Semester 2 Week 9 Tutorial 8

Question 1

Outline why it is necessary to eliminate internal trading.

Answer 1

It is necessary to remove internal trading as this could lead to transactions being double counted, potentially overstating revenue, profits and inventories. Essentially we should be treating the group using the “single entity” approach as if it was just one company.

Question 2

Cooper Ltd. owns 100% of Pell Ltd. at the year-end Pell owes Cooper £300,000. Outline the adjustment required at the year-end.

Answer 2

After adding the statements of financial position together £300,000 should be removed from both receivables and payables.

Question 3

White Plc. owns 100% of Blue Ltd. During the year Blue sold goods to White for £320,000. The gross margin on this transaction is 30%. At the year-end 50% of these goods remain in stock.

a. Calculate the overall profit on this transaction.
b. Outline the unrealised profit at the year-end.
c. Outline the adjustment required at the year-end.

Answer 3

Remember to show the workings for each part:

a. The overall profit is 30% x £320,000 = £96,000
b. 50% of these profit or 50% x £96,000 = £48,000 is unrealised
c. The adjustment would involve remove £48,000 from both inventories and retained earnings.

Question 4

On 1 March 20X4 Cole Ltd purchased a 100% shareholding in Porter Ltd for £18m in cash. Porter’s retained earnings at 1 March 20X4 were £7.5 million. Neither company paid dividends during the year.

1. At the date of acquisition, the fair value of Porter’s assets were equal to their carrying amounts with the exception of the items listed below which exceed their carrying amounts as follows:
   -Inventory £200,000
   -Plant and equipment (remaining useful life 10 years) £800,000
   Porter Ltd has not adjusted the carrying amounts or adjusted for depreciation as a result of the fair value exercise. The inventories had all been sold by the year end.
2. An impairment test conducted at the year-end revealed that consolidated goodwill of Porter Ltd had been impaired by 25%.
3. On 1 October 20X4, Cole Ltd sold goods to Porter Ltd for £200,000, at a gross profit margin of 40%. 20% of these goods had been sold by Porter Ltd as at 28 February 20X5.

Required:
Prepare the consolidated statement of financial position of the Cole group as at 28 February 20X5.

Answer 4

3. Goodwill:
   Cost of investment 18,000
   Share capital of Porter
   Reserves of Porter
   FV ADJ
   -10,500
   Goodwill 7,500
   Impairment loss 25% -1,875
   Goodwill at 28/02/X5 5,625
4. Retained earnings

Per accounts = 33,200 + 8,150 = 41,350

Less RE on acquisition = 41,350 – 7,500 = 33,850

Less effects of FV adjustment = 33,850 - 280 = 33,570

Less impairment of goodwill = 33,570 – 1,875 = 31,695

Less unrealised profit on sale = 31,695 - 64 = 31,631