FAR610/620: The primary activities of Frozit Bhd are manufacturing, sale, trading and distribution of frozen food: Advanced Financial Accounting And Reporting 1 / Consolidated Financial Statements Assignment, UTM, Malaysia

University Universiti Teknologi MARA (UTM)
Subject FAR610/620: Advanced Financial Accounting And Reporting 1 / Consolidated Financial Statements

PART A

Introduction

The primary activities of Frozit Bhd are manufacturing, sale, trading and distribution of frozen food products in Malaysia. The company has become one of the leading exporters and largest manufacturers of frozen Asian culinary delights worldwide. Despite setbacks during the covid19 pandemic, the company managed to deliver a good performance for the financial year
2021.

Frozit Bhd has equity interests in Supreme Bhd,  Nutri Bhd and Crest Bhd.

Investment in Supreme Bhd

Frozit Bhd gained control over Supreme Bhd by acquiring 90% of Supreme Bhd’s ordinary shares on 1 January 2019, when the retained earnings and other reserves of Supreme Bhd were RM2.5 million and RM2 million respectively. The consideration for the business acquisition had been settled.

At the date of acquisition, the carrying amount of Supreme Bhd’s net assets reflect their fair value except for a property whose fair value was RM1 million above the carrying amount. No adjustment was made in the books of Supreme Bhd to reflect this value.

On 1 April 2021, Frozit Bhd disposed of 20% of its ordinary shares in Supreme Bhd for a cash consideration of RM6 million. This transaction has not yet been recorded.

Investment in Nutri Bhd

On 1 July 2021, Frozit Bhd acquired 65% interest in the ordinary share capital of Nutri Bhd for RM12 million.

Revaluation of Nutri Bhd’s net assets on the date of the acquisition indicated that the fair value was equal to the carrying amount. However, on that date, Frozit Bhd also valued Nutri Bhd’s customer list, which Nutri Bhd has not recognised, as an intangible asset at a fair value of

RM0.2 million. It was to be amortised over five years.

Investment in Crest Bhd

Frozit Bhd acquired 25% of Crest Bhd’s ordinary shares on 1 January 2020. On that date, the retained profit of Crest Bhd stood at RM1 million, and the fair value of Crest Bhd’s net assets was equal to the carrying amount. With this interest, Frozit Bhd was able to exercise significant influence over the decision on the relevant activities of Crest Bhd.

Financial Statements

The following are the companies’ financial statements for the year ended 31 December 2021.

Statements of Financial Position as at 31 December 2021

Statements of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2021

Frozit Bhd
Statement of Changes in Equity (Extracted) for the year ended 31 December 2021

Supreme Bhd
Statement of Changes in Equity (Extracted) for the year ended 31 December 2021

Nutri Bhd
Statements of Changes in Equity (Extracted) for the year ended 31 December 2021

Crest Bhd
Statement of Changes in Equity (Extracted) for the year ended 31 December 2021

Additional information:

1. On 1 October 2021, Nutri Bhd sold equipment to Frozit Bhd at a gain of RM0.2 million. Nutri Bhd’s statement of profit or loss and other comprehensive income recognized the gain as ‘other income’. The remaining useful life of the equipment on the date of disposal was two (2) years.

2. Throughout the current year, Supreme Bhd had purchased goods worth RM7.8 million on credit from Frozit Bhd. As of 31 December 2021, Supreme Bhd still held RM2.6 million of inventory supplied by Frozit Bhd, and Supreme Bhd had also not settled RM0.65 million of the amount due.

3. Frozit Bhd sold goods worth RM3 million to Crest Bhd during the year. As of 31 December 2021, RM1 million worth of these goods remained in Crest Bhd’s inventory.

4. Half of the bills payable of Nutri Bhd were drawn in favour of Frozit Bhd. Frozit Bhd had discounted RM0.14 million of these bills.

5. On 1 January 2020, Frozit Bhd grants 30 share options to its 200 employees. The option only vests if the employees remain employed by Frozit Bhd for three years from the grant date. The options are exercisable after 1 July 2023. The fair value of each option was RM20 at the grant date. In the year ended 31 December 2020, 30 employees left Frozit Bhd. On 31 December 2021, 10 employees had left, and it was expected that another 40 employees would resign over the following two years. Frozit Bhd has not
accounted for the transaction in its books at reporting period end.

6. Included in the intangible asset of Frozit Bhd is an intellectual property which cost RM1 million, with an indefinite useful life. The recoverable amount of the intellectual property at 31 December 2021 was RM0.75 million. Frozit Bhd has not amended its books to reflect the recoverable amount.

7. Goodwill on the acquisition of Supreme Bhd was impaired by RM0.1 million and RM0.06 million for the year ended 31 December 2020 and 31 December 2021.

8. All companies declared a dividend on ordinary shares and preference shares on 30 December 2021. Frozit Bhd had not recognized any receivable from its subsidiaries.

9. All profits or losses were deemed to accrue evenly throughout the year.

10. It is the group policies to:

• Measures the non-controlling interests at its proportionate share of the fair value of the net assets of the subsidiaries at the acquisition date.

• Depreciate its property, plant and equipment using straight-line method, on a yearly basis, charging the full year’s depreciation in the year of purchase and none in the year of disposal.
• All inter-company sales are marked up by 20% on the sales value.

Required:

a. Compute the goodwill or bargain purchase for the acquisition of Supreme Bhd.

b. Compute the goodwill or bargain purchase for the acquisition of Nutri Bhd.

c. Compute the gain or loss on the disposal of shares in Supreme Bhd.

d. Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income for Frozit Bhd Group for the year ended 31 December 2021.

e. Prepare the Consolidated Statement of Changes in Equity for Frozit Bhd Group for the year ended 31 December 2021, showing the group retained profit and non-controlling interests.

f. Prepare the Consolidated Statement of Financial Position for Frozit Bhd Group as at 31 December 2021.

PART B

a. Pandan Bhd and Serimuka Bhd own 52% and 48% equity shares in Lapis Bhd. The Board of Directors in Lapis Bhd has 5 members who control the most significant decisions in the company. Pandan Bhd appoints 3 out of the 5 members, while Serimuka Bhd nominates the CEO in Lapis Bhd. The CEO reports to and functions under the direction of the Board of Directors.

Required:

With reference to the relevant Malaysian Financial Reporting Standards, explain briefly which investor is most likely to control Lapis Bhd. Justify your answer.

b. Hylo Bhd has investments in several subsidiaries. Hylo Bhd owned 85% of the issued equity shares in Odele Bhd, which was acquired for RM200 million. Odele Bhd had 500 million issued equity shares. On 1 October 2021, Pippa Bhd made a private offer to buy 80% of Hylo Bhd’s interest in Odele Bhd for RM455 million. Hylo accepted the offer on 1 October 2021. The financial year-end of the Hylo Bhd group is 31 December.

Required:

i. Identify the relationship between Hylo Bhd and Odele Bhd after the private offer. (Show relevant workings to justify your answer).

ii. With reference to MFRS 10 Consolidated Financial Statements, explain briefly the effect of the private offer in the consolidated financial statements for the year ended 31 December 2021.

c. West Bhd acquired 75% equity shares of South Bhd. North Bhd holds 80% of the equity shares of West Bhd. North Bhd also had 15% equity shares of East Bhd, and North Bhd is allowed to appoint two of East’s five directors.

Required:
i. Identify the related parties to North Bhd with reference to MFRS 124 Related Party Disclosures.

ii. Explain briefly whether investors (North and West) have control, joint control, or significant influence in their respective investees.

QUESTION 2

Sonic Bhd, incorporated 15 years ago, had diversified its activities and expanded its operations by acquisitions of shares in subsidiaries and associate companies. Accounts for all companies are made up to 31 December. The consolidated financial statements of Sonic Bhd as at 31 December 2021 and its comparative figures are as follows

Additional information:

1. The operating expenses include depreciation charge on property, plant and equipment of RM1,750,000, impairment of investment in associate of RM200,000, impairment of goodwill of RM5,760,000, impairment of development cost, and gain on sale of the machine.

2. During the year, a machine with a carrying value of RM5,000,000 was disposed for RM6,000,000. In addition, Sonic Bhd has acquired equipment at the fair value of RM500,000, and the acquisition was resolved through the issuance of ordinary shares.

Freehold land was revalued at a deficit of RM900,000 during the year. The land had previously been revalued, and the asset revaluation surplus is related to the land.

3. During the first quarter of the year, the group has spent a further RM700,000 to complete the development project. Commercial production commenced in the second quarter of the year. However, sales of the new product proved disappointing, and on 31 December 2021, the development costs were written down to RM1,500,000 via impairment charge.

4. On 1 January 2021, Sonic Bhd acquired 75% interest in Tunggak Bhd. The
consideration was settled partly by issuing ordinary shares in Sonic Bhd at a fair value of RM6,500,000 and immediate cash. The fair value of the net assets of Tunggak Bhd at the date of acquisition was as follows:

RM’000

Property, plant and equipment 3,500
Inventory 1,100
Trade receivables 500
Cash at bank 700
Trade payables 300
Tax payable 200

5. The non-controlling interest was measured at its proportionate share of the fair value of the subsidiary’s identifiable net assets on the acquisition date.

Required:
a. Determine the cash consideration arising from the acquisition of Tunggak Bhd on 1 January 2021.

b. Prepare the Consolidated Statement of Cash Flows of Sonic Bhd Group for the year ended 31 December 2021, using the INDIRECT METHOD.

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