Reference no: EM132956755

Question

The balance sheet of Omega as at 30 September 1992 contained the following balances and notes:

Share capital                                                                                                         10 000

Reserves:

Share premium                                                      Note 1                                       1 000

Revaluation reserve                                              Note 2                                       1 780

Other Reserves:

Merger reserve                                                      Note                                         3 550

Profit and loss account - 1992                               Note 4                                   1 940

Profit and loss account b/f                                                                                    (200)

Capital and reserves                                                                                             15 070

Liabilities                                                                                                                15 070

Total assets                                                                                                           30 140

Note 1 The share premium arose on the issue of shares on 1 October 1989.

Note 2 The revaluation reserve arose as a result of a revaluation of certain of the fixed assets on 1 October 1991. It comprises a gain of £2 000 000 on the revaluation of plant and machinery, which is the balance remaining after the transfer to the profit and loss account of £200000 representing the depreciation on the revaluation surplus; and a loss of £220 000 arising from the revaluation of office premises. The directors propose to revalue the remaining fixed assets which currently appear at historic cost in a subsequent financial year.

Note 3 The merger reserve represented the premium of £1 450 000 on shares issued on the acquisition on 1 October 1991 of a subsidiary, Alpha plc, in accordance with the merger provisions of the Companies Act 1985 less goodwill of £900 000 arising on a separate transaction. The goodwill has an estimated useful economic life of 15 years.

Note 4 The profit and loss account balance is the balance after:

(i) Writing off the total acquisition goodwill of £400 000 arising on the acquisition on 1 October 1991 of an unincorporated business carried on by Beta Associates. The estimated useful economic life of the goodwill is 10 years.

(ii) Creating a provision of £1 200 000 representing a permanent diminution in the value of a subsidiary, Gamma plc.

(iii) The transfer of the £200 000 mentioned in Note 2 from the revaluation reserve to the profit and loss account representing the amount by which the total depreciation charge for the year exceeded the amount that would have been provided if the plant had not been revalued.

(iv) Crediting an exchange gain of £38000 that arose on the translation of a long-term loan taken out in French francs on 1 October 1991. The loan was taken out to use in the United Kingdom because the interest rate was favourable at the date the loan was raised.

Required

(a) Calculate the amount of distributable profit for Omega on the basis that it is:

(i) A public company.

(ii) An investment company.

(b) Explain briefly:

(i) The disclosure requirements relating to distributable profits in a single company and group context.Chapter 4 · What is profit? 91

(ii) The effect on the distributable profits of the holding company if the group has sufficient distributable profits in aggregate to make a distribution to the holding company's shareholders but the holding company itself has insufficient distributable profits.

(iii) The effect on the distributable profits of the holding company if the holding company has sold one subsidiary company to another subsidiary for a consideration that exceeds the carrying value of the investment in the holding company's accounts.

(iv) The effect on the distributable profits of the holding company if a subsidiary company which has a coterminous accounting period declares a dividend after the end of the holding company's year end.