Example 2

Below are the income statements of Barbie Group and its associated companies, as at 31st December, 200
Barbie Ken Shelly
$1,000 $1,000 $1,000
Revenue 385 100 60
Cost of Sales 185 60 20
Gross Profit 200 40 40
Operating Expenses 50 15 10
Profit before Tax 150 25 30
Tax 50 12 10
Profit for the Year 100 13 20

Additional Information:
1. Barbie acquired 60,000 ordinary shares in Shelly for $80,000 when the company had a credit
2. Barbie acquired 45,000 ordinary shares in Ken, a number of years ago, for $70,000 when the r
3. During the year Shelly sold goods to Barbie for $28,000. Barbie still holds some of these good
4. Non controlling interests are valued using proportion of net assets method.
5. Goodwill and investment in associate were impaired for the first time during the year as follow
Shelly $2,000
Ken $3,000
Impairment of the subsidiary’s goodwill should be charged to operating expenses.
Required:
Prepare the consolidated income statement for Barbie including the results of its associated company.

SOLUTION
WORKINGS
W1) OWNERSHIP STRUCTURE
a) Barbie in Shelly
60000 x100
200000 30% Shelly is an Associate

b) Barbie in Ken
45000 x100
50000 90% Ken is a Subsidiary

W2) GOODWILL
a) Barbie in Ken
Purchase Consideration 70000
Net Assets
Ord shares 50000
RE (pre) 20000
Total Net Assets 70000
% of TNA=90% x 70000 63000
Goodwill 7000
Less: Impairment of GW 3000
Net Goodwill 4000

W3) NON CONTROLLING INTEREST (Ken)

Profit for the year 13000
Less: Impairment of GW 3000
Adjusted Profit for the year 10000 10%

W4) SALE OF INVENTORY (Shelly to Babbie)

Sales 28000
Unrealised profit 2000

W5) SHARE OF PROFITS OF ASSOCIATE

% Profit of the Year 20000 30% 6000
Less: Unreal Profit(2000 x 30%) 600
Less: Impairment of GW 2000
Share of profits of associate 3400

BABBIE GROUP
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
RWF000
Revenue (385 +100) 485
Less: COS (185 +60) 245
G. Profit (P +S) 240
Less: O. Exp(50 + 15 + 3 impairm of Ken) 68
Operating Profit 172
Add: Share of Profits from Associates (W5) 3.4
Profit before Tax 175.4
Less: Tax (50 +12) 62
Profit 4 the year 113.4

Profit Attributable to :
Parent (Balancing Figure)(Profit 4 yr-NCI)(113.4-1) 112.4
Non Cont Interest (profit -Adj) x NCI% W3 1
Total Profit for the year 113.4
 XYZ GROUP
CONSOLIDATED IS FOR THE YEAR ENDED XXX
at 31st December, 2008. Revenue (P+S)
COS (P+S)
G. Profit (P +S)
Less: O. Exp(P+S)
Operating Profit
Add: Share of Profits from Associates (Working)
Profit before Tax
Less: Tax (P+S)
Profit 4 the year

Profit Attributable to :
Parent (Balancing Figure)(Profit 4 yr-NCI)
Non Cont Interest (profit -Adj) x NCI%
Total Profit for the year
company had a credit balance on its retained earnings of $50,000 a number of years ago. Shelly has 200,000 $1 ordinary shares.
for $70,000 when the retained earnings were $20,000. Ken has 50,000 $1 ordinary shares.
lds some of these goods in inventory at the year end. The profit element included in these remaining goods is $2,000.

uring the year as follows:

sociated company.

Shelly is an Associate

Ken is a Subsidiary

b) Barbie in Shelly
P. Consideration 80000
 Ord Shares 200000
RE (Pre) 50000
TNA 250000
% of TNA 75000
GW 5000
Less: Impair 2000
Net Goodwill 3000 Goes to NCA in SOFP

1000

CEMBER 2008
THE YEAR ENDED XXX
xx WORKING
(xx) Profit from Associate
xx % of profit of the year xx
(xx) Less: % of Unreal Profit (xx)
xx Less: Impairment (xx)
ssociates (Working) xx Share of profit of associate xx
xx
(xx)
xx

ofit 4 yr-NCI) xx
j) x NCI% xx
xx
as 200,000 $1 ordinary shares.

ng goods is $2,000.
Example 1
P acquired 80% of S on 1st December, 2004 paying $4.25 in cash per share.
At this date the balance on S’s retained earnings were $870,000.
On 1st March 2007 P acquired 30% of A’s ordinary shares.
The consideration was settled by share exchange of 4 new shares in P for every 3 shares acquired in A.
the share price of P at the date of acquisition was $5.00.
P has not yet recorded the acquisition of A in its books.

The statement of financial position of the three companies as at 30th November, 2007 is as follows:
P
$1,000
Non Current Assets
Property 1300
Plant and Equipment 450
Investments 1825

Current Assets
Inventory 550
Receivables 300
Cash 120
Total Assets 4545

Share Capital $1 1800

Share Premium 250
Retained earnings 1145
3195
Non Current Liabilities
10% Loan Notes 500

Current Liabilities
Trade Payables 520
Income Tax 330
Total Equity and Liabilities 4545

Additional Information
1. As at 1st December, 2004, plant in the books of S was determined to
have a fair value of $50,000 in excess of its carrying value. The plant had
a remaining life of 5 years at this time.
2. During the year, S sold goods to P for $400,000 at a mark-up of 25%.
P has a quarter of these goods still in inventory at the year end.
3. In September A sold goods to P for $150,000. These goods had cost
A $100,000. P had $90,000 (at cost to P) in inventory at the year end.

4. As a result of the above intercompany sales, P’s books showed

$50,000 and $20,000 as owing to S and A respectively at the year end.
These balances agreed with the amounts recorded in S’s and A’s books.
5. Non controlling Interests are measured using the proportion of net
assets method. Goodwill is to be impaired by 30% at the reporting date.
An impairment review found the investment in associate was to be
impaired by $15,000 at the year end.
6. A’s profit after tax for the year is $600,000.
Required:
Prepare the Consolidated Statement of Financial Position as at 30 th
November, 2007.

WORKINGS
W1) COST OF INVESTMENT (PURCHASE CONSIDERATION)
a) Cost of Investment in S
Immediate Cash = (4.25 x 500000shares)x 80%=

b) Cost of Investment in A
Share Exchange= {250000 x (4/3) x 5}x30%=

c) New Shares ( Share exchange in Acq of A)

Ord Share Capital = 500,000 x (1/5)=
Share Premium = 500,000 x (5-1)/5=

W2) FAIR VALUE ADJUSTMENT on Plant

a) FVA on Plant
Plant

b) Depreciation Undercharge on FVA on Plant

Deprec= (50,000/ 5 years) x 3 years

W3) SALE OF INVENTORY (S to P)

Sales 400,000
Mark up to Margin
25/100 to 25/(100+25)= 25/125 20%
Margin Profit = 20% x 400,000= 80,000
Unrealised profit on unsold Inventory= 1/4 of 80,000 20,000

W4) SALE OF INVENTORY ( A to P): Only pick the % of P in A

Sales 150,000
Cost of Good to A 100,000
Profit that A made on Sale to P 50,000
Unreal Profit = (90000/150000) x 50000= 30,000
% Acquired in A = 30000 x 30% = 9,000

W5) INTER COMPANY BALANCES

Between P and S 50,000
Between P and A 20,000

W6) GOODWILL in S
Purchase Consideration (W1a)
Net Assets
Share Capital 500,000
Share Premium 80,000
R Earnings (Pre Acq) 870,000
FVA (W2a) 50,000
Total Net assets 1,500,000
80% of 1500000=
Goodwill
Less: Impairment on Goodwill (30% of 500000)
Net Goodwill

W7) GOODWILL in A
Purchase Consideration (W1b)
Net Assets
Share Capital 250,000
Share premium
R Earnings (Pre)= 1200000-(9/12 x 600000)= 750,000
Total Net Assets 1,000,000
30% of 1000000
Goodwill
Less: Impairment of A
Net Goodwill
W8) CONSOLIDATED RETAINED EARNINGS
P
RE in SOFP 1,145,000
Less: Depreciation Undercharge ( W2b)
Less: Unreal profit on sale of Invent (w3)
Ajusted RE of S
Less: Pre Acq RE of S
Post Acq Retained Loss of S
Less: Share of Post Acq Loss = 80% x 520000 416,000
Less: Impairment of GW of S ( W6) 150,000
less: Impairm of GW of A 15,000
Add: Post Acq Profit of Assoc {(600,000 x9/12) x30%}- 9000( W4) 126,000
Consolidated RE 690,000

W9) NON CONTROLLING INTEREST

Net Assets of S
Share Capital 500,000
Share Premium 80,000
RE (A) (w 8) 350,000
FVA 50,000
Total Net Assets 980,000

NCI = 20% x 980000= 196,000

W10) INVESTMENT IN ASSOCIATE

Cost of Investement ( w1b) 500,000
Add: Post Acq Profit ( W8) 126,000
Less: Impairment of Ass 15,000
INVESTEMENT IN ASSOCIATE 611,000

P GROUP
CONSOLIDATED SOFP AS AT 30 NOVEMBER 2007
NON CURRENT ASSETS FRW000
Property(1300 + 850)
Plant & Equipt (450+210+50(w2a) -30(w2b)
Investments (1825-1700 (w1a))
Goodwill of S (W6)
Investment in Associate (w10)
Total NCA
CURRENT ASSETS
Inventory (550+230-20 (w3) 760
Receivables (300+340 -50(w5) 590
Cash (120+50) 170
TOTAL ASSETS

EQUITY
Ord Shares ( 1800 +100 (w1c)
Share Premium (250 +400(w1c)
RE ( W8 )

Non Controlling Interest ( W9)

NON CURRENT LIABILITIES

10% Loan Notes (500 +300)

CURRENT LIABILITIES
Payables (520 +330-50(w5) 800
Income Tax (330 +70) 400
TOTAL EQUITY AND LIABILITIES
 FORMAT
XYZ GROUP
CONSOLIDATED SOFP AS AT XXX
NON CURRENT ASSETS
ry 3 shares acquired in A. Property (P+S +/- Adj related to Subsidiary)
Plant & Equipt (P + S +/-Adj related to Subsidiary)
Investments (Other Investments ) (not Invest in S or A)
Goodwill of S if Positive ( Don’t include GW of Assoc)
er, 2007 is as follows: Investment in Associate (Calculated)
S A Total NCA
$1,000 $1,000 CURRENT ASSETS
Inventory (P + S - Adj related to S)
850 900 Receivables (P + S - inter co balance btwn P& S onl
210 150 Cash (P +S- Cash in transit related to S)
- - TOTAL ASSETS

EQUITY
230 200 Ord Shares ( P + New shares in Parent)
340 400 Share Premium (P + New shares in Parent)
50 140 RE ( Workings)
1680 1790
Non Controlling Interest ( Working)
500 250
80 - NON CURRENT LIABILITIES
400 1200 Loan (P +S - Acquired Loan)
980 1450 Debenture (P + S)

300 - CURRENT LIABILITIES

Payables ( P + S - Inter co bal related to S)
Overdraft (P + S - CIT)
330 250 Proposed Dividends ( P + S - (% of P in S))
70 90 TOTAL EQUITY AND LIABILITIES
1680 1790
 1,700,000

500,000

100,000
400,000 500,000

50,000 Affects GW, NCI

30,000 Affects RE of S (deduct)

Sales 400,000
COS ( Bal fig) 380,000
Margin Profit 20,000
 Eliminated from both Receivable and Payables
Not Eliminated

1,700,000

1,200,000
500,000
150,000
350,000 Goes to NCA in SOFP

500,000

300,000
200,000
15,000
185,000
S
400,000
30,000
20,000
350,000 A: Goes to NCI
870,000
(520,000)

FRW000
2,150
680
125
350
611
3,916

1,520
5,436

1,900
650
690
3,240
196

800

1,200
5,436
 to Subsidiary) xx
related to Subsidiary) xx
nts ) (not Invest in S or A) xx
on’t include GW of Assoc) xx
xx
xx

xx
balance btwn P& S onl xx Don’t deduct inter co balances related to Associate
xx xx
xx

xx
res in Parent) xx
xx
xx
xx

xx
xx xx

related to S) xx
xx
(% of P in S)) xx xx
ABILITIES xx
Example 2
H Ltd, a Public listed company acquired 80% of S Ltd ordinary shares on 1st January, 2006.
H Ltd paid $47 million for the acquisition when the retained earnings of S Ltd stood at $5 M.
As part of the acquisition H Ltd acquired $5 M of the 10% loan notes.
The summarized SOFP of the Two Companies at 31st December 2006 are shown below:
H Ltd S Ltd
$1,000 $1,000 $1,000 $1,000
Non Current Assets
PPE 44,500 52,200
Development 4,000 6,800
Investments - in S Ltd 47,000 -
- Others 24,500 4,000
120,000 63,000
Current Assets
Inventory 12,500 4,500
Accounts Receivables 32,000 4,000
Bank Balance 4,000 48,500 3,500 12,000
Total Assets 168,500 75,000

Equity and liabilities

Equity
Share Capital 30,000 22,000
Share Premium 20,000 10,000
Revaluation Reserves 22,000 8,000
Retained Earnings 18,000 10,000
90,000 50,000
Non Current Liabilities
10% Loan Notes 25,000 8,000
Deferred Tax 5,000 30,000 2,000 10,000
Current Liabilities
Accounts Payables 26,000 9,000
Taxation 22,500 4,000
Bank Overdraft - 48,500 2,000 15,000
Total Equity and Liabilities 168,500 75,000

Required:
Prepare the Consolidated Balance Sheet for H Company.
 SOLUTION
nuary, 2006. WORKINGS
tood at $5 M. W1) GOODWILL (Proportion of Net Assets)
FRW000 FRW000
Purchase Consideration (47,000-5,000) 42,000

Net Assets
Share Capital 22,000
Share Premium 10,000
Revaluation Reserve 8,000
Retained Earnings (Pre Acq) 5,000
Total Net Assets 45,000
80% of Net Assets (80% x 45000) 36,000
Goodwill (PC- NA80%) 6,000

W2) CONSOLIDATED RETAINED EARNINGS

H LTD S LTD
FRW000 FRW000
Retained Earnings in SOFP 18,000 10,000
Less: Pre Acquisition RE of S Ltd 5,000
Post Acquisition RE of S Ltd 5,000
% of Post Acq RE of S Ltd (80% of B) 4,000

Consolidated RE 22,000

W3) NON CONTROLLING INTEREST (Proportion of Net Assets)

Net Assets
Share Capital 22,000
Share Premium 10,000
Revaluation Reserve 8,000
Retained Earnings (Adjusted RE) A 10,000
Total Net Assets (100%) 50,000

NCI (20% of Total Net Assets) 10,000

H GROUP
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2006
FRW000 FRW000
NON CURRENT ASSETS
PPE (44500 + 52200) 96,700
Development (4000+6800) 10,800
Investment - Other (24500 +4000) 28,500
Goodwill (W1) 6,000
Total NCA 142,000

CURRENT ASSETS
Inventory (12500+4500) 17,000
Receivables (32000 +4000) 36,000
Bank(4000+3500) 7,500 60,500
TOTAL ASSETS 202,500

EQUITY AND LIABILITIES

EQUITY
Share Capital (Parent) 30,000
Share Premium (Parent) 20,000
Revaluation Reserve (Parent) 22,000
Retained Earnings (W2) 22,000
Non Controlling Interest (W3) 10,000
Total Equity 104,000

NON CURRENT LIABILITIES

10% Loan Notes (25000+8000-5000) 28,000
Defered Tax (5000 +2000) 7,000 35,000

CURRENT LIABILITIES
Payables (26000+9000) 35,000
Taxation (22500+4000) 26,500
Bank OD 2,000 63,500

TOTAL EQUITY AND LIABILITIES 202,500

A

B
 Example 3
The following relates to H Ltd and its Subsidiary S at 31st December, 2006.
H LTD S LTD
NON CURENT ASSETS
Tangible PPE $ 150,000 $ 120,000
Investment in S Ltd $ 80,000 -
CURRENT ASSETS
Inventory $ 10,000 $ 12,000
Accounts Receivables $ 30,000 $ 26,000
Cash at Bank $ 13,000 $ 10,000
TOTAL ASSETS $ 283,000 $ 168,000

Ordinary Share Capital $1 each $ 100,000 $ 60,000

Preference Shares $ 70,000 $ 40,000
Retained Profits $ 80,000 $ 20,000

NON CURRENT LIABILITIES

10% Loan Stocks $ 15,000 -
8% Loan Stocks - $ 20,000
CURRENT LIABILITIES
Accounts Payable $ 12,000 $ 18,000
Proposed Dividends $ 6,000 $ 10,000
$ 283,000 $ 168,000
Additional Information
1 H ltd acquired 54000 ordinary shares of S Ltd on 1st January 2004 when the retained earnings of S Ltd were $1000
H also acquired 60% of preference share capital in S Ltd.
2 On 1st January 2005 H Ltd sold an item of plant to S Ltd at a selling price of $. 40000.
H Ltd made a profit of 25% on cost. It’s the policy of group to charge depreciation at a rate of 20% on cos
3 Included in inventory of S are goods amounting to $.3000 that were purchased from H Ltd. H reported a t
Required:
Prepare the Consolidated SOFP as at 31st December, 2006 assuming that:
H has not accounted for proposed dividends.
 W2) SALE OF PLANT (NCA)

d earnings of S Ltd were $10000.

ciation at a rate of 20% on cost.

ed from H Ltd. H reported a third of the selling price as profit.
 SOLUTION
WORKINGS
W1) OWNERSHIP of ord shares
54000 shares
60000 shares 60000/1

90%

F PLANT (NCA) H Ltd to S Ltd

Sales 40000
Mark Up (Profit on Cost 25%)
Convert Mark Up to Margin 25
100
Margin 20%

a) Unrealised Profit on Sale of Plant = (20% x40000)=

b) Depreciation Overcharge on Plant

Sold at 40000 instead of selling at 32000 (40000-8000)
S was charging depreciation based on a value of 40000 instead of 32000 therefore depreciation was overcharged for t
The extra value of the plant was 8000
Therefore Depreciation = 1st year (2005) = 20% x 8000=
2nd year (2006) = 20% x 8000=
Total Depreciation for 2 years

W3) SALE OF INVENTORY H to S

Sales 3000
Profit 1/3 of SP
Unrealised Profit = 1/3 x3000= 1000

W4) GOODWILL (Proportion of Net Assets)

FRW FRW
Purchase Consideration $ 80,000
Net Assets
Ordinary Shares (90% x 60000) 54000
Pref Shares (60% x 40000) 24000
Rearnings (Pre) (90% x10000) 9000
Total Net Assets (% P acq in S) 87000
Negative Goodwill $ (7,000)

Negative Goodwill is 7000

W5) CONSOLIDATED RETAINED EARNINGS
HLTD SLTD
FRW FRW
RE in SOFP 80000 20000
Add: Depreciation Overcharge (W2b) 3200
Adjusted RE of S Ltd 23200 A
Less: Pre acquisition RE of S Ltd 10000
Post Acquisition RE of S ltd 13200 B
% of Post acq (90% x B) 11880
Less: Unreal Profit on sale of Plant (W2a) 8000
Less: Unreal Profit on Sale of Goods (W3) 1000
Add: Negative Goodwill 7000
Add: Dividends from S (90% x 10000) 9000
Consolidated Retained Earnings 98880

W6) NON CONTROLLING INTEREST (Proportion of Net Assets)

Net Assets
Share Capital (10% x 60000) 6000
Preference Shares (40% x 40000) 16000
R/Earnings Adjusted (A)(10% x23200 2320
Total NCI 24320

H GROUP
CONSOLIDATED SOFP AS AT 31ST DECEMBER. 2006
FRW FRW
NON CURRENT ASSETS
PPE (150000+120000-8000(w2a)+3200 (w2b)) 265200

CURRENT ASSETS
Inventory (10000+12000-1000(w3) 21000
Receivables (30000+26000) 56000
Bank (13000+10000) 23000 100000
TOTAL ASSETS 365200

EQUITY AND LIABILITIES

EQUITY
Ordinary Shares 100000
Preference Shares 70000
Retained Earnings (W5) 98880
Non Controlling Interest (W6) 24320
TOTAL EQUITY 293200

Non Current Liabiulities

10% Loan Notes 15000
8% Loan Notes 20000 35000

Current Liabilities
Payables (12000+18000) 30000
Proposed Dividends (6000 +1000{10000-9000}) 7000 37000

TOTAL EQUITY AND LIABILITIES 365200

 25 25
100+25 125 20%

8000

tion was overcharged for two years

1600 8000 6400

1600 8000 6400
3200 16000 12800 3200
Example 4
The following relates to H Ltd and its Subsidiaries S at 31st December, 2006.
H LTD S LTD
NON CURENT ASSETS
Tangible Land 100000 50000
Building 150000 80000
Plant 80000 50000
Investments in S Ltd 100000 -
CURRENT ASSETS
Inventory 60000 40000
Accounts Receivable 80000 50000

Cash at Bank 25000 -

TOTAL ASSETS 595000 270000

Ordinary Share Capital $ 1 each 200000 100000

Capital Reserves 100000 40000
Retained Profits 90000 50000

NON CURRENT LIABILITIES

10% Loan Stocks 100000 20000

CURRENT LIABILITIES
Bank Overdraft - 10000
Accounts Payable 80000 30000
Proposed Dividends 25000 20000
595000 270000

Additional Information
1) H acquired investment in S Ltd on 1st January 2004 as follows:
a) 60% ordinary shares 90000
b) Loan stock 10000
2) On date of acquisition the capital reserves of S Ltd amounted to $. 10000 and retained profits $. 500
On the same date the fair values of land and buildings were shs. 10000 and shs. 20000 respectively
above the carrying amounts, no depreciation is provided on land and buildings are charged depreciat
3) Included in the inventory of H Ltd are goods purchased from S Ltd.
They have a selling price of $. 15000. S reports a profit of 50% on cost.

4) Included in the plant of S Ltd is plant bought from H Ltd on 1st January, 2005 at a price of $. 20000
H Ltd reported a profit of a third on cost. The group provides depreciation on 30% on reducing balan
5) H Ltd has not accounted for its share of proposed dividends in S Ltd.
6) Included in accounts payable of H Ltd is an amount of $. 25000 due to S Ltd.
This amount stands at $. 28000 in the books of S Ltd.
7) Goodwill has been impaired by 60%
Required:
Prepare the Consolidated SOFP of H Ltd as at 31st December, 2006.
mber, 2006. H GROUP
CSOFP AS AT 31 DEC 2006
NCA
Land (100000+50000+10000(W2a)= 160,000
Buidling (150000+80000+20000(w2a) -3000(w2b))= 247,000
Plant (80000+50000-5000(w4a)+2550(w4b)= 127,550
Goodwill (W7) 1,200
Total NCA 535,750
Current Assets
Inventory (60000+40000-5000(w3) 95,000
Receivables (80000+50000-28000(w6) 102,000
Cash at Bank (25000+0) 25000 222,000
TOTAL ASSETS 757,750
EQUITY
Ord Share Capital 200000
Capital Reserves (W1) 118,000
Retained Earnings (W8) 118,930
Non Controlling Interest (W9) 85,820
Total Equity ( Including NCI) 522750
NON CURRENT LIABILITIES
10% Loan Notes (100000+20000-10000(Loan acq)) 110000

CURRENT LIABILITIES
Bank OD (10000-3000(w6) 7,000
Acc Payable (80000+30000-25000(w6) 85,000
Proposed Dividends (25000+20000-12000(w5)) 33,000 125,000
TOTAL EQUITY & LIABILITIES 757,750

ed to $. 10000 and retained profits $. 5000.

shs. 10000 and shs. 20000 respectively
land and buildings are charged depreciation at 5% on cost.

0% on cost.

n 1st January, 2005 at a price of $. 20000.

es depreciation on 30% on reducing balance.
5000 due to S Ltd.
SOLUTION
WORKINGS
W1) CAPITAL RESERVES
HLTD S LTD
Capital Res in SOFP 100,000 40,000 A
Less: Pre Acq Cap Reserves 10,000
Post Acq Capital Reserves 30,000 B
% of Acq (60% of B) 18,000
Consolidated Capital reserves 118,000
goes to SOFP under equity

W2) FAIR VALUE ADJUSTMENT (FVA)

a) FVA on Land and Building
Land 10,000
Building 20,000
Total Fair Value Adjustement 30,000 Increases net assets in Goodwill, NCI

b) Depreciation Undercharge in Building

Deprec= 20000 x 5% x 3 years= 3,000 Deduct from RE

W3) SALE OF INVENTORY (From S Ltd to H Ltd)

Sales 15,000
Profit Mark up = 50% = 50/100: You need to convert Mark up to Margin
Mark Up Margin
50 50 50
100 100+50 150
Unrelised Profit on Inventory =33.33% x 15000=
5,000 Unrealised Profit Deduct from profit of S L

W4) SALE OF PLANT (From H Ltd to S Ltd)

a) Unrealised Profit on Sale of Plant
Selling Price 20,000
Mark up = 1/3 Convert to Margin
Mark UP Margin
1 1 1
3 3+1 4
Unrealised Profit = 25% x 20000= 5,000 Deduct from profit of H Ltd
Cost (20000-5000) 15,000

b) Depreciation Overcharge
Deprec 1st Year (Jan - Dec 2005) 5000x 30%= 1,500
Deprec 2nd Year (Jan - Dec 2006) (5000-1500)x30%= 1,050
Total Depreciation Overcharge 2,550 Add to Profit of S Ltd

W5) PROPOSED DIVIDENDS ( Has not yet been accounted for)

Proposed Dividends of S= 20,000
Share of Parent in S = 20000 x 60%= 12,000 Added to profit of H ltd
Deducted from Consolidated Current liabiliti

W6)INTER COMPANY BALANCES (Should be eliminated from Receivables and Payables)

DR CR
Payables (H Ltd) 25,000
Cash in transit (28000-25000) 3,000
Receivables (S Ltd) 28,000
28,000 28,000

W7) GOODWILL

Purchase Consideration (100000-10000 (loan))= 90,000

Net Assets of Subsidiary
Ordinary share capital 100,000
Capital Reserves (Pre Acq) 10,000
Retained Earnings (Pre Acq) 5,000
Add: FVA (w2 a) 30,000
Total Net Assets 145,000
% Acquired (60% x 145000) 87,000
Goodwill 3,000
Less: Impairment of Goodwill ( 60% x 3000)= 1,800 Deducted from Profits of
Net Goodwill 1,200 Goes to NCA in SOFP

W8) CONSOLIDATED RETAINED EARNINGS

HLTD S LTD
Rearnings in SOFP 90,000 50,000
Less: Unreal Prof from sale of Invent (W3) 5,000
Add: Deprec overcharge on Plant (W4b) 2,550
less: Deprec undercharge on FVA (W2b) 3,000
Adjusted RE of S Ltd 44,550 A
Less: Pre Acq RE of S Ltd 5,000
Post Acq RE of S Ltd 39,550 B
% of H ltd in S ltd (60% x39550 B) 23,730
Less; Unreal Profit on Plant (W4a) 5,000
Add: Proposed Dividends (W5) 12,000
Less: Impairment of Goodwill (W7) 1,800
Consolidated Retained Earnings 118,930

W9) NON CONTROLLING INTEREST

Net Assets of S Ltd
ord Share Capital 100,000
Capital Reserves ( Value A in W1) 40,000
Retained Earnings ( Value A in W7) 44,550
Fair Value Adjustement (W2a) 30,000
Total Net Assets 214,550

NCI = 40% x 214550= 85,820

H GROUP
CONSOLIDATED SOFP AS AT 31ST DEC 2006
s in Goodwill, NCI

33.33% This is the margin: Profit on Selling price

Deduct from profit of S Ltd

25%
Add to Profit of S Ltd

nsolidated Current liabilities (Propsed Dividends)

Deducted from Profits of H ltd

Goes to NCA in SOFP
Example 5
H acquires 24 Million $1 shares (80%) of the ordinary shares of S by offering a share for share exchange of
two shares for every three shares acquired in S ltd and a cash payment of $1 per share payable three years
later. H ltd shares have a nominal value of $1 and a current market value of $2. The cost of capital is 10%
and $1 receivable in 3 years can be taken as $0.75.
Required:
1. Calculate the cost of investment and show the journals to be recorded in H accounts.
2. Show how the discounts would be unwound.
SOLUTION

COST OF INVESTMENT (Purchase Consideration)

1) Share Exchange
2) Deferred Cash
$
1) Share Exchange = 24,000,000 x 2/3 x 2= 32,000,000

2) Deferred Cash = 24,000,000 x 1 x0.75= 18,000,000

Total Cost of Investment (Purchase Consideration)= 50,000,000

1/(1+r)^n

For the Share Exchange which gives = 32,000,000

Its divided into two:
Ordinary Share Capital = Nomi 1 x 32,000,000
Market 2
Share Premium = Market -Nominal 2-1 x 32,000,000
Market price 2

For the Defered cash of 18m calculate the interest payable

18000000 x 10%= 1,800,000 Deducted from Retained Earnings
It also increases Non Current Liabilities
Amount that goes to NCL = 18,000,000 + 1,800,000= 19,800,000

Double Entry
Dr. Cost of Control 50,000,000
Cr. Ordinary Share Capital 16,000,000
Cr. Share Premium 16,000,000
Cr. Deferred Consideration 18,000,000
 Is Divided into two: Ordinary share capital and Share premium

Goes to Goodwill as purchase consideration

16,000,000

16,000,000

ed Earnings
Current Liabilities
Example 6
Statement of Financial Position of P and S as at 30th June 20X8 are given below:
P LTD S LTD
$ $
Property Plant and Equipmen 15000 9500
Investment in S Ltd 5000

Current Assets 7500 5000

Total Assets 27500 14500

Equity and Liability

Share Capital $1 each 6000 5000
Share Premium 4000 -
Retained Earnings 12500 7200
22500 12200

Non Current Liabilities 1000 500

Current Liabilities 4000 1800
27500 14500

Additional Information
1. P acquired 60% of S on 1st July 20X7 when the retained earnings of S were $5800.
P paid $5000 in cash. P also issued 2 $1 shares for every 5 acquired in S and
agreed to pay a further $2000 in 3 years time.
The market value of P’s shares at 1st July 20X7 was $1.8.
P has only recorded the cash paid in respect of the investment in S. Current Interest ra
2. The P Group uses the fair value method to value Non Controlling Interests.
At the date of acquisition, the fair value of NCI was $5750.
Required:
Prepare the consolidated Statement of Financial Position of P Group as at 30 June 20X8.
 SOLUTION
8 are given below: WORKINGS
W1) COST OF INVESTEMENT (Purchase Consid
a) Immediate Cash

Share Exchange (5000 x2/5 x 1.8)x 60%

Deferred Cash= 2000 x 1/(1+0.06)^3=

Total Cost of Investment

b) New Shares
Ordinary Share Capital = (1/1.8) x 2160=

Share Premium = (1.8-1)/1.8 x 2160=

Total New Share Capital

c) Interest on deferred Cash =1679 x 6%=

NCL as a result of D. Cash =1679 +101=

earnings of S were $5800. W2) GOODWILL (Fair Value Method)

5 acquired in S and
Purchase Consideration (W1a)
Add: F.V of NCI
ent in S. Current Interest rate is 6%. Total Value of S Ltd
trolling Interests. Net Assets
Share Capital
Share Premium
roup as at 30 June 20X8. Rearnings (Pre Acq)
Total Net Assets
Goodwill

W3) CONSOLIDATED RETAINED EARNINGS

RE in SOFP
Less: Pre Acq RE
Post Acq RE
% of Post (60% x 1400)
Less: Interest on D. Cash ( W1 c)
Consolidated Retained Earnings

W4) NON CONTROLLING INTEREST (Fair Val

Fair Value of NCI at Acquisition=
Add: Post Acq Profit of NCI (1400 {w3)x 40%)
Total Value of NCI

P GROUP
CONSOLIDATED SOFP AS AT 30 JUNE 20X8

NON CURRENT ASSETS

PPE (15000+9500)
Goodwill ( W2)
Total NCA

CURRENT ASSETS (7500+5000)

TOTAL ASSETS

Equity
Ord Share Capital (6000 +1200{w1b})
Share Premium (4000+960{w1b})
Retained Earnings (W3)
Total Equity
Non Controlling Interest (W4)

Non Current Liabilities (1000+500+1780{W1c}

Current Liabilities (4000 +1800)

TOTAL EQUITY AND LIABILITIES

MENT (Purchase Consideration)
5,000

(5000 x2/5 x 1.8)x 60%= 2,160

2000 x 1/(1+0.06)^3= 1,679

8,839

/1.8) x 2160= 1,200

8 x 2160= 960
2,160

=1679 x 6%= 101 Deducted from RE

Increase the NC. Liabilities
=1679 +101= 1,780

lue Method)

8,839
5,750
14,589

5,000

5,800
10,800 10,800
3,789

TAINED EARNINGS
P LTD S LTD
 12,500 7,200
5,800
1,400
840
101
13,239

G INTEREST (Fair Value Method)

5,750
I (1400 {w3)x 40%) 560
6,310

AS AT 30 JUNE 20X8

24,500
3,789
28,289

12,500
40,789

200{w1b}) 7,200
4,960
13,239
25,399
6,310

00+500+1780{W1c} 3,280
 5,800

IABILITIES 40,789
Example 1
P Co acquired 75% of the ordinary shares of S Co on that company’s incorporation in 20X3.
The summarized income statement of the two companies for the year ending 31st December,
20X6 is set out below:
P Co S Co
$ $
Revenue 75,000 38,000
Cost of Sales 30,000 20,000
Gross Profit 45,000 18,000
Administration Expenses 14,000 8,000
Profit before Taxation 31,000 10,000
Income Taxes 10,000 2,000
Profit for the year 21,000 8,000

Note: Movement on Retained Earnings

Retained Earnings brought forward 87,000 17,000
Profit for the year 21,000 8,000
Retained Earnings Carried Forward 108,000 25,000
Required:
Prepare the consolidated Income Statement and Movement on retained earnings for the group.
 SOLUTION
poration in 20X3. P GROUP
ng 31st December, CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENED 31ST DEC 20X6
$
Revenue (75000 +38000) 113,000
Cost of Sales (30000 +20000) 50,000
Gross Profit 63,000
Administration Expenses (14000+8000) 22,000
Profit before Taxation 41,000
Income Tax (10000+2000) 12,000
Profit for the year 29,000

Profit Attributable To:

Parent (balancing Figure)(Total - NCI) 27,000
Non Controlling Interest (25% x 8000) 2,000
Total Profit for the year 29,000

Movement on Retained Earnings

R/E brought forward (87000 + (17000 x75%) 99,750
nings for the group. Profit for the year 27,000
R/E Carried Forward 126,750
31ST DEC 20X6
Example 2
The following information relates to the Wheeler group for the year to 30th April, 20X7.
Wheeler Co Brookes Co
$1,000 $1,000
Revenue 1100 500
Cost of Sales 630 300
Gross Profit 470 200
Administration Expenses 105 150
Profit before Tax 365 50
Income Tax 65 10
Profit for the year 300 40
Note:
Retained Earnings brought forward 460 106
Retained Earnings carried forward 760 146

Additional Information
1. The issued share capital of the group was as follows.
Wheeler Co: 5000000 ordinary shares of $1 each.
Brookes Co: 100000 ordinary shares of $1 each.
2. Wheeler Co purchased 80% of the issued share capital of Brookes Co in 20X0.
At that time, the retained earnings of Brookes amounted to $56000.
SOLUTION
WHEELER GROUP
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30TH APRIL 20X7
$Thousands
Revenue (1100+500) 1600
Cost of Sales (630+300) 930
Gross Profit 670
Administration Expenses (105+150) 255
Profit before Tax 415
Income Tax (65+10) 75
Profit for the year 340

Profit Attributable to:

Parent (Balancing Figure)(Total -NCI) 332
Non Controling Interest (20% x 40) 8
Total Profit for the year 340

Movement on R/Earnings
R/E brought forward (460 + {106-56}x80%) 500
Profit for the year 332
R/E Carried Forward 832
0TH APRIL 20X7
Example 1
P Co acquired 75% of the ordinary shares of S Co on that company’s incorporation in 20X3.
The summarized income statement of the two companies for the year ending 31st December,
20X6 is set out below:
P Co S Co
$ $
Revenue 75,000 38,000
Cost of Sales 30,000 20,000
Gross Profit 45,000 18,000
Administration Expenses 14,000 8,000
Profit before Taxation 31,000 10,000
Income Taxes 10,000 2,000
Profit for the year 21,000 8,000

Note: Movement on Retained Earnings

Retained Earnings brought forward 87,000 17,000
Profit for the year 21,000 8,000
Retained Earnings Carried Forward 108,000 25,000

Example 3
Suppose in our earlier example (Example 1) that S Co has recorded sales of $5000 at
a gross margin of 40% to P Co during 20X1.
50% of the goods remained in P Co’s inventories at 30th December, 20X1.

Required:
Prepare a revised consolidated income statement.
 SOLUTION
poration in 20X3. Workings
g 31st December, Unsold Goods = 50%
Margin (Profit on Sales)= 40% x 5000= 2000
Unrealised profit on unsold Good = 50% x 2000=

W2. Inter Company Trading

Sales 5000
COS (Balancing Figure)(Sales - Unreal profit) 4000
Unrealised Profit 1000

P GROUP
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2

Sales (75000 +38000-5000 W2) 108,000

Cost of Sales (30000+20000-4000) 46,000
Gross Profit 62,000
Administration Exp (14000+8000) 22,000
Profit before Tax 40,000
Income Tax (10000+2000) 12,000
Profit for the year 28,000

Profit Attributable to:

Parent (Balancing Figure) 26,250
Non Controlling Interest (8000-1000)x25% 1750
Total Profit for the Year 28,000

Movement on R/E
R/E Brought Froward (87000+{17000x75%}) 99750
Profit for the year 26,250
R/E Carried Forward 126,000
 1000

NDED 31ST DECEMBER 20X6

Example 6
P Co acquired 60% of the equity of S Co on 1st April, 20X5.
The income statement of the two companies for the year ended 31st December,
20X5 are set out below.
P Co S Co Pre S Co Post S Co
$ $ 3months 9months
Revenue 170000 80000 20000 60000
Cost of Sales 65000 36000 9000 27000
Gross Profit 105000 44000 11000 33000
Administration Expenses 43000 12000 3000 9000
Profit before Tax 62000 32000 8000 24000
Income taxes 23000 8000 2000 6000
Profit for the Year 39000 24000 6000 18000
Note:
Retained Earnings Brought Forward 81000 40000
Retained Earnings Carried Forward 108000 58000

Required:
Prepare the consolidated income statement and movements on retained earnings.
SOLUTION

P GROUP
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 20X5

Sales (170,000 +60,000) 230,000

Cost of Sales (65,000 + 27,000) 92,000
Gross Profit 138,000
Adm Exp (43000+9000) 52,000
Profit before tax 86,000
Income Tax (23000 +6000) 29,000
Profit for the year 57,000

Profit Attributable to
Parent 49,800
NCI (40% x18,000) 7,200
Total Profit for the year 57,000

Movement on RE
R/E Brought Forward 81,000
Profit for the year 49,800
R/E Carried Forward 130,800
31ST DECEMBER 20X5