Question 1 - Jane and Kate

Jane plc acquired 180,000 of the 200,000 £1 ordinary shares in Kate ltd five years ago when the reserves of
Kate Ltd were £270,000.
Jane plc Kate Ltd
£'000 £'000
Revenue 900 720
Cost of sales -380 -395
Gross profit 520 325
Other income - investment income 15
Distribution & Admin expenses -305 -131
Profit before tax 230 194
Taxation -70 -60
Profit after tax 160 134

Statement of Changes in Equity - Extract

Retained Retained
earnings earnings
£'000 £'000
Profit after tax 160 134
Dividends paid
Ordinary -52 -15
Retained profit for the year 108 119
Retained profit brought forward 734 580
Retained profit carried forward 842 699

ANSWER Jane plc Kate Ltd Total Cancel Jane plc

Parent % Sub Consol
£'000 £'000 £'000 £'000 £'000
Revenue 900 720 1620 -300 1,320 Working 1
Cost of sales -380 -395 -775 270 - 505 Working 1
Gross profit 520 325 845 -30 815
Other income - investment income 15 15 -13.5 2 Working 2
Distribution & Admin expenses -305 -131 -436 - 436
Profit before tax 230 194 424 -43.5 381
Taxation -70 -60 -130 - 130
Profit after tax 160 134 294 -43.5 251
Attributable to Non-Controlling Interests - 13 Working 3
Attributable to equity holders of the group 237

Jane plc - Statement of Changes in Equity - Extract Retained

earnings
£'000
Profit attributable to ordinary shareholders 237.1
Dividends paid - Parent company only - 52.0
Retained profit for the year 185.1
Retained profit brought forward 1,013.0 Working 4
Retained profit carried forward 1,198.1

Working 1
Eliminate intercompany sales £300,000

The goods were invoiced at cost plus 25%.

Half of these goods remained in stock of Kate ltd at the year-end.

profit on stock £'000

300,000 x 25/125 = 60
unrealised 1/2 30

Working 2 Dividends received by J from K

£'000 % £'000
Ordinary 15 90% 13.5
Working 3 Non-controlling interest £'000 £'000
Profit after tax of Kate Ltd 134 10% 13.4
13.4

Working 4 Retained profit brought forward £'000

Parent Company J plc 734
Share of K Ltd's post-acquistion reserves
(580,000-270,000) x 90% 279
1013

£'000 £'000
Part b) Goodwill
Consideration 575
NCI at acquisition (10%*470) 47
622
Assets acquired
Share capital 200
Revenue Reserve 270
470 -470
152

Part c) Goodwill 152

Less impairment -30
122

Part d)
It is necessary to eliminate unrealised prfoits when preparing group financial statements
as the purpose of group accounts is to show the impact of trading with third parties.
If intra group sales and unrealised profit were not eliminated it would be possible to
inflate both the revenue earned by the group and the profits by recording sales between
goup entities.

The individual accounts of Kate Ltd could mislead a potental investor because they
could include unrecognised profits on transactions with the parent company Jane plc