(a) WORKINGS – CONSOLIDATION SCHEDULE Memo GH¢ Goodwill Silver Ltd. GH¢ Goodwill Wood Ltd GH¢ Non Controlling Interest GH¢ Capital Surplus GH¢ Cons. I/S GH¢ Silver Ltd:
Ordinary share capital (60:10) Preference shares (40:60) Capital surplus:
At acquisition (60:40) Post acquisition (60:40) (1,070,000 – 900,000) Fair value – building (60:40) Income surplus:
At acquisition Contingent liability Post acquisition
(1,890,500 – 800,000 + 120,000) Unrealized profit on equip (60:40) Gold Ltd:
Capital surplus Income surplus Dep’n adj. re equip. 20%*6/12*50,000
Cost of investment in Silver Ltd: Ordinary shares
Preference shares Wood Ltd:
Ordinary shares capital (80:20) Capital surplus at acqn (80:20) Capital surplus post acqn (80:20) Income surplus
At acquisition (80:20) Post acquisition (70:30) (1,331,260 – 200,000) Cost of investment in Wood Ltd Ordinary shares
Totals
Impairment loss
Negative goodwill transferred to income statement Consolidated balances 2,000,000 350,000 900,000 170,000 100,000 800,000 (120,000) 1,210,500 (50,000) 1,583,000 3,450,500 5,000 (2,400,000) (140,000) 1,600,000 200,000 100,000 200,000 1,131,260 (1,200,000) 1,200,000 140,000 540,000 60,000 480,000 (72,000) (2,400,000) (140,000) (192,000) 50,000 (142,000) 1,280,000 160,000 160,000 (1,200,000) 400,000 (400,000) - 800,000 210,000 360,000 68,000 40,000 320,000 (48,000) 484,200 (20,000) 320,000 40,000 20,000 40,000 226,252 2,860,452 2,860,452 102,000 1,583,000 80,000 1,765,000 1,765,000 726,300 (30,000) 3,450,000 5,000 905,008 5,058,058 (50,000) 40,000 5,408,058
WORKINGS – CONSOLIDATION SCHEDULE – BALANCE SHEET
Balance sheets as at 31st December, 2009 Gold Ltd GH¢ Silver Ltd GH¢ Wood Ltd GH¢ Adjust. GH¢ Cons. B.S GH¢ Assets Non-current Assets
Property, plant & equipment Long term investments Goodwill
Current Assets Stocks
Accounts receivable Cash & bank balances Total Assets
Liabilities and Owners’ Equity Current Liabilities Accounts payables Sundry payables Accruals Long-term Loans Owners’ Equity Stated capital Capital surplus Income surplus
Non controlling interest
Total Liabilities & Owners’ Equity
4,383,500 3,740,000 8,123,500 1,284,400 1,000,100 249,000 2,533,500 10,657,000 1,033,000 672,000 332,000 2,037,000 536,500 3,050,000 1,583,000 3,450,500 _________ 8,083,500 10,657,000 4,897,000 - 4,897,000 1,216,000 582,100 155,300 1,953,400 6,850,400 553,450 427,500 134,950 1,115,900 424,000 2,350,000 1,070,000 1,890,500 ________ 5,310,500 6,850,400 3,474,600 - 3,474,600 555,860 428,100 128,060 1,112,020 4,586,620 510,000 343,940 140,420 994,360 361,000 1,600,000 300,000 1,331,260 ________ 3,231,260 4,586,620 56,250 (3,740,000) (60,000) 60,000 (1,188,000) 12,811,350 - 12,811,350 142,000 3,056,260 1,950,300 592,360 5,598,920 18,552,270 2,096,450 1,443,440 607,370 4,147,260 1,321,500 3,050,000 1,765,000 5,408,058 2,860,452 13,083,510 18,552,270
(i) Property plant & equipment comprised:
Gold Ltd Silver Ltd Wood Ltd GH¢ GH¢ GH¢
Buildings 1,181,000 2,770,000 1,568,000
Plant & equipment 1,588,100 1,641,000 1,440,000 Furniture & fittings 977,400 486,000 462,600 4,383,500 4,897,000 3,474,600
(ii) The stated capital of the companies is made up of:
Gold Ltd Silver Ltd Wood Ltd GH¢ GH¢ GH¢
Ordinary shares 2,800,000 2,000,000 1,600,000
Preference shares 250,000 350,000 - 3,050,000 2,350,000 1,600,000
Consolidated balance sheet of Gold Ltd and its subsidiaries as at 31st December, 2009 GH¢ Assets
Non-current Assets
Property, plant & equipment Goodwill
Current Assets Stocks
Accounts receivable Cash & bank balances
Total Assets
Liabilities and Equity Current Liabilities Trade creditors Sundry creditors Accruals Non-current Liabilities Long-term Loans
Equity attributable to equity holders of the parent Stated capital
Capital surplus Income surplus
Non controlling interest
Total Liabilities and Equity
Notes
(i) Property, plant & equipment comprised Buildings
Plant & equipment Furniture & fittings
(ii) Stated Capital Ordinary shares Preference shares (iii) 12,811,350 142,000 12,953,350 3,056,260 1,950,300 592,360 5,598,920 _________ 18,552,270 2,096,450 11,443,440 607,370 4,147,260 1,321,500 3,050,000 1,765,000 5,408,058 10,223,058 2,860,452 18,552,270 6,156,000 4,729,350 1,926,000 12,811,350 2,800,000 250,000 3,050,000
(b) The existence of significant influence by an investor is usually evidence in one or more of the following ways:
a. representation on the board of directors or equivalent governing body of the investee;
b. participation in policy-making process, including participation in decisions about dividends or other distributions;
c. material transactions between the investor and the investee; d. interchange of managerial personnel; or
e. provision of essential technical information.
QUESTION 2
(a) Operating profit:
Historical Cost Factor CPP
Sales (500,000 x 5.2) 2,600,000 115/107.5 2,781,395 Cost of sales: Purchases (200,000 x 3.2) 640,000 115/100 736,000 (360,000 x 3.4) 1,224,000 115/105 1,340,571 1,864,000 2,076,571 Closing stock (60,000 x 3.4) (204,000) 115/105 (223,429) 1,660,000 1,853,142 Operating profit 940,000 928,253 Holding Gain: CPP purchases 2,076,571
Historical cost purchases (1,864,000)
212,571
Realized Holding Gain:
CPP cost of sales 1,853,142
Historical cost of sales (1,660,000)
193,142
Unrealized Holding Gain:
CPP closing stock 223,429
Historical cost of C/I stock (204,000) 19,429
(b) Any three (3) Reasons for HC
- Differences about the method of recognizing inflation in the accounts. - Differences about the choice of appropriate indexes
- Deflate current monetary values.
- Transactions with third parties who are extreme to the business are done on historical cost basis.
- Current cost and current purchasing power methods are not popular because they lack verifiability of records.
- Historical cost method is currently the only method acceptable to tax authorities. Categories of Employee Benefits
- Short-term employee benefits, eg wages, salaries, SSF, paid annual leave, paid sick leave, bonuses, medical care, etc.
- Post employment benefits, eg pension, life insurance, post employment medical care. - Other long-term employee benefits, eg sabbatical leave, long-service awards.
- Terminal benfits
(i) Defined contribution Plans – post employment benefit plans under which an enterprise pays fixed contributions into a separate entity or separate fund and will have no legal or contractual obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. (ii) Defined Benefit Plants – retirement benefit plans under which amounts to be paid as
retirement benefits are determined by reference to an actuarial formula usually based on employees earnings and years of service.
(c) a. Amortised Cost
It is the amount at which the financial liability or (asset) is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between that initial amount and the maturity amount, and minus any write-down for impairment or
uncollectability.
Effective Interest Rate
It is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount.
b. Working
Year Amortised cost at beginning at year end ¢ Income statement charge (20%) ¢ Interest payment ¢ Amortised cost at end of year ¢ 2008 2009 2010 20,000 21,600 23,520 4,000 4,320 4,704 (2,400) (2,400) (2,400) 21,600 23,520 (25,824)
Income statement for the year ended 31/12/08 ¢ 31/12/09 ¢ Finance charge Balance sheet as at 31/12/ Financial liability 4,000 2008 ¢ 21,600 4,320 2009 ¢ 23,520 QUESTION 3
a) Amount Receivable by Boafo
Sales Proceeds GH¢ Freehold property 28,000 Equipment 102,000 Inventories 20,000 150,000 Distribution
Classic Bank (Overdraft) 28,000
Tax Authorities 22,000
Debenture stocks 24,000 74,000
Available for unsecured creditors 76,000
Analysed as to
Classic Bank (O/D) 6,000 Sundry payables
(206,000 – 22,000) 184,000 190,000 Dividend payout
76,000/190,000 = 40% or 40 pesewas in a GH¢ Total amount receivable by Boafo
Debenture 24,000
Unsecured credit (40% of 120,000) 48,000 72,000
b) Statement of Financial Position after Reconstruction
Non Current Assets GH¢
Freehold property 34,000 Equipment 180,000 214,000 Inventory 60,000 Cash 70,000 Total Assets 344,000 Stated capital 200,000 Capital surplus (34,000 – 10,000) 24,000 224,000 Sundry payables (206,000 – 120,000) 86,000 Bank overdraft 34,000 344,000
Workings
Shareholding in the reconstruction entity
Number GH¢
Boafo
Conversion of Debenture stocks 24,000 24,000
Conversion of trade credit 66,000 66,000
New subscription 70,000 70,000 160,000 160,000 Existing Shareholders 1/5 x 200,000 40,000 40,000 200,000 200,000 c) Numerical Comparison Proposal 1 GH¢ Cash received 72,000
Available funds for investment 70,000 Total investible funds 142,000
Annual Investment Income = 15% of 142,000 = GH¢21,300 Proposal 2
% of shareholding in Business = 160,000 shares / 200,000 shares = 80% Annual earnings = 80% of annual profit = 80% of GH¢27,000 = GH¢21,600 Proposal 2 seems more advantageous
d) On liquidation, the bank receives [GH¢28,000 + (40% of GH¢6,000)] = GH¢30,400. Under reconstructed business, the bank would be owed GH¢34,000. The bank is likely to support the scheme.
QUESTION 4
a) Quantitative Factors i. Profitability
Even though Relax Ltd achieved a lower GP% than the industry, is eventually made a higher NP% than the industry. It is likely that the marketing and distribution expenses and other direct cost of sales are uncontrollable for Relax Ltd due to external factors. However, Relax Ltd is able to control its own administrative cost and is what accounted for the higher NP%. The lower ROCE is worrisome but can be improved with increased managerial vigilance.
ii. Liquidity
Relax Ltd performed better in terms of the current ratio in relation to the industry but rather poorly in terms of its quick ratio. It is likely that a lot of stocks are becoming obsolete and their patronage is on the decline in the market. This is supported by the fact that stock-turn over is much slower than the industry. The best option is for Relax Ltd to reengineer its operations with the view to introducing new products and also venturing into new markets.
iii. Efficiency
Relax Ltd collects its sales much slower than the industry but pays its creditors much faster than the industry. It means that Relax Ltd is giving interest-free loan to its creditors but is pre-financing the operations of its debtors. This is not a good policy and calls for a renegotiation with its trading partners inorder to improve the present situation.
iv. Gearing
Relax ltd is unduly geared. With the present 40% debt, credit providers can easily worry the company with threats of liquidation. This may be the reason why they have been able to secure a comfortable cover for interest on their loans such that there is nothing to pay as dividend to shareholders. Relax Ltd must take steps to either pay off some of the debt or convert some of it to equity in order the condition of shareholders.
b) Qualitative Factors
i. Relax Lt must watch out for unethical business conduct and avoid worsening its own problems. ii. Resignations of top management staff is not good enough as it sends the wrong signals. If
managers cannot relate to the Managing Director (MD), the MD must leave in the overall interest of the company.
c) Conclusion
Inspite of the difficulties the company may be going through as well as the genuine concerns of Mr. Abu, calling for a mass dismissal of all management staff may not be the solution to the problem. Management should rather be fed with alternative strategies as will greatly improve the fortunes of the company.
Factors that distort the application of financial ratios: Information Problems
- The fare information is often outdated, so if the information is not timely where would be problem of interpretation.
- Historical cost information may be inappropriate information for the derision for which the analysis is being made.
- Analysis of accounting information only identities symthoms not causes and this is of limited use. Comparison problems
- Effects of price changes make comparisons difficult unless adjustments are made.
- Impact of changes in technology on the price of assets, the likely return and the future market. - Impact of a changing environment on the result reflected in the accounting information. - Potential effects of changes in accounting policies on the reported results.
- Problems associated with establishing a normal …. year to compare other years with. Inter-firm companies problems
- Selection of industry norms and the usefulness of norms based on averages. - Different firms have different financial and business risk, structure and returns.
QUESTION 5
VENTUM LTD
Bronze Ltd
Valuation of shares using Net Assets Basis.
This method is adopted in valuing shares when there is an intention to liquidate or use as a security to support the order basis of valuation.
The share price = Net Assets available to ordinary shareholders Number of ordinary shares issued
Based on the following basis, the Net Assets per share of Bronze Ltd is calculated as follows:
Assets GH¢’000 GH¢’000
Free hold land & building 610,000
Plant & machinery 288,000
Motor vehicles 340,000 Patent - 12000/10% 120,000 Inventory 500,000 Trade receivable 380,000 Bank balance 120,000 1,858,000 Less Liabilities: Debentures 1,220,000 Tax payable 120,000 Trade payable 240,000 Accrued expenses 60,000 1,640,000 Net assets available to ordinary shares 218,000 Net assert per share
¢218,000 = ¢0.22 1,000,000
Discounted cash flow
Using the DCF method in valuing shares looks at the profitability of the company. The price per share is the present value of future cash flow discounted at appropriate cost of capital to arrive at the present value.
Price per share = Present value No of shares issued
Discounted present value
Years Pre-Tax Profit Depreciation Cash Flow
2011 2012 2013 2014 2015 550,000 650,000 880,000 1,200,000 1,400,000 45,000 55,000 60,000 85,000 90,000 595,000 705,000 940,000 1,285,000 1,490,000
DCF PV Price per share 0.909 540,855 0.826 582,330 3,632,020 0.751 705,940 1,000,000 0.683 877,655 = ¢3.63 0.621 925,290 3,632,070
Price Earnings Ratio Basis
The price earnings ratio is used to value unquoted security on the basis of its profitability. The method is MV = P/E Ratio x EPS
Since Bronze Ltd is unquoted, it is expected to pay a lower price for it shares as against similar quoted company (80% x 8) = 6.4 times.
The EPS of bronze Ltd is calculated as following using the laters earnings. Alternatively, a candidate can also use average historical or projected earnings.
PAT GH¢325,000 = ¢0.325 1,000,000
MV = 6.4 x 0.325 = ¢2.08
Dividend Yield Basis
The dividend yield basis is suitable for small holding valuation since the investor cannot influence retention policy.
The price per share = DPS/D Yield
The dividend yield of the unquoted company is expected to be higher than that of quoted company because of higher risk. Therefore for the dividend yield of Bronze Ltd it would be adjusted by addition 20% of 10% as risk premium.
Bronze Ltd (10 + 2) = 12%
The dividend per share of Bronze Ltd is (180,000/1,000,000 = ¢0.18
:. MV = ¢0.18 = ¢1.50 0.12
