Keep It Cool ("KIT") is a manufacturer of refrigeration systems that are used in industrial air-conditioning units. KIT acquired 31% of the ordinary shares of Freeze (Pty) Ltd ("Freeze"), an importer of refrigeration systems, on 1 January 2020. The cost of the investment amounted to R8.505 million.
The main reason for making the investment is because Freeze is one of KIT’s largest suppliers and the CEO of KIT, Mr Ice, has plans to integrate the whole supply chain over the next five years.
The statement of financial position of Freeze as at 31 December 2019 was supplied to you:
Book value Fair value
Current assets 3 795 000 3 795 000
Plant and equipment 10 245 000 12 000 000
Land and buildings 15 855 000 19 275 000
29 895 000 35 070 000
Current liabilities 3 210 000 3 210 000
Borrowings 6 225 000 6 225 000
Net assets 20 460 000 25 635 000
Additional information
Income earned by Freeze amounted to R17.145 million for 2020 and R19.065 million for 2021.
Freeze depreciates plant and equipment on the straight-line basis and at the time of the investment, plant and equipment had a useful life of six years remaining. Freeze does not depreciate land and buildings.
During 2020 Freeze sold products to KIT for R5.1 million. Freeze paid R3.57 million for these units. At 31 December 2020 KIT had R1.710 million worth of these products in closing inventory which was sold to third parties during 2021.
During 2016 Freeze paid dividends of R10.65 million.
REQUIRED
Calculate the goodwill that resulted from the acquisition. (4 marks)
Calculate the equity income in the income statement of KIT for 2020 and 2021. (8 marks)
Calculate the balance of the investment account as at 31 December 2021. (4 marks)
