(a) On 1st January 2017 Babake Co. Ltd acquired 60,000 of the 100,000 equity shares in Mwanae Co. Ltd, it’s only subsidiary. The draft statements of profit or loss and other comprehensive income of both companies as at 31st December 2017 are shown below:
|Babake Co. Ltd TZS.‘000’||Mwanae Co. Ltd TZS.‘000’|
|Cost of sales||(28,000)||(18,000)|
|Other income – dividend received from Mwanae||2,000||–|
|Profit before tax||10,500||4,700|
|Income tax expense||(1,400)||(900)|
|Profit for the year Other comprehensive income:||9,100||3,800|
|Gain on property revaluation (Note 1)||–||2,000|
|Investment in equity instrument||200||–|
|Total comprehensive income for the year||9,300||5,800|
The following additional information is relevant:
1. At the date of acquisition, the fair values of Mwanae’s assets were equal to their carrying amounts with the exception of a building which had a fair value TZS.1 million in excess of its carrying amount. At the date of acquisition the building had a remaining useful life of 20 years. Building depreciation is charged to administrative expenses. The building was revalued again at 31st December
2017 and its fair value had increased by an additional TZS.1,000,000.
2. Sales from Babake to Mwanae were TZS.6 million during the post-acquisition period. All of these goods are still held in inventory by Mwanae. Babake marks up all sales by 20%.
3. Despite the property revaluation, Babake has concluded that goodwill in
Mwanae has been impaired by TZS.500,000.
4. It is Babake’s policy to value the non-controlling interest at full (fair) value.
5. Income and expenses can be assumed to have arisen evenly throughout the year.
Prepare the consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31st December 2017.
(b) One shareholder of Babake Co. Ltd in part (a) above was concerned that following the acquisition, the profit from operations of the parent and subsidiary were less than the aggregate of the individual profit from operation figures. She was concerned that the acquisition, which the directors had supported as means of improving earnings per share, appeared to have reduced the combined profits. She wanted to know where the profits had gone.
Give explanation to the concerned shareholder.