Tutorial Exercises 6

Answer the following questions.

1 Durie plc
Durie plc has many subsidiary companies. On 1 January 20X6 Durie plc bought 30% of the share
capital of Edberg Ltd for £6,660. The retained earnings of Edberg Ltd at that date were £13,000 and
the fair value of its assets less liabilities was £20,000. The excess of fair value over carrying amount
related to a plot of land which was still owned at 31 December 20X9; its fair value was unchanged at
that date. The fair value was not reflected in the books of Edberg Ltd.
The summarised draft statement of financial position of Edberg Ltd on 31 December 20X9 includes
the following.

£
Share capital – £1 ordinary shares 5,000
Retained earnings 17,000
Total equity 22,000

By the end of 20X9 the investment in Edberg Ltd had been impaired by £264.
Requirement
At what amount should the investment in Edberg Ltd be shown using the equity method on 31
December 20X9?

2 Pik plc and Wik Ltd

Extracts from the statements of profit or loss of Pik plc and its subsidiaries and Wik Ltd, its associate,
for the year ended 31 March 20X6 are as follows.

Pik plc
(inc subsidiaries) Wik Ltd
£ £
Gross profit 2,900,000 1,600,000
Administrative expenses (750,000) (170,000)
Distribution costs (140,000) (190,000)
Dividends from Wik Ltd 20,000 –
Profit before tax 2,030,000 1,240,000
Income tax expense (810,000) (440,000)
Profit for the year 1,220,000 800,000

Pik plc acquired 25% of the ordinary shares in Wik Ltd on 1 April 20X3 when the retained earnings of
Wik Ltd were £80,000.
Requirement
At what amount should the profit before tax be shown in the consolidated statement of profit or loss
of Pik plc for the year ended 31 March 20X6?

628 Financial Accounting and Reporting − IFRS ICAEW 2021

3 Albert Ltd
Albert Ltd owns many subsidiaries and 25% of Victoria Ltd. In the year ended 31 December 20X5
Albert Ltd sold goods to Victoria for £400,000, earning a gross profit of 20%. Victoria Ltd held
£120,000 of them in its inventories at the year end.
Requirement
By what amount should Albert Ltd’s cost of sales be increased when preparing its consolidated
statement of profit or loss?

4 Austen plc
Austen plc has owned 100% of Kipling Ltd and 30% of Dickens Ltd, an associate, for many years. At
31 December 20X5 the trade receivables and trade payables shown in the individual company
statements of financial position were as follows.

Austen plc Kipling Ltd Dickens Ltd

£ £ £
Trade receivables 50,000 30,000 40,000
Trade payables 30,000 15,000 20,000
Trade payables included amounts owing to:
Austen plc – – –
Kipling Ltd 2,000 – 4,000
Dickens Ltd 7,000 – –
Other suppliers 21,000 15,000 16,000
30,000 15,000 20,000

The inter-company accounts agreed after taking into account the following.
(1) A sales invoice for £3,000 posted by Kipling Ltd on 31 December 20X5 was not received by
Austen plc until 2 January 20X6.
(2) A cheque for £6,000 posted by Austen plc on 30 December 20X5 was not received by Dickens
Ltd until 4 January 20X6.
Requirement
What amount should be shown as trade receivables in the consolidated statement of financial
position of Austen plc?

5 H plc
H plc and its subsidiaries (S1 and S2) and associate (A) have the following inter-company balances at
the year end.

H S1 S2 A
£ £ £ £
H with A 50,000 CR 50,000 DR
S2 with A 75,000 DR
S1 with A 80,000 CR 80,000 DR

Any differences related to cash in transit and where this is the case adjustments are to be made in the
books of the receiving company.
Requirement
After making the necessary adjustments to reflect the above, what amounts due to or from associates
should be recognised in the consolidated statement of financial position at the year end?

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6 Helen plc
Helen plc, a company with several subsidiaries, acquired 35% of Troy Ltd on 1 January 20X6 for
£90,000. At that date Troy Ltd had share capital of £70,000 and retained earnings of £96,000. It also
owns a plot of land which had a fair value of £60,000 compared to a carrying amount of £42,000; this
fair value has not been incorporated into the books of Troy Ltd and the fair value is unchanged at 31
December 20X9. Since the investment was made, Troy Ltd has reported profit for the year of
£118,000 including £110,000 made in the current year. The investment in Troy Ltd has become
impaired by £2,560 during the current year.
Requirement
What is the net amount to be included in the consolidated statement of profit or loss for the year
ended 31 December 20X9 in respect of Troy Ltd?

7 Adam Ltd and Eve Ltd

On 1 January 20X0 Adam Ltd purchased 30% of Eve Ltd for £55,000. At this date the retained
earnings of Eve Ltd stood at £60,000 and the fair value of net assets, which was subsequently
reflected in Eve Ltd’s books, was £170,000. The excess of fair value over carrying amount related to a
plot of land which was still owned at 31 December 20X4.
The statement of financial position of Eve Ltd on 31 December 20X4 showed the following.

£
Share capital 100,000
Revaluation surplus 10,000
Retained earnings 200,000
Total equity 310,000

Requirement
At what amount should Adam Ltd’s investment in Eve Ltd be stated in its consolidated statement of
financial position at 31 December 20X4?

8 Drought plc
Drought plc became a venturer in a joint venture by acquiring 40% of the ordinary shares of Deluge
Ltd, on 1 January 20X7 for £250,000. At that date Deluge Ltd had retained earnings of £210,000 and
a factory building with a fair value £60,000 in excess of its carrying amount and a remaining useful
life of 20 years. No fair value adjustment has been carried out in the books of Deluge Ltd. At 31
December 20X9 Deluge Ltd had retained earnings of £420,000.
Requirement
What amount should be shown as ‘investment in joint venture’ in the consolidated statement of
financial position of Drought plc at 31 December 20X9?

9 Haley plc
The draft statements of financial position of three companies as at 31 December 20X9 are set out
below.

Haley plc Socrates Ltd Aristotle Ltd

£ £ £
Property, plant and equipment 300,000 100,000 160,000
Investments at cost
18,000 shares in Socrates Ltd 75,000 – –

630 Financial Accounting and Reporting − IFRS ICAEW 2021

 Haley plc Socrates Ltd Aristotle Ltd
£ £ £
18,000 shares in Aristotle Ltd 30,000 – –
Current assets 345,000 160,000 80,000
750,000 260,000 240,000
Ordinary shares of £1 each 250,000 30,000 60,000
Retained earnings 400,000 180,000 100,000
Total equity 650,000 210,000 160,000
Current liabilities 100,000 50,000 80,000
750,000 260,000 240,000

The retained earnings of Socrates Ltd and Aristotle Ltd when the investments were acquired eight
years ago were £70,000 and £30,000 respectively.
Impairment reviews to date have resulted in the need for the following amounts to be written off
Haley plc’s investments.

£
Socrates Ltd 12,000
Aristotle Ltd 2,400

Requirement
Prepare the consolidated statement of financial position as at 31 December 20X9.
Total: 10 marks

10 Corfu Ltd
Corfu Ltd holds 80% of the ordinary share capital of Zante Ltd (acquired on 1 February 20X9) and
30% of the ordinary share capital of Paxos Ltd. Paxos Ltd is a joint venture set up by Corfu Ltd and
two other venturers on 1 July 20X8. The contractual agreement provides for joint control of Paxos
Ltd. Corfu Ltd uses the equity method of accounting wherever possible.
The draft statements of profit or loss for the year ended 30 June 20X9 are set out below.

Corfu Ltd Zante Ltd Paxos Ltd

£ £ £
Revenue 12,614,000 6,160,000 8,640,000
Cost of sales and expenses (11,318,000) (5,524,000) (7,614,000)
Trading profit 1,296,000 636,000 1,026,000
Dividends received from Zante Ltd 171,000 – –
Profit before tax 1,467,000 636,000 1,026,000
Income tax expense (621,000) (275,000) (432,000)
Profit for the year 846,000 361,000 594,000

Included in the inventory of Paxos Ltd at 30 June 20X9 was £150,000 for goods purchased from
Corfu Ltd in May 20X9, which the latter company had invoiced at cost plus 25%. These were the only
goods Corfu Ltd sold to Paxos Ltd but it did make sales of £50,000 to Zante Ltd during the year.
None of these goods remained in Zante Ltd’s inventory at the year end.

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 Requirement
Prepare a consolidated statement of profit or loss for Corfu Ltd for the year ended 30 June 20X9.
Total: 8 marks

11 King Ltd
King Ltd acquired shares in two other companies as follows.

Goodwill Retained
Shares on earnings at
Company Acquisition date acquired acquisition acquisition
% £ £
Prawn Ltd 1 October 20X7 80 90,000 260,000
Madras Ltd 31 December 20X5 25 – 340,000

The results and changes in retained earnings of the three companies for the year ended 30
September 20X9 are as follows.

King Ltd Prawn Ltd Madras Ltd

£ £ £
Revenue 800,000 430,000 600,000
Dividend from Prawn Ltd 40,000 – –
Dividend from Madras Ltd 10,000 – –
Cost of sales and expenses (550,000) (255,000) (440,000)
Profit before tax 300,000 175,000 160,000
Income tax expense (80,000) (45,000) (60,000)
Profit for the year 220,000 130,000 100,000

Retained earnings
Madras
King Ltd Prawn Ltd Ltd
£ £ £
540,00
Balance brought forward 600,000 320,000 0
Total comprehensive income 100,00
for the year 220,000 130,000 0
Dividends paid (110,000) (50,000) (40,000)
600,00
Balance carried forward 710,000 400,000 0

You are also given the following information.

(1) During the year King Ltd made sales of £80,000 to Prawn Ltd at a gross profit of 25%. At the year
end Prawn Ltd still held £36,000 of these goods in inventory.
(2) Impairment reviews at the following dates revealed the following amounts to be written off in
respect of King Ltd’s investment in Prawn Ltd and Madras Ltd.

632 Financial Accounting and Reporting − IFRS ICAEW 2021

 Prawn Ltd Madras Ltd
£ £
Review at
30 September 20X8 9,000 17,000
30 September 20X9 9,000 6,000

Requirement
Prepare the consolidated statement of profit or loss and the retained earnings column in the
consolidated statement of changes in equity of the King Ltd group for the year ended 30 September
20X9.
Total: 13 marks

12 Water Ltd
The draft statements of financial position of three companies as at 30 September 20X5 are as follows.

Hydrogen Oxygen
Water Ltd Ltd Ltd
£ £ £
Non-current assets
Property, plant and equipment 697,210 648,010 349,400
Investments
160,000 shares in Hydrogen Ltd 562,000 – –
80,000 shares in Oxygen Ltd 184,000 – –
1,443,210 648,010 349,400
Current assets
Inventories 495,165 388,619 286,925
Trade receivables 415,717 320,540 251,065
Cash 101,274 95,010 80,331
Total assets 2,455,366 1,452,179 967,721
Equity
Ordinary share capital 600,000 200,000 200,000
Retained earnings 1,015,000 820,000 463,000
Total equity 1,615,000 1,020,000 663,000
Non-current liabilities 400,000 150,000 100,000
Current liabilities
Trade payables 440,366 282,179 204,721
Total equity and liabilities 2,455,366 1,452,179 967,721

You are given the following additional information.

(1) Water Ltd purchased the shares in Hydrogen Ltd on 1 October 20X0 when the retained earnings
of Hydrogen Ltd were £500,000. The goodwill and non-controlling interest arising on the
acquisition of Hydrogen Ltd should be measured using the proportionate method.
(2) The shares in Oxygen Ltd were acquired on 1 October 20X2 when its retained earnings were
£242,000.

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(3) Included in the inventory figure for Water Ltd is inventory valued at £20,000 which had been
purchased from Hydrogen Ltd at cost plus 25%.
(4) Included in the trade payables figure of Water Ltd is £18,000 payable to Oxygen Ltd, the amount
receivable being recorded in the trade receivables figure of Oxygen Ltd.
(5) Impairment reviews to date have revealed a total of £1,000 to be written off goodwill in respect
of Hydrogen Ltd and £2,000 off in respect of Water Ltd’s investment in Oxygen Ltd.
Requirements
12.1 Prepare the consolidated statement of financial position for Water Ltd as at 30 September
20X5.
12.2 Identify the required accounting treatment for different levels of investment in undertakings for
consolidated accounts purposes, explaining why these are appropriate.
12.3 Set out a brief explanation in note form of how subsidiaries and associates are accounted for in
the consolidated statement of financial position.
Total: 21 marks

Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.

634 Financial Accounting and Reporting − IFRS ICAEW 2021