) Each month since acquisition, Vanguard's sales to Jupiter
were consistently €4.6 million. Vanguards had marked these up by
15% on cost. Jupiter had one month’s supply (€4.6 million) of these
goods in inventory at 31 March 2021. Vanguard’s normal mark-up (to
third party customers) is 40%.
3) Jupiter’s trade payable balance with Vanguard at 31 March
2021 was €2.8 million, which did not agree with Vanguard’s
equivalent trade receivable due to a payment of €900,000 made by
Jupiter on 28 March 2021. It was not received by Vanguard until 3
April 2021.
4) There was no impairment loss within the group during the year
ended 31 March 2021
Required:
(a) Produce the consolidated statement of financial position for
Vanguard Group as at 31 March 2021 consistent with international
accounting standards.
(b) Vanguard has a strategy of buying struggling businesses,
reversing their decline and then selling them on at a profit within
a short period of time. Vanguard is hoping to do this with Jupiter.
As an adviser to a prospective purchase of Jupiter, explain any
concerns you would raise about basing an investment decision on all
the information available.
(c) Appraise the need for consolidated financial statements, and
discuss why equity accounting was not the appropriate treatment for
Jupiter in the consolidated financial statements.
Vanguard €m 47.4 7.5 Jupiter €m 25.5 3.2 Property, Plant& Equipment Financial asset: equity investment Stock Trade receivables Bank 20.4 14.8 2.1 37.3 8.4 9.0 nil 17.4 nit 17.6 Current liabilities Bank overdraft Trade payables Non-current liabilities 10% loan notes 9.1 19.7 13.0 74.6 (4.7) 24 8.0 66.6 nil 24 40 20 Share Capital (1) Reserves (P&L) 26.6 66.6 4 24