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Principles and Practice

of Group Accounts:
A European Perspective

Solutions to self-assessment exercises

Aileen Pierce
and
Niamh Brennan

Copyright Cengage Learning 2003


Aileen Pierce and Niamh Brennan have taken great care to ensure the accuracy and reasonableness
of these solutions. However, there may remain some errors, and/or a particular solution may be
unclear. The authors would welcome being alerted to any such deficiencies in the material included
in this website.

aileen.pierce@ucd.ie
niamh.brennan@ucd.ie

Copyright Cengage Learning 2003


2.1 Tony and Gerry
80%
(W1) Group structure Tony Gerry

(W2) Goodwill B B
Investment at cost 71,000
Net assets acquired
Ordinary share capital 80,000
General reserves 5,000
Profit and loss account 2,500
87,500
Group acquired (87,500@80%) 70,000
Goodwill 1,000

(W3) Consolidated general reserves


B
Tony 15,000
Group share of post-acquisition reserves of Gerry
([12,500reserves 5,000pre-acquisition] @ 80%)
6,000
21,000

(W4) Consolidated profit and loss account


B
Tony 11,000
Group share of post-acquisition reserves of Gerry
([7,500profit and loss account 2,500pre-acquisition] @ 80%) 4,000
15,000

(W5) Minority interest in net assets of Gerry


B
Net assets of Gerry at year end 100,000
Minority interest: 20%minority share 20,000

Consolidated balance sheet


B
Fixed assets 70,000
Goodwill (W2) 1,000
Net current assets 85,000
156,000
Share capital 100,000
General reserve (W3) 21,000
Revenue reserve (W4) 15,000
136,000
Minority interest (W5) 20,000
156,000

2.2 Tom and Joe


75%
(W1) Group structure Tom Joe

(W2) Consolidated balance sheet working accounts

Adjustment/cost of control account


B000 B000
Investment 130 Share capital 75
Revenue reserves (60pre-acquisition reserves @ 75%group share) 45
___ Balance c/d goodwill 10
130 130
Balance b/d goodwill 10 Consolidated reserves 10

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Minority interest account
B000 B000
Balance c/d 36.5 Share capital 25.0
____ Revenue reserves (46Joe @ 25%minority interest) 11.5
36.5 36.5

Consolidated reserves account


B000 B000
Adjustment/cost of control 45.0 Tom 73.0
Minority interest 11.5 Joe 46.0
Goodwill written off 10.0
Balance c/d 52.5 _____
119.0 119.0

Consolidated balance sheet as at 31 December 20X7


B000
Sundry assets (140Tom + 290Joe) 430.0
Share capital 50.0
Revenue reserves 52.5
102.5
Minority interest 36.5
Debentures (50Tom + 80Joe) 130.0
Creditors (97Tom + 64Joe) 161.0
430.0

3.1 Jack and Box


80%
(W1) Group structure Jack Box

(W2) Year-end entries None

(W3) Reconciliation of current accounts


B B
Dr Stock 700
Cr Debtors 700
Also exclude inter company balances from debtors and creditors

(W4) Unrealised profit None

(W5) Consolidated balance sheet working accounts

Cost of control account


B B
Cost 80,000 Share capital (50,000 @ 80%group share) 40,000
Capital reserves (10,000pre-acquisition @ 80%group share) 8,000
Profit and loss (30,000pre-acquisition @ 80%group share) 24,000
______ Balance c/d goodwill 8,000
80,000 80,000
Balance b/d goodwill 8,000 Consolidated profit and loss account 6,000
_____ Balance c/d goodwill 2,000
8,000 8,000

Consolidated profit and loss account


B B
Cost of control 24,000 Jack 21,600
Minority interest 8,000 Box 40,000
Goodwill written off 6,000
Consolidated balance sheet 23,600 ______
61,600 61,600

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Minority interest
B B
Consolidated balance sheet 22,100 Share capital (50,000Box @ 20%minority share) 10,000
Profit and loss (40,000Box @ 20%minority share) 8,000
______ Capital reserve (20,500Box @ 20%minority share) 4,100
22,100 22,100

Capital reserves
B B
Cost of control 8,000 Jack 10,000
Minority interest 4,100 Box 20,500
Consolidated balance sheet 18,400 ______
30,500 30,500

Jack Group
Consolidated balance sheet at 31 March 20X7
B B
Fixed assets
Intangible Goodwill 2,000
Tangible ([25,400+14,200+3,200+3,160]Jack +
[10,100 + 8,180 + 1,020+2,100]Box) 67,360
69,360
Current assets
Stock (34,140Jack + 32,100Box + 700stock in transit) 66,940
Debtors (16,800Jack + 48,050Box 2,800inter-company debtors) 62,050
Prepayments (1,200Jack + 5,050Box) 6,250
Cash and bank (1,470Jack + 38,200Box + 30Jack + 900Box) 40,600
175,840
Creditors and accruals (44,500Jack + 34,000Box + (81,100)
3,500Jack + 1,200Box 2,100inter-company creditors) 94,740
164,100
Financed by
Share capital 100,000
Capital reserve 18,400
Profit and loss account 23,600
142,000
Minority interest 22,100
164,100

3.2 Potato and Peeler


75%
(W1) Group structure Potato Peeler

(W2) Consolidated balance sheet working accounts

Adjustment/cost of control account


B000 B000
Investment 800 Ordinary share capital 450
Preference share capital 50
Revenue reserves (100pre-acquisition @ 75%group share) 75
___ Balance c/d goodwill 225
800 800

Minority interest
B000 B000
Balance c/d 275 Ordinary share capital 150
Preference share capital 50
___ Revenue reserves (300Peeler @ 25%minority share) 75
275 275

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Consolidated revenue reserves account
B000 B000
Adjustment/cost of control 75 Potato 1,200
Minority interest 75 Peeler 300
Goodwill written off 225
Unrealised profit 65
(160inter-company stock + 100stock in transit) / 25%margin
33.3%mark-up 25%margin on sales
Balance c/d 1,060 _____
1,500 1,500

(W3) Workings for the balance sheet


Inter-
Potato Peeler company Unrealised Total
B000 B000 B000 B000 B000
Fixed assets 2,000 700 2,700
Stocks 1,500 400 100 (65) 1,935
Debtors 1,200 300 (200) 1,300
Bank 600 100 50 750
Creditors 1,200 300 (50) 1,450
Taxation 400 200 600

Consolidated balance sheet as at 31 December 20X8


B000 B000
Fixed assets (W3) 2,700
Current assets
Stocks (W3) 1,935
Debtors (W3) 1,300
Bank (W3) 750
3,985

Current liabilities
Creditors (W3) 1,450
Taxation (W3) 600
Proposed dividends 300
2,350
Net current assets 1,635
4,335
Shareholders funds
Share capital 3,000
Revenue reserves 1,060
4,060
Minority interest 275
4,335

4.1 Monitor and Screen


75%ordinary shares
50%preference shares
(W1) Group structure Monitor Screen

(W2) Consolidated balance sheet working accounts

(Note: Completing the entries approach has been taken to deal with the proposed dividends in Screen)

Adjustment/cost of control account


B000 B000
Investment in Screen Ordinary share capital 3,000
Ordinary shares 3,800 Preference share capital 500
Preference share 490 Creditors due after more than one year 200
Loan stock 200 Capital reserves (400pre-acquisition @ 75%group share) 300
Revenue reserves (200pre-acquisition @ 75% group share) 150
_____ Balance c/d goodwill 340
4,490 4,490

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Minority interest
B000 B000
Balance c/d 2,350 Ordinary share capital 1,000
Preference share capital 500
Capital reserves (2,000Screen @ 25%minority share) 500
_____ Revenue reserves (1,400Screen @ 25%minority share) 350
2,350 2,350

Consolidated reserves accounts


Capital Revenue Capital Revenue
B000 B000 B000 B000
Adjustment/cost of control 300 150 Monitor 2,000 1,300
Minority interest 500 350 Screen 2,000 1,400
Goodwill 340 Ordinary dividends receivable 15
(20Screen proposed dividends @ 75%group share)
Balance c/d 3,200 1,877 Preference dividends receivable 2
(4Screen proposed dividends @ 50% group share) _____ _____
4,000 2,717 4,000 2,717

Dividend elimination account


B000 B000
Consolidated revenue reserves Proposed dividends Screen: Preference 4
Dividend receivable Proposed dividends Screen: Ordinary 20
Monitor: Preference 2
Monitor: Ordinary 15
Consolidated balance sheet due to minority 7 __
24 24

Consolidated balance sheet as at 31 December 20X8


B000
Fixed assets
Tangible assets (4,500Monitor + 5,000Screen) 9,500
Financial assets (4,500Monitor + 1,000Screen 4,490inter-company) 1,010
10,510
Current assets
Stocks (3,900Monitor + 2,900Screen) 6,800
Debtors (5,600Monitor + 3,800Screen) 9,400
Bank (900Monitor + 500Screen) 1,400
17,600
Creditors due within one year (6,060Monitor + 3,776Screen + 7minority dividend + 40proposed dividend) 9,883
7,717
18,227
Ordinary share capital 6,000
Preference share capital 2,000
8,000
Capital reserves 3,200
Revenue reserves 1,877
13,077
Minority interest 2,350
Creditors due after one year (2,000Monitor + 1,000Screen 200inter-company) 2,800
18,227

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5.1 Increasing stake of existing subsidiary Teeny and Tiny
(W1) Group structure
60%first acquisition
+20%second acquisition
Teeny Tiny

(W2) Goodwill First acquisition Second acquisition Total


B000 B000 B000 B000 B000
Investment at cost 11,500 4,900 16,400
Net assets acquired
Ordinary share capital 15,000 15,000
Profit and loss account 2,500 *6,250
Fair value adjustment 400 600
17,900 21,850
Group acquired 60%/20% 10,740 4,370 15,110
Goodwill 760 530 1,290

Annual amortisation (one-fifth) 152 106 258

Cumulative amortisation at 1 July 20X4 456(152 3 years) 456


*[5,500Tiny opening balance profit and loss account + (1,500Tiny profit for year @ 6months /12months) = 6,250]

(W3) Consolidated balance sheet working accounts

Adjustment/cost of control account


B000 B000
Investment at cost 16,400 Ordinary share capital (15,000Tiny @ 80%group share) 12,000
Revenue reserves (2,500Tiny 31.12.X1 @ 60%first acquisition) 1,500
([5,500Tiny 30.6.X4 + 750Tiny 1.7.X431.12.X4] @ 20%second acquisition) 1,250
Fair value adjustments (400 excess fair value 31.12.X1 @ 60% first acquisition) 240
(600excess fair value 31.12.X4 @ 20%second acquisition) 120
______ Balance c/d goodwill (see W2) 1,290
16,400 16,400
Balance b/d 1,290 Accumulated amortisation at 1.7.X4 456
Charge for year (W2) 258
_____ Balance c/d 576
1,290 1,290

Minority interest
B000 B000
Consolidated balance sheet 4,400 Ordinary share capital (15,000Tiny @ 20%minority share) 3,000
_____ Revenue reserves (7,000Tiny @ 20%minority share) 1,400
4,400 4,400

Consolidated revenue reserves


B000 B000
Cost of control pre-acquisition 2,750 Teeny 24,500
Cost of control fair value adjustment1 240 Tiny 7,000
Cost of control fair value adjustment1 120
Minority interest 1,400
Goodwill amortisation 1.7.X4 456
Amortisation year ended 30.6.X5 258
Consolidated balance sheet 26,276 ______
31,500 31,500

1
The net assets subject to fair value adjustments at the time of acquisition have been consumed/disposed of by the
balance sheet date. Consequently, group revenue reserves are reduced by the amounts effectively treated as
pre-acquisition reserves.

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Consolidated balance sheet
B000
Goodwill 576
Sundry net assets (20,100Teeny + 22,000Tiny) 42,100
42,676
Share capital 12,000
Revenue reserve 26,276
38,276
Minority interest 4,400
42,676

5.2 Simple investment becomes subsidiary Teeny and Tiny


(W1) Group structure
10%first acquisition
+70%second acquisition
Teeny Tiny

(W2) Goodwill
B000 B000
Investment at cost
Simple investment (10%) 1,750
Majority share (70%) 14,650 16,400
Net assets acquired
Ordinary share capital 15,000
Profit and loss account 6,2501
Fair value adjustment 600
21,850
Group acquired 80% 17,480
Negative goodwill (1,080)

Annual credit to profit and loss account2 (216)

1
[5,500 + (6/12 1,500) = 6,250].
2
Negative goodwill is assumed to be treated in a parallel way to positive goodwill.

(W3) Consolidated balance sheet working accounts


Adjustment/cost of control account
B000 B000
Investment at cost 16,400 Ordinary share capital (15,000Tiny @ 80%group share) 12,000
Balance c/d goodwill (see W2) 1,080
Revenue reserves
([5,500Tiny 30.6.X4 + 750Tiny 1.7.X431.12.X4] @ 80%group share) 5,000
______ Fair value adjustments (600excess fair value 31.12.X4 @ 80%group share) 480
17,480 17,480

Credit for year 216 Balance b/d 1,080


Balance c/d 864 _____
1,080 1,080

Minority interest (exactly the same as 5.1)


B000 B000
Consolidated balance sheet 4,400 Ordinary share capital (15,000Tiny @ 20%minority share) 3,000
_____ Revenue reserves (7,000Tiny @ 20%minority share) 1,400
4,400 4,400

Consolidated revenue reserves


B000 B000
Cost of control pre-acquisition 5,000 Teeny 24,500
Cost of control fair value adjustment1 480 Tiny 7,000
Minority interest 1,400 Goodwill credited to profit and loss account 216
Consolidated balance sheet 24,836 ______
31,716 31,716

1 The net assets subject to fair value adjustments at the time of acquisition have been consumed/disposed of by the
balance sheet date. Consequently, group revenue reserves are reduced by the amounts treated as pre-acquisition
reserves.

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Consolidated balance sheet
B000
Goodwill (864)
Sundry net assets 42,100
41,236

Share capital 12,000


Revenue reserve 24,836
36,836
Minority interest 4,400
41,236

5.3 Associate becomes subsidiary Teeny and Tiny


(W1) Group structure
40%first acquisition
+40%second acquisition
Teeny Tiny

(W2) Goodwill First acquisition Second acquisition Total


B000 B000 B000 B000 B000
Investment at cost 7,400 9,000 16,400
Net assets acquired
Ordinary share capital 15,000 15,000
Profit and loss account 2,500 6,250*
Fair value adjustment 400 600
17,900 21,850
Group acquired 40% / 40% 7,160 8,740 15,900
Goodwill 240 260 500

Annual amortisation 48 52 100


Cumulative amortisation at 1 July 20X4 144(3 years 48) 144

*[5,500Tiny opening balance profit and loss account + (1,500Tiny profit for year @ 6months /12months) = 6,250]

(W3) Consolidated balance sheet working accounts

Adjustment/cost of control account


B000 B000
Investment at cost 16,400 Ordinary share capital (15,000Tiny @ 80%group share) 12,000

Revenue reserves (2,500Tiny 31.12.X1 @ 40%first acquisition) 1,000


([5,500Tiny 30.6.X4 + 750Tiny 1.7.X431.12.X4] @ 40%second acquisition) 2,500

Fair value adjustments 160


(400 excess fair value 31.12.X1 @ 40% first acquisition)
(600excess fair value 31.12.X4 @ 40%second acquisition) 240
______ Balance c/d goodwill (see W2) 500
16,400 16,400

Balance b/d 500 Accumulated amortisation at 1.7.X4 (W2) 144


Charge for year (48first acquisition W2+ 52second acquisition W2) 100
____ Balance c/d goodwill 256
500 500

Minority interest (exactly the same as 5.1 and 5.2)


B000 B000
Consolidated balance sheet 4,400 Ordinary share capital (15,000Tiny @ 20%minority share) 3,000
_____ Revenue reserves (7,000Tiny @ 20%minority share) 1,400
4,400 4,400

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Consolidated revenue reserves
B000 B000
Cost of control pre-acquisition 3,500 Teeny 24,500
Cost of control fair value adjustment1 160 Tiny 7,000
Cost of control fair value adjustment1 240
Minority interest 1,400
Goodwill amortisation 1.7.X4 144
Amortisation year ending 30.6.X5 100
Consolidated balance sheet 25,956 ______
31,500 31,500

1 The net assets subject to fair value adjustments at the time of acquisition have been consumed/disposed of by the balance sheet
date. Consequently, group revenue reserves are reduced by the amounts effectively treated as pre-acquisition reserves.

Consolidated balance sheet


B000
Goodwill 256
Sundry net assets 42,100
42,356
Share capital 12,000
Revenue reserve 25,956
37,956
Minority interest 4,400
42,356

6.1 Tic, Tac and Toe


(W1) Group structure
35% 31.12.X2
Tic Toe

80%
30.6.X2

40%
31.12.X1
Tac

Tac Toe
% %
Group share (direct) 80 35
Indirect 32 (80% 40%)
80 67
Minority share (direct) 20 25
Indirect 8 (20% 40%)
20 33

Tac is a subsidiary on 30 June 20X2. Pre-acquisition reserves of Tac at that date are B6m.
Toe is an associate at 30 June 20X2 and becomes a subsidiary at 31 December 20X2.
Consequently, Toe is a piecemeal acquisition using the step-by-step approach to identifying the pre-acquisition reserves: Pre-
acquisition reserves for associate undertaking status are those at 30 June 20X2, i.e., B4.5m. Pre-acquisition reserves when
subsidiary status is achieved are those at 31 December 20X2, i.e., B5m.

(W2) Consolidated balance sheet working accounts


Cost of control
B000 B000
Tics investment at cost 28,000 Tac: Ordinary share capital (20,000 @ 80%group share) 16,000
Tacs investment Tac: Pre-acquisition reserves (6,000 @ 80%group share) 4,800
(5,900 @ 80%group share) 4,720 Toe: Ordinary share capital (10,000 @ 67%group share) 6,700
Toe: Pre-acquisition reserves (4,500first acquisition@ 32%) 1,440
(5,000second acquisition@ 35%) 1,750
______ Bal c/d goodwill 2,030
32,720 32,720

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Consolidated revenue reserves
B000 B000
Cost of control: Tac (6,000@ 80%group share) 4,800 Tic 20,000
Cost of control: Toe ([4,500first acquisition@32%]+[5,000second acquisition@35%]) 3,190 Tac 16,000
Minority interest: Tac (16,000 @ 20%minority share) 3,200 Toe 10,000
Minority interest: Toe (10,000 @ 33%minority share) 3,300
Consolidated balance sheet 31,510 ______
46,000 46,000

Minority interest
B000 B000
Minority share of cost of Tac: Ordinary share capital (20,000 @ 20%group share) 4,000
Tacs investment in Toe Toe: Ordinary share capital (10,000 @ 33%group share) 3,300
(20% 5,900) 1,180 Tac: Revenue reserves (16,000 @ 20%minority share) 3,200
Consolidated balance sheet 12,620 Toe: Revenue reserves (10,000 @ 33%minority share) 3,300
13,800 13,800

Consolidated balance sheet


B000
Assets
Goodwill 2,030
Sundry net assets (22,000Tic + 30,100Tac + 20,000Toe) 72,100
74,130
Financed by
Share capital 30,000
Consolidated revenue reserves 31,510
61,510
Minority interest 12,620
74,130

6.2 Petal, Rose and Stem


(W1) Group structure
Petal

80%

1.1.20X4

Rose

80%

1.7.20X6

Stem

Rose Stem
% %
Group share (direct) 80
Indirect 64 (80% 80%)
80 64
Minority share (direct) 20 20
Indirect 16 (20% 80%)
20 36

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(W2) Consolidated balance sheet working accounts
Cost of control
B000 B000
Cost Rose 180 Rose: Ordinary share capital (100,000 @ 80%group share) 80.0
Rose: Share premium (60,000 @ 80%group share) 48.0
Rose: Revaluation reserve (10,000 @ 80%group share) 8.0
Rose: P/L (20,000 @ 80%group share) 16.0
Cost Stem (100 @ 80%group share) 80 Stem: Ordinary share capital (40,000 @ 64%group share) 25.6
Stem: P/L (60,000 @ 64%group share) 38.4
___ Goodwill (28Rose + 16Stem) 44.0
260 260.0
Balance b/d 44 Profit and loss account 20X4 (284) 7
Profit and loss account 20X5 (284) 7
Profit and loss account 20X6 (284) + (164) 11
__ Balance c/d 19
44 44

Consolidated profit and loss account


B000 B000
Rose: Cost of control (20,000 @ 80%group share) 16.0 Rose 145
Stem: Cost of control (60,000 @ 64%group share) 38.4 Petal 84
Goodwill amortised (7+7+11) 25.0 Stem 70
Rose: Minority interest (84,000 @ 20%minority share) 16.8
Stem: Minority interest (70,000 @ 36%minority share) 25.2
Consolidated balance sheet 177.6 ___
299.0 299

Minority interest
B000 B000
Rose: Ordinary share capital (100,000 @ 20%minority share) 20.0
Rose: Share premium (60,000 @ 20%minority share) 12.0
Investment in Stem Rose: Revaluation reserve (50,000 @ 20%minority share) 10.0
Rose: P/L (84,000 @ 20%minority share) 16.8
(100 @ 20%minority share) 20.0 Stem: Ordinary share capital (40,000 @ 36%minority share) 14.4
Stem: P/L (70,000 @ 36%minority share) 25.2
Consolidated balance sheet 78.4
98.4 98.4

Consolidated balance sheet


B000 B000
Fixed assets
Tangible fixed assets 250.0
Goodwill 19.0
Current assets
(375Petal + 215Rose + 140Stem [22+20inter-company accounts] +
5goods in transit + 7cash-in-transit) 700

Creditors: Amounts due within one year


(130Petal + 121Rose + 80Stem [15 + 15inter-company accounts]) (301) 399.0
668.0
Financed by
Share capital 200.0
Share premium account (Petal only) 150.0
Revaluation reserve (30Petal + (40,000 @ 80%)post-acquisition Rose) 62.0
Profit and loss account 177.6
Minority interest 78.4
668.0

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7.1 Champion Group
(W1) Group structure
30%
Champion Ship

80%

1.1.20X4

Winner

75%

1.9.20X3

Trier

(W2) Group share


Winner Trier Ship
Direct 80% 30%
Indirect 60% (80% 75%) ____
80% 60% 30%

(W3) Minority share


Winner Trier
Direct 20% 25%
Indirect 15% (20% 75%)
20% 40%

(W4) Unrealised profits


A Adjust stock in Winner/ profit in Trier by B100,000 (see note (v)).

B Fixed asset in Champion (note vii):


Eliminate profit on disposal (Winner) B100,000 (B500,000transfer value-400,000book value)
Uplift book value
Additional depreciation (Champion) B25,000 pa for 3 years = B75,000
Current depreciation: B500,000transfer value @ 1/4thremaining useful life= 125,000 pa
Original depreciation: B800,000original cost@12% = 100,000 pa
Difference B25,000 pa Extra depreciation to be adjusted

(W5) Consolidated balance sheet working accounts


Cost of control account
B000 B000
Investment in Winner 2,500 Ordinary share capital (750Winner @ 80%) 600
Investment in Trier (1,500cost @ 80%) 1,200 Ordinary share capital (500Trier @ 60%) 300

Reserves Winner (1,450pre-acquisition @ 80%) 1,160


Reserves Trier (940pre-acquisition @ 60%) 564
Revaluation surplus (350land note (iv) @ 80%) 280
_____ Balance c/d goodwill 796
3,700 3,700
Balance b/d 796 Goodwill amortised (6years/8years 796balance b/d) 597
___ Balance b/d 199
796 796

Minority interest
B000 B000
Ordinary share capital (750Winner @ 20%) 150
Investment in Trier (1500cost @ 20%) 300 Ordinary share capital (500Trier @ 40%) 200
Revenue reserves (1,750Winner 100profit on disposal @ 20%) 330
Revenue reserves (1,290Trier 100profit on sale stock@ 40%) 476
Balance c/d 926 Revaluation surplus (350land note (iv) @ 20%) 70
1,226 1,226

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Consolidated revenue reserves account
B B
Unrealised profit in stock (note v) 100 Champion 2,970
Unrealised fixed asset profit (note vii) 100 Winner 1,750
Minority Winner (1,750reserves Trier 1,290
100unrealised fixed assets profit @20%) 330
MinorityTrier (1,290reserves Depreciation adjustment (25adjustment pa 3years) 75
100unrealised stock profit @ 40%) 476
Cost of control Winner 1,160 Associated company
Cost of control Trier 564 (120[420 retained profits 300 pre-acquisition] @ 30%group share) 36
Goodwill amortised: Subsidiaries 597
Associatesee below 45
Balance c/d 2,749
6,121 6,121

(W6) Investment in associate


Investment in associate
B B
Investment @ cost 240 Goodwill amortised (3years /8years [240cost
[100share capital+300pre-acquisition reserves@30%]]) 45
Group share of post-acquisition revenue
reserves (420reserves300pre-acquisition @ 30% 36 Balance c/d 231
276 276

Presentation of associated company B


Group share of net assets at balance sheet date 520share capital 100 and reserves 420 @ 30% 156
Group share of goodwill: (5years /8years [240cost[100share capital+300pre-acquisition reserves@30%]) 75
231

(W7) Workings for the balance sheet


Champion Winner Trier Inter Total
B000 B000 B000 B000 B000
Land 750 400 850 fair value adjustment (iv)
350 2,350
Equipment 1,045 345 250 depreciation (3 25,000)
75
_____ ___ _____ unrealised profit (vii)
(100) 1,615
Tangible assets 1,795 745 1,100 325 3,965
Stocks 644 423 241 profit
(100) 1,208
Debtors 921 647 407 1,975
Bank 713 232 353 1,298
Creditors due within one year 843 1,047 311 2,201
Creditors due after one year 1,000 1,000

Champion and Group


Consolidated balance sheet at 31 December 20X9
B000 B000
Fixed assets
Intangible fixed assets (W5) 199
Tangible fixed assets (W7) 3,965
Financial fixed asset
Investment in associate (W6) 231

Current assets
Stocks (W7) 1,208
Debtors (W7) 1,975
Bank (W7) 1,298
4,481
Less: Creditors due within one year (W7) 2,201
Net current assets 2,280
6,675

Creditors falling due after more than one year (W7) 1,000
Share capital and reserves
Ordinary share capital 2,000
Revenue reserves (W5) 2,749
Minority interest (W5) 926
6,675

15

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8.1 Luke and Warm
(W1) Group structure
Luke Warm
75% 31.12.20X1

(W2) Adjustments
Bonus issue B B
Dr Capital reserve 20,000
Cr Share capital 20,000
Devaluation
Dr Capital reserve 14,000
Cr Fixed assets 14,000

(W3) Provision for unrealised profit


Unrealised profit B4,800inter-company stock 20mark-up /120cost + mark-up = B800
Dr Cost of control 600
Dr Minority interest 200
Cr Stock 800

(W4) Consolidated balance sheet working accounts


Cost of control
B B
Cost 100,000 Ordinary share capital (100Warm@ 75%group share) 75,000
Capital reserve
Unrealised profit (W3) 600 Revenue reserve (10pre-acquisition @ 75%group share) 7,500
Profit and loss account (10pre-acquisition @ 75%group share) 7,500
_______ Goodwill 10,600
100,600 100,600

Consolidated revenue reserves


B B
Cost of control (W3) 7,500 Luke 20,000
Minority interest 2,500 Warm 10,000
Consolidated balance sheet 20,000 ______
30,000 30,000

Consolidated profit and loss account


B B
Cost of control 7,500 Luke 50,000
Minority interest 2,500 Warm 10,000
Consolidated balance sheet 50,000 ______
60,000 60,000

Minority interest
B B
Unrealised profit (W3) 200 Ordinary share capital (100Warm 25%minority share) 25,000
Consolidated balance sheet 29,800 Revenue reserve (10Warm @ 25%minority share) 2,500
______ Profit and loss account (10 Warm @ 25%minority share) 2,500
30,000 30,000

Alternative approach (assuming share capital and capital reserves are before bonus issue and fixed asset
write down)
Alternative cost of control
B B
Cost 100,000 Ordinary share capital (80Warm @ 75%group share) 60,000
Capital reserve (34pre-acquisition 75%group share) 25,500
Devaluation (14 @ 75%group share) 10,500 Revenue reserve (10 pre-acquisition 75%group share) 7,500
Unrealised profit (W3) 600 Profit and loss account (10 pre-acquisition 75%group share) 7,500
_______ Balance c/d goodwill 10,600
111,100 111,100

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Alternative minority interest
B B
Unrealised profit (W3) 200 Ordinary share capital (80Warm @ 25%minority share) 20,000
Devaluation (14 25%minority share) 3,500 Capital reserve (34Warm @ 25%minority share) 8,500
Consolidated balance sheet 29,800 Revenue reserve (10Warm @ 25%minority share) 2,500
______ Profit and loss account (10Warm @ 25%minority share) 2,500
33,500 33,500

Luke and Group


Consolidated balance sheet at 31 December 20X1
B B
Fixed assets (14devaluation) 367,000
Goodwill 10,600
Current assets
Stock (800unrealised profit) 39,200
Bills receivable (700inter-company) 1,300
Debtors and bank 37,000
77,500
Current liabilities
Creditors 52,500
Bills payable (700inter-company) 2,800
55,300 22,200
399,800
Share capital 300,000
Revenue reserves 20,000
Profit and loss account 50,000
370,000
Minority interest 29,800
399,800

Note: There is a contingent liability for bills receivable discounted of B900 (B1,200Q 300inter-company bills receivable discounted and now eliminated).

9.1 Harold
(W1) Group structure
100%
Harold Sivex

Consolidated balance sheets (a) (b)


Acquisition Merger
method method
B B
Freehold property 960,000 860,000
Goodwill (250cost [139net assets acquired + 100revaluation]) 11,000
Current assets
Cash 79,000 79,000
Other 70,000 70,000
149,000 149,000
Creditors: Amounts falling due within one year (155,000) (155,000)
Net current (liabilities) (6,000) (6,000)
965,000 854,000
Creditors: Amounts falling due after more than one year
Bank term loan 400,000 400,000

Ordinary shares 350,000 350,000


Capital reserves 210,000* 35,000**
Revenue reserves 5,000 69,000
565,000 454,000
965,000 854,000
B
*Capital reserves
Harold 60,000
Sivex
Share premium (100,000shares issued B1.50premium) 150,000
210,000

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**Nominal value of shares issued 100,000
Nominal value of shares acquired 70,000
(30,000)
Capital reserves Harold 60,000
Sivex 5,000
35,000

9.2 Mergacquis
(W1) Group structure
90%
Mergacquis Sivex

Consolidated balance sheets (a) (b)


Acquisition Merger
method method
B B
Freehold property 930,000 880,000
Goodwill (180cost [149net assets acquired+ 50revaluation] @ 90%group share) 900 _______
Current assets 930,900 880,000
Stock 120,000 120,000
Debtors 80,000 80,000
Cash 99,000 99,000
299,000 299,000
Creditors: Amounts falling due within one year (175,000) (175,000)
Net current assets 124,000 124,000
Total assets less current liabilities 1,054,900 1,004,000

Creditors: Amounts falling due after more than one year


Bank term loan 350,000 350,000

Share capital and reserves


Ordinary shares 400,000 400,000
Capital reserves (80,000share premium+ 80,000capital reserves) 160,000 65,500*
Revenue reserves 125,000 173,600
685,000 639,100
Minority interest (149net assets acquired+ 50revaluation) @ 10%minority share) 19,900 14,900
1,054,900 1,004,000

B000 B000
*Capital reserves
Mergacquis 80.0
Sambon (15,000 @ 90%group share) 13.5
93.5
Nominal value of shares: Issued 100.0
Acquired 72.0 (28.0)
65.5

10.1 Large, Medium and Small


Consolidated workings
(W1) Group structure
90%
Large Medium

60%

Small

(W2) Intercompany cost of sales adjustment B000


In Large: Purchases from Small less closing stock (1,500sales300stock) 1,200
In Small: Goods sold to Large and in stock @ year-end (300stock 331/3%) 200
1,400

(W3) Intercompany dividends in Large B000


From Medium ([240dividends 40preference dividends] @ 90%group share) 180
From Small (60dividends @ 60%group share ) 36
216

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(W4) Consolidated profit and loss Large Medium Small Adjustment Consolidated
account profit and
loss account
B000 B000 B000 B000 B000
Sales 17,000 10,000 1,500 (1,500) 27,000
Cost of sales (12,000) (6,000) (1,000) 1,400 (17,600)
Gross profit 5,000 4,000 500 (100) 9,400
Expenses (3,600) (2,400) (280) (6,280)
Investment income 216 (216)
Profit before tax 1,616 1,600 220 (316) 3,120
Tax (628) (650) (70) (1,348)
Profit after tax 988 950 150 (316) 1,772
Minority interest preference (40)
Minority interest ordinary (91) (60)
Minority interest in unrealised profit ___ ____ ___ 40
(131) (60) 40 (151)

Profit after tax after minority interest 988 819 90 (276) 1,621
Dividends: Large (400) (400)
Dividends: Medium (180) 180
Dividends: Small ___ ___ (36) 36 _____
Retained for year 588 639 54 (60) 1,221
Retained b/f 912 540 310
Less: Pre-acquisition (140) (110)
Post-acquisition 912 400 200
Group share (90% / 60%) 912 360 120 1,392
Retained c/f 1,500 999 174 (60) 2,613

10.2 Head and Toe


Consolidated workings
(W1) Group structure:
80% Ordinary share capital
Head Toe
1/10/20X4

(W2) Revaluation of tangible fixed assets at acquisition and depreciation adjustment


B
Total revaluation surplus 175,000
Group share (80%) 140,000
Minority share (20%) 35,000

Plant and machinery


Depreciation on revalued amount (50,000 @ 20%) 10,000
For six months (6months /12months) 5,000
Group share (80%) 4,000
Minority share (20%) 1,000

(W3) Pre-acquisition dividend


Dividend for year ended 31 March 20X5 B60,000
Group share (80%) B48,000
Pre-acquisition (6months /12months) B24,000
Post-acquisition (Consolidated profit and loss) B24,000

(W4) Provision for unrealised profit in stock


Head 25%mark-up on cost 20%gross profit percentage on sales value
Unrealised profit on stock B50,000stock(half) @ 20%gross profit percentage on sales value = B10,000
Cost of sales adjustment = 100inter-company sales 10unrealised profit on stock = B90,000

(W5) Total cost of sales adjustment


Provision for unrealised profit in stock (W4) 90,000
Additional depreciation (W2) (5,000)
85,000

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(W6) Consolidated balance sheet working accounts
Cost of control account
B000 B000
Investment at cost Ordinary share capital (150Toe @ 80%group share) 120
Toe 900
Pre-acquisition dividend (24) 876 Revaluation surplus (175excess fair values @ 80%group share) 140
(60dividend 6 months /12 months @ 80%group share) Profit and loss account ([500opening bal + 70six months] @ 80%group share) 456
___ Balance c/d goodwill 160
876 876
Balance b/d 160 Consolidated profit and loss account (one-fifth 6months /12months) 16
___ Balance c/d 144
160 160

Consolidated revenue reserves account


B000 B000
Provision for unrealised profit 10 Head 410
Cost of control ([500opening bal+70six months]
@ 80%group share) 456 Toe 640
Depreciation adjustment (W2) 4 Dividends receivable 24
Goodwill amortisation 16 (60dividends 6months /12months @ 80%group share)
Minority interest (640Toe @ 20%minority share) 128
Consolidated balance sheet 460 _____
1,074 1,074

Minority interest
B000 B000
Depreciation adjustment (W2) 1 Ordinary share capital (150Toe @ 20%minority share) 30
Consolidated balance sheet 192 Revaluation surplus (175excess fair value @ 20%minority share) 35
___ Profit & loss account (640Toe@ 20%minority share) 128
193 193

(W7) Consolidated profit and loss account workings


Head Toe Adjustment Total
6months /12months
B000 B000 B000 B000
Turnover 1,200 500 (100) 1,600
Cost of sales (650) (330) 85 W5 (895)
550 170 (15) 705
Operating expenses (120) (44) (16) W6 (180)
Operating profit 430 126 (31) 525
Investment income 24 (24)
Debenture interest (6) ___ (6)
Profit before tax 454 120 (55) 519
Tax (100) (20) ___ (120)
354 100 (55) 399
Minority interest (20%) ____ (20) 1 W8 (19)
Attributable to Group 354 80 (54) 380
Dividends (80) (80)
Inter-company dividends ___ (24) 24 W3 ___
Retained for year 274 56 (30) 300
Retained profit b/f 160 160
434 56 (30) 460

(W8) Minority interest adjustment: profit and loss account


B
Minority share of depreciation adjustment (B5,000 20%) 1,000

(W9) Retained earnings b/fwd


Head balance at 1.4.20X4 = B160,000

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Consolidated profit and loss account for year ended 31 March
20X5 20X4
B000 B000
Turnover 1,600
Cost of sales (895) C
Gross profit 705 O
Operating expenses (180) M
Operating profit 525 P
Interest payable (6) A
Profit before taxation 519 R
Taxation (120) A
Profit after tax 399 T
Minority interest (19) I
380 V
Dividends (80) E
Profit retained for year 300 S
Retained earnings b/f (W9) 160
Retained earnings c/f 460

Consolidated balance sheet at 31 March 20X5


20X5 20X4
B000 B000 B000
Fixed assets
Land and buildings (400Head + 150Toe + 125excess fair value note (i)) 675
Plant and machinery
(220Head + 510Toe + 50excess fair value note (i) 5depreciation adjustment) 775
1,450 C
Financial fixed assets 30 O
Intangible fixed assets (W6) 144 M
1,624 P
Current assets A
Stock (240Head + 280Toe 10unrealised profit) 510 R
Debtors (170Head + 210Toe 56inter-company current account) 324 A
Cash (20Head + 40Toe + 20cash-in-transit) 80 T
914 I
Creditors: Amounts due in less than one year V
Trade creditors (170Head + 155Toe 36inter-company current account) 289 E
Tax (50Head + 45Toe) 95 S
Dividends (40Head + 60Toe 48inter-company) 52
436
Net current assets 478
Total assets less liabilities 2,102
Creditors: Amounts due in more than one year (150)
1,952

Ordinary share capital (400balance sheet + 300share issue) 700


Share premium account (300shares issued B2premium on issue) 600
Profit and loss account (W6) 460
Shareholders funds 1,760
Minority interest (W6) 192
1,952

11.1 Golf, Club, Ball and Tee


(W1) Group structure
50% preference share capital
75% ordinary share capital
Golf Tee
1.11.X2
30%
1.7.X2
Ball

Investment in Club is a simple investment.

(W2) Unrealised profit


B24,000 25% = B6,000 provision required

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(W3) Dividends receivable by Golf
Per question B
Ball (60,000ordinary dividend @ 30%group share) 18,000
Tee (32,000ordinary dividend @ 75%group share) 24,000
(9,000preference dividend @ 50%group share) 4,500
46,500
To be recorded in consolidated profit and loss account
Club (100,000ordinary dividend @ 15%group share) 15,000
Ball (60,000ordinary dividend @ 30%group share) 18,000
Tee (32,000ordinary dividend @ 75%group share 8months /12months) 16,000
(9,000preference dividend @ 50%group share 8months /12months) 3,000
52,000
Inter-company (18,000Ball + 16,000Tee ordinary + 3,000Tee preference) (37,000)
Group (i.e., dividend due from Club see note 2 of question) 15,000

To be recorded in consolidated revenue reserves account


Club (100,000ordinary dividend @ 15%group share) 15,000
Less: Pre-acquisition Tee (32,000ordinary dividend @ 75%group share 4months /12months) (8,000)
(9,000preference dividend @ 50%group share 4months /12months) (1,500)
5,500

(W4) Consolidated workings: Golf Tee Adjustment Total Ball


Profit and loss account 75% 30%
8/12
B000 B000 B000 B000 B000
Turnover (W2) 2,100 800 (24)* 2,876 1,900
Expenses (W2) (1,850) (716) 18* (2,548) (1,690)
Operating profit (W2) 250 84 (6) 328 210
Dividends receivable (W3) 52 (37) 15
Share of associate (30%) ___ ___ ___ 63 63
302 84 (43) 406 63
Taxation (90) (34) (124)
Share of associate (30%) ___ ___ ___ (25.5) (25.5)
212 50 (43) 256.5 37.5
Minority interest:
Preference dividend
(9,000preference dividend @ 50% minority share 8months /12months) (3)
Attributable to ordinary minority shareholders
(50,000profit after tax [9preference dividend 8months /12months]
25%minority share) ___ (11) ___ (14) ____
212 36 (43) 242.5 37.5
Profit b/f 450 200 720.5 (30%)
70.5
Pre-acquisition profits (75%group share) (150) (220.5) (70.5)
Minority interest in pre-acquisition profits (25%minority interest) ___ (50) (50) ___
450 450
Profit c/f 662 36 (43) 692.5 37.5
Dividends Golf (132) (132)
Inter-company:
Tee (32ordinary dividend 75%group share 8months /12months) (16) 16
Tee (9preference dividend 50%group share 8months /12months) (3) 3
Ball (60ordinary dividend 30%group share) ___ ___ 18 (18)
530 17 (6) 560.5 19.5
*Adjustments to sales and expenses are incomplete and based only on details relating to goods remaining in stock at the year-end.

(W5) For information only: Balance sheet workings (extract)


Consolidated revenue reserves account
B B
Provision for unrealised profit 6,000 Golf 524,500
Pre-acquisition Tee* 158,500 Dividend receivable (52W3 46.5W3) 5,500
Minority interest: (234Tee @ 25%minority share) 58,500 Tee 234,000
Consolidated balance sheet 560,500 Ball (65,000retained profit 30%group share) 19,500
783,500 783,500

*Pre-acquisition profits of Tee B


Retained profits b/f 200,000
Pre-acquisition (34,000current year retained profit 4months /12 months) 11,333
211,333
Group share (75%) 158,500

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Golf Group
Consolidated profit and loss account
for the year ended 30 June 20X3
Notes B
Turnover 1 2,876
Expenses (2,548)
Operating profit 2 328
Investment income 15
Share of pre-tax profits of associate 63
Profit before tax 3 406
Taxation
Group (124)
Associate (25.5)
Profit after tax 256.5
Minority interest (14)
Profit attributable to group 4 242.5
Dividends (132)
Profit retained for year 110.5
Balance b/f 450
Retained profit c/f 5 560.5

Notes to the accounts

Note 4 Profit attributable to the group


Of this profit, B212,000W4 is dealt with in the accounts of Golf.

Note 5 Retained profit


B000
Retained in group 541
Retained in associates (W4) 19.5
560.5

(b) Consolidated workings: Golf Tee Adjustment Total Ball


Profit and loss account 75% 30%
8/12
B000 B000 B000 B000 B000
Turnover (W2) 2,100 800 (24)* 2,876 1,900
Expenses (W2) (1,850) (716) 18* (2,548) (1,690)
Operating profit (W2) 250 84 (6) 328 210
Dividends receivable (W3) 52 (37) 15
Share of associate (30%) ___ ___ ___ 63 63
302 84 (43) 406 63
Taxation (90) (34) (124)
Share of associate (30%) ___ ___ (25.5) (25.5)
212 50 256.5 37.5
Minority interest:
Preference dividend
(9,000preference dividend @ 50% minority share 8months /12months) (3)
Attributable to ordinary minority shareholders
(50,000profit after tax [9preference dividend 8months /12months]
25%minority share) (11) (14)
Minority share of unrealised profit (6unrealised profit @
25%minority interest) ___ __ 1.5 1.5 ____
212 36 (41.5) 244.0 37.5
Profit b/f 450 200 720.5 (30%)
70.5
Pre-acquisition profits (75%group share) (150) (220.5) (70.5)
Minority interest in pre-acquisition profits (25%minority interest) ___ (50) (50) ___
450 450
Profit c/f 662 36 (41.5) 694 37.5
Dividends Golf (132) (132)
Inter-company:
Tee (32ordinary dividend 75%group share 8months /12months) (16) 16
Tee (9preference dividend 50%group share 8months /12months) (3) 3
Ball (60ordinary dividend 30%group share) ___ ___ 18 (18)
530 17 (4.5) 562 19.5

*Adjustments to sales and expenses are incomplete, and based only on details relating to goods remaining in stock at the year-end.

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Balance sheet workings (extract)
Consolidated revenue reserves account
B B
Provision for unrealised profit 4,500 Golf 524,500
Pre-acquisition Tee* 158,500 Dividend receivable (52W3 46.5W3) 5,500
Minority interest: (234Tee @ 25%minority share) 58,500 Tee 234,000
Consolidated balance sheet 562,000 Ball (65,000retained profit 30%group share) 19,500
783,500 783,500

11.2 Kale, Leek, Neep and Sage


(W1) Group structure
Kale

1.3.X0 1.3.X4 1.4.X4



80% 40% 90%

Leek Sage
Neep
(W2) Adjustments
Neeps gross margin
3,105/6,900 = 45%
Unrealised profit
B222,435 @ 45% = B100,096
Say B100,000
Paragraph 31(b) FRS 9: Adjust for associated company unrealised profit in stock.
Adjust for the group share of unrealised profit, against the group share of the associated companys profit (i.e., B40,000).

(W3) Dividends received/receivable by Kale


B000
Leek (180dividend 80%group share) 144
Sage (250dividend 90%group share) 225
Neep (150dividend 40%group share) 60
429
Less: Pre-acquisition (225Sage 1month/12months) 18.75
Group 410.25

(W4) Consolidated workings: Profit and loss account


Kale Leek Sage Adjustment Total Neep
11/12
B000 B000 B000 B000 B000 B000
Turnover 15,721 5,488 5,594 26,803 6,900
Cost of sales (8,018) (3,183) (2,349) ______ (13,550) (3,795)
Gross profit 7,703 2,305 3,245 13,253 3,105
Distribution expenses (1,964) (622) (1,040) (3,626) (875)
Administration costs (4,584) (1,384) (1,555) ______ (7,523) (1,799)
Operating profit 1,155 299 650 2,104 431
Dividend income 410.25 ____ ____ (410.25) ____
Profit before tax 1,565.25 299 650 (410.25) 2,104
Share of Neep (40%) (40.00) 132 172
Profit before tax 1,565.25 299 650 (450.25) 2,236 172
Tax (504.00) (112) (236) (852)
Share of Neep (40%) (59) (59)
1,061.25 187 414 (450.25) 1,325 113
Minority interest (37)20% (41)10% _______ (78)
Attributable to group 1,061.25 150 373 (450.25) 1,247 113
Profit b/f 3,216 175 463 3,854 78.8
Minority interest (35)20% (46) (81) (78.8)
Pre-acquisition 12 (417) (405) ___
3,216 152 3,368
Profit c/f 4,277.25 302 373 (450.25) 4,615 113
Dividend (500) (500)
Inter-company (W3) (144) 144
Dividends (206.25) 206.25
________ ___ ______ 60 (60)
3,777.25 158 166.75 (40) 4,115 53

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(W5) For information only: Balance sheet workings
Consolidated revenue reserves
B000 B000
Unrealised profit 40.0 Kale 3,796
Sage: Pre-acquisition (463retained profit b/f +
[201retained profit for year 1/12] @ 90%group share) 431.8 Leek 182
Sage: Pre-acquisition dividend
(250dividend 90%group share 1month/12months) 18.8 Sage 664
Minority Interest Neep (133current year retained profit @ 40%group share) 53
Leek (182retained profit @ 20%minority share) 36.4 Leek: Pre-acquisition (15debit on p/l @ 80%group share) 12
Sage (664 retained profit @ 10%minority share) 66.4
Consolidated balance sheet 4,113.6 _____
4,707.0 4,707

Pre-acquisition profits of Sage B000


Retained profits b/f at 1.3.20X4 463
Pre-acquisition (201current year retained profit x 1month /12months) 16.75
479.75
Group share (90%) 431.78

Kale Group
Consolidated profit and loss account for year ended 28 February 20X5
Notes B000
Turnover 1 26,803
Cost of sales (13,550)
Gross profit 13,253
Distribution costs (3,626)
Administration expenses (7,523)
Operating profit 2,104
Share of pre-tax profits of associated undertaking 132
Profit on ordinary activities before tax 2 2,236
Taxation 3 (911)
Profit after tax 1,325
Minority interest (78)
Profit attributable to group 4 1,247
Dividends (500)
Profit retained for year 747
Balance b/f 3,368
Retained profit c/f 5 4,115

12.1 Atley, Bartram and Conway: disposal of entire holding mid-year


(W1) Group structure
20W6 100%
1.7.20X6 (100%)
Atley Conway
75% 30.9.20X6
Bartram

(W2) Profit/loss on disposal of Conway (a)


B
Proceeds 100,000 B3 300,000
Less: Cost (150,000)
Profit in the individual accounts of Atley 150,000
Loss in group accounts =
Profit in company accounts less post-acquisition retained profits of subsidiary disposed of
B B
Profit in company accounts 150,000
Post-acquisition profits disposed of
Reserves at 31.12.20X5 (400closing profit 24current year profit) 376,000
Current year profit to date disposal (24 6months /12months) 12,000
Total reserves to date of disposal 388,000
Pre-acquisition profit (200,000)
Post-acquisition profit disposed of (188,000)
Consolidated loss on disposal (38,000)

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(W3) Profit and loss account columnar workings (d)
3/12 6/12
Atley Bartram Conway Adjustment Total
B000 B000 B000 B000 B000
Operating profit 500.00 25 25 550
Dividend receivable (20 x 75%group share 3months /12months) 3.75 (3.75)
Profit/(loss) on disposal of subsidiary (W2) 150.00 (188.00) (38)
Profit before tax 653.75 25 25 (191.75) 512
Taxation (260.00) (13) (13) (286)
393.75 12 12 (191.75) 226
Minority interest (12 25%) 25%
(3) (3)
393.75 9 12 (191.75) 223
Profit b/f (900Q150profit on disposal Conway180profit for year) 570.00 570
(600Q 28profit for year) 572 572
(400Q 24profit for year) 376 376
Pre-acquisition (572 75%group share) (429) (200) (629)
Minority interest (572 @ 25%minority interest) (143) (143)
570.00 Nil 176 (b) 746
Profit c/f 963.75 9 188 (191.75) 969
Proposed dividend (60.00) (60)
Inter-company dividend (20 x 75%group share 3months /12months) (3.75) 3.75
Reserves no longer consolidated (188) 188.00
903.75 5.25 909

(W4) Consolidated workings: balance sheet


Reversing the entries (proposed dividends)
Gross of pre-acquisition dividend (in cost of control)
Cost of control
B000 B000
Cost of investments Bartram 700 Ordinary share capital (200 @ 75%group share) 150
Reserves 456
([600Q 28retained profit for year] + [48profit for year 9/12] @ 75%group share)
___ Goodwill 94
700 700

Consolidated revenue reserves


B B
Pre-acquisition 456 Atley 900
Minority interest (620 @ 25%minority interest) 155 Bartram (+ 20inter-company dividend) 620
Consolidated balance sheet 909 _____
1,520 1,520

Minority interest
B B
Current liability (20proposed dividend 25%minority share) 5 Share capital (200 @ 25%minority interest) 50
Consolidated balance sheet 200 Revenue reserves (620 @ 25%minority interest) 155
205 205

(W5) Alternative approach to balance sheet workings: Complete the entries and net cost
Cost of control
B B
Cost of investment 700.00 Ordinary share capital (200 @ 75%group share) 150.00
Less: Pre-acquisition dividends receivable Reserves ([600Q 28retained profit for year] + [28profit for year
(20proposed dividend 9months /12months @ 75%group share) (11.25) 9/12] @ 75%group share) 444.75
______ Goodwill 94.00
688.75 688.75

Consolidated revenue reserves


B B
Pre-acquisition profit 444.75 Atley 900.00
Minority interest (600 @ 25%minority interest) 150.00 Bartram 600.00
Consolidated Balance Sheet 909.00 Dividends receivable 3.75
(20proposed dividend x 75%group share x 3months /12months) ________
1,503.75 1,503.75

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Minority interest
B B
Ordinary share capital (200 @ 25%group share) 50
Consolidated balance sheet 200 Reserves (600 @ 25%minority interest) 150
200 200

Dividend elimination
B B
Investment @ cost 11.25 Proposed dividend: Bartram 20
Revenue reserves 3.75
Due to minority 5.00 __
20.00 20

(W6) Consolidated profit and loss account for year ended 31 December 20X6 (d)
B000
Operating profit 550
Loss on disposal of subsidiary (38)
Profit before tax 512
Tax (286)
Profit on ordinary activities after tax 226
Minority interest (3)
Profit attributable to group shareholders 223
Dividends (60)
Retained profit 163
Balance b/f 746
Balance c/f 909

(W7) Consolidated balance sheet at 31.12.20X6 (c)


B000 B000
Fixed assets (1,200Atley + 700Bartram) 1,900
Goodwill (W5) 94
Net current assets (100Atley + 100Bartram) 200
Proposed minority dividend (W5) (5)
Add back: Proposed dividend Bartram 20 215
2,209
Share capital 700
Revenue reserves (W5) 909
1,609
Minority interest (W5) 200
12% debentures (400Atley) 400
2,209

(W8) Reconciliation: Consolidated reserves for 20X6 (e)


B000 B000
Opening balance (W3) (b) 746
([900Q Atley 150profit on disposal conway 180profit for year] +
[400Q Conway 200pre-acquisition 24profit for year])
Profit for year before exceptional item (W3) 550
Tax charge (W3) (286) 264
Minority interest (W3) (3)
Exceptional item
Company profit and loss account (W2) 150
Consolidated reserves of Conway no longer consolidated (W2) (188) (38)
Proposed dividend (60)
Balance c/f (W3) 909

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12.2 Hot, Cross and Bun
(W1) Group structure
90% 1.7.X6
Hot Bun
90% 1.10.X0
(20%) 31.3.X6
Cross

Sale of part-shareholding but with retention of control

(W2) Post-acquisition retained profits on shares disposed


B000
Profit retained at 30.9.X6 10
Add: Loss from 1.4 30.9.X6 (2nd six months) 10
Retained profit at date of disposal (31.3.X6) 20
Less: Profit at date of acquisition (40cent per share note 1) (40)
Loss since acquisition (20)

(W3) Exceptional profit


B000
Proceeds of disposal (20,000 B1.70proceeds of disposal per share) 34
Cost (20,000 B1.20cost per share) (24)
Exceptional profit: Parent company 10
Post-acquisition retained loss (20,000)loss W2 20%group share disposed) 4
Group exceptional profit 14

(W4) Consolidated balance sheet workings


Complete entries, net cost of investment
Cost of control
B000 B000
Investment @ cost Cross (100share capital @ 70%group share) 70
Cross (70shares B1.20cost per share) 84 Cross (40reserves @ 70%group share) 28
Bun 180 Bun (100share capital @ 90%group share) 90
Less: Bun pre-acquisition dividend Bun (40profit b/f 90%group share) 36
(20proposed dividend 90%group share 9months /12months) (13.5) Bun (20profit for year 90%group share 9months /12months) 13.5
Balance c/d goodwill 13
250.5 250.5

Consolidated profit and loss account


B000 B000
Cost of control Hot 284
Cross (40reserves @ 70%group share) 28 Cross 10
Bun (40profit b/f 90%group share) + (20profit for year Bun 60
90%group share 9months /12months) 49.5
Minority interest Exceptional profit on disposal 10
Cross (10reserves @ 30%minority share) 3 Dividends receivable
Bun (60reserves @ 10% minority share) 6 (20 @ 90%group share 3months /12months) 4.5
Consolidated B/S 282 368.5
368.5

Minority interest
B000 B000
Cross (100ordinary share capital @ 30%minority share) 30
Bun (100ordinary share capital @ 10%minority share) 10
Cross (10reserves @ 30%minority share) 3
Consolidated balance sheet 49 Bun (60reserves @ 10% minority share) 6
49 49

Dividend elimination
B000 B000
Dividends receivable: Bun proposed dividend 20
Cost of control: Bun pre-acquisition dividend 13.5
(20proposed dividend 90%group share 9months /12months)
Revenue reserves 4.5
Due to minority (20proposed dividend 10%minority share) 2.0 __
20.0 20

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(W5) Consolidated profit and loss account columnar workings
3/12
Hot Cross Bun Adjustment Total
B000 B000 B000 B000 B000
Operating profit 250.0 (20) 16.25 246.25
Profit on disposal 10.0 4.0 14.00
Dividends receivable (20,000 90%group share 3/12) 4.5 ___ _____ (4.5) ______
Profit before tax 264.5 (20) 16.25 (0.5) 260.25
Taxation (128.0) (6.25) ____ (134.25)
Profit after tax 136.5 (20) 10.00 (0.5) 126.00
Minority interest (20,000 6/12 10%minority share) 1
(20,000 6/12 30%minority share) 3
Bun: 10% _____ ___ (1.00) ___ 3.00
Profit for year 136.5 (16) 9.00 (0.5) 129.00
Profit b/f 242.0 30 40
Minority interest (3) (4)
Pre-acquisition reserves (36) (36)
242.0 (9) 233.00
Profit c/f 378.5 (25) 9.0 (0.5) 362.00
Accumulated losses no longer consolidated 4 (4.0)
([(10)+(10)]@ 20%portion disposed of)
Proposed dividend (80.0) (80.00)
Inter-company dividend _____ ___ (4.5) 4.5 ______
298.5 (21) 4.5 282.00

Consolidated profit and loss account


B000
Operating profit 246.25
Profit on disposal 14.00
Profit before tax 260.25
Taxation (134.25)
Profit after tax 126.00
Minority interest 3.00
Profit attributable to the group 129.00
Proposed dividend (80.00)
49.00
Profit b/f 233.00
Profit c/f 282.00

Consolidated balance sheet


B000
Net assets (430Hot + 110Cross + 160Bun + 20proposed dividend 2 )
minority interest in proposed dividend
718
Goodwill (W4) 13
731
Share capital 400
Revenue reserves (W4 /W5) 282
682
Minority interest (W4) 49
731

12.3 Leap, Jump and Step


(W1) Group structure
Ordinary share capital 100% 30.9.X3
Ordinary share capital (62%) 1.10.X3
Preference share capital 66.67%
Leap Jump

80%

Step

On disposal of 62% of Jump by Leap, Jump becomes an associated undertaking half-way through the year

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(W2) Profit/loss on disposal Jump
Individual accounts of Leap B000
Proceeds 700
Cost 500shares disposed / 800shares owned B1,880cost (1,175)
Loss 475

Group loss/profit B000 B000


Company loss (475)
Post-acquisition retained profit disposed of
Retained profits at 31.3.X4 630
Less: Retained 1.10.X3 to 31.3.X4 (200retained profit 6months /12months) (100)
Retained profits to date of disposal 530
Pre-acquisition profit (520)
Post-acquisition profit 10
Amount disposed of (62%) (6.25)
Consolidation loss on disposal (481.25)

(W3) Pre-acquisition reserves Step


The question does not specify whether B900,000 reserves are gross (i.e., before pre-acquisition dividend) or net of pre-acquisition
dividend. The solution assumes that B900,000 reserves are before deduction of the dividend which gave Leap B50,000 return of
capital.

(W4) Consolidated balance sheet working accounts


Cost of control account
B000 B000
Cost Step 1,655 Step (700ordinary share capital @ 80%group share) 560
Pre-acquisition dividend (50) Step (900revenue reserves @ 80%group share) 50pre-acquisition dividend) 670
_____ Balance c/d goodwill 375
1,605 1,605

Consolidated revenue reserves


B000 B000
Loss on disposal of subsidiary 475.00 Leap 2,030.00
Minority interest 324.00 Dividends receivable (100from Step 80%group share +
(1,620Step @ 20%minority share) 100from Jump @ 37.5%group share) 117.50
Pre-acquisition: Cost of control
(900Step@ 80%group share) 50pre-acquisition dividend) 670.00 Step 1,620.00
Consolidated balance sheet 2,339.75 Jump share of associate 41.25
([630reserves520pre-acquisition profit] @ 37%group share)
3,808.75 3,808.75

Minority interest
B000 B000
Consolidated balance sheet 464 Step: (70,000ordinary share capital @ 20%minority share) 140
___ Step: (1,620Step @ 20%minority share) 324
464 464

Investment in associate
B000 B000
Investment @ cost (1,880 @ 37%group share) 705.00
Post-acquisition revenue reserves ([630reserves
520pre-acquisition profit] @ 37%group share) 41.25
Preference shares @ cost 190.00 Consolidated balance sheet 936.25
936.25 936.25

Investment in associate Jump B000


Share of net assets ([1,730total net assets 300preference shares] 37%group share) + (300preference shares @ 66.7%group share)) 736.25
Goodwill: ([1,880total cost 3/8 + 190cost preference shares] [300ordinary share capital + 200preference shares + (520reserves @ 37%group share)]) 200.00
936.25

Dividend elimination
B000 B000
Revenue reserves 80 Proposed dividends: Step 100
Due to minority 20 ___
100 100

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Dividend receivable
B000 B000
Revenue reserves: Due from Jump 37.50 Consolidated profit and loss account 37.50

(W5) Consolidated profit and loss account workings


Leap Jump Step Adjustment Total Jump
6/12 6/12
B000 B000 B000 B000 B000 B000
Profit for the year 523.0 215.00 310 (120.00) 928.00 215
Loss on disposal (475.0) (6.25) (481.25)

Dividends receivable: Jump 37.5 (37.50)


Step 80.0 ______ ___ (80.00) _____ ___
165.5 215.00 310 (243.75) 446.75 215
Share of Jumps profits
(43030 6/12 @ 37.5%)
+ (30 2/3 6/12) ____ _____ ___ _______ 85.00 85
Profit after tax 165.5 215.00 310 (243.75) 531.75 85
Minority interest (20%) (62)
Preference dividends of
Jump (30 6/12 1/3) ____ (5.00) ___ ______ (67.00) __
165.5 210.00 248 (243.75) 464.75 85
Profit b/f 1,707.0 430.00 1,410 3,547.00
Pre-acquisition (520.00) (520.00)
((900Step pre-acquisition @ 80%)
50pre-acquisition dividend) (670) (670.00)
Minority interest (@20%) ______ _____ (282) _____ (282.00) __
1,707.0 (90.00) 458 2,075.00
Profit c/f 1,872.5 120.00 706 (243.75) 2,539.75 85
Reserves no longer consolidated (6.25) 6.25
Dividend (200.0) (200.0)
Inter-company dividends
Jump ordinary paid (100.00) 100.00
Jump preference paid (10.00) 20.00 (10.0)
Jump ordinary proposed 37.50 (37.5)
Step ordinary proposed (80) 80.00
Transfer of reserves _______ (3.75) 3.75
1,672.5 626 2,339.75 41.25
Leap and Group
Consolidated profit and loss account
B000
Profit for the year 928.00
Loss on disposal (481.25)
446.75
Share of associates profits 85.00
Profit after tax 531.75
Minority interest (67.00)
Profit attributable to group 464.75
Dividend (200.00)
Profit retained for year 264.75
Profit b/f 2,075.00
Profit c/f 2,339.75
Leap and Group
Consolidated balance sheet B000 B000
Fixed assets (3,205Leap + 1,760Step) 4,965.00
Goodwill (W4) 375.00
Investment in associate (W4) 936.25
Current assets
Stock (1,740Leap + 1,060Step) 2,800.0
Debtors (910Leap + 840Step + 37.5dividend receivable from Step) 1,787.5
Bank (950Leap) 950.0
5,537.5
Creditors: Amounts falling due within one year
Bank overdraft (130Step) 130.0
Creditors (1,850Leap + 910Step) 2,760.0
Proposed dividends (200Leap + 20minority share of Step proposed dividend) 220.0
3,110.0 2,427.50
8,703.75

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Creditors: Amounts falling due after more than one year
Long-term loan 2,400.00
Share capital and reserves
Share capital 2,000.00
Share premium 1,500.00
Revenue reserves (W4) 2,339.75 5,839.75
Minority interest (W4) 464.00
8,703.75

12.4 Knife, Fork and Spoon


(W1) Group structure at beginning of year
80%
Knife Spoon

75%

Fork

Disposal of Spoon shares Date Proportion of Spoons Holding


profit included in remaining
consolidated P/L
(A) Sale of entire holding 1 January 20X9 0%

(B) Sale of part-holding 1 April 20X9 3months /12months 60%


Retention of control

(C) Sale of part-holding 1 July 20X9 6months /12months 5%


Retention of simple investment

(D) Sale of part-holding 1 October 20X9 9months /12months 30%


Retention of associated undertaking

(W2) Gain / loss on disposal


(A) (B) (C) (D)
B B B B
Proceeds 700 180 600.00 500.0
Original cost (300)
(20proportion sold /80original group share B300original cost) (75)
(75proportion sold /80original group share B300original cost) (281.25)
(50proportion sold /80original group share B300original cost) ___ ___ ______ (187.5)
Profit in the individual accounts of Knife 400 105 318.75 312.5
Post-acquisition retained profits sold (160)
(300opening reserves 100pre-acquisition profit) 80%group share sold (40)
(300opening reserves 100pre-acquisition profit) 20% group share sold (150.00)
(300opening reserves 100pre-acquisition profit) 75%group share sold (100.0)
(300opening reserves 100pre-acquisition profit) 50%group share sold

Profit 20X9 sold


(200retained profit for year 3months /12 months) 20%group share sold (10)
(200 retained profit for year 6 months /12 months) 75%group share sold (75.00)
(200 retained profit for year 9 months /12 months) 50%group share sold ___ ___ ___ (75.0)

Group profit 240 55 93.75 137.5

(W3) Simple investment additional consolidation adjustment required


Profits attaching to remaining 5% now included in surrogate costs
B
Post-acquisition profits (300opening reserves 100pre-acquisition profit) 200
Profit to date of disposal (200retained profit for year 6months /12months) 100
300 @ 5% = 15

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(W4) Profit brought forward
Knife Fork Spoon Group
B B B B
Profit b/f 400 400 300 1,100
Minority interest 25%
(100) 20%
(60) (160)
Pre-acquisition profit (group share) (150) 80%
(80) (230)
400 150 160 710

(W5) Consolidated profit and loss account: Workings


(A) (B) (C) (D)
B B B B
Profit before tax
Knife 500 500 500.00 500.0
Fork 400 400 400.00 400.0
Spoon 300 6/12
150.00 9/12
225.0
900 1,200 1,050.00 1,125.0
Profit on disposal (W2) 240 55 93.75 137.5
1,140 1,255 1,143.75 1,262.5
Share of associated undertaking (30% 3 months /12 months) 22.5
1,140 1,255 1,143.75 1,285.0
Tax
Knife (200) (200) (200.00) (200.0)
Fork (100) (100) (100.00) (100.0)
Spoon (100) 6/12
(50.00) 9/12
(75.0)
Share of associated undertaking (30% 3months /12months) (7.5)
Profit after tax 840 855 793.75 902.5
Minority interest
Fork (25%) (75) (75) (75.00) (75.0)
Spoon (20% 3 months /12months) (10)
Spoon 20% 6/12 (20.00)
Spoon 20% 9/12 (30.0)
Spoon 40% 9/12 ___ (60)
Group profit after tax and minority interest 765 710 698.75 797.5
Dividends (100) (100) (100.00) (100.0)
665 610 598.75 697.5
Retained profit b/f (W5) 710 710 710.00 710.0
c/f 1,375 1,320 1,308.75 1,407.5

(W6) Minority interests balance sheet workings


(A) (B) (C) (D)
B B B B
Fork: (800share capital + 300reserves) @ 25%minority share 275 275 275 275
Spoon: (500share capital + 200 reserves) @ 40%minority share 280
275 555 275 275

(W7) Sundry assets (excluding cash on disposal) balance sheet workings


Knife Fork Spoon
B B B
At 31 December 20X8 1,000 800 500
Less: Investments (800)
Add: Profit retained 200 300 200
400 1,100 700

(W8) Goodwill balance sheet workings


(A) (B) (C) (D)
B B B B
Fork: 500cost ((400share capital + 200pre-acquisition reserves) 75%group share) 50 50 50 50
Spoon: 60/80 (300 cost [200 share capital + 100 pre-acquisition reserves] @ 80%group share) 45
50 95 50 50

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(W9) Investment in associated company balance sheet workings (D only)
B
Spoon: Cost: (30%retained/80%acquired B300total cost) 112.50
Post-acquisition retained profit ((500total reserves100pre-acquisition reserves) @ 30%group share) 120.00
232.50
Group share of Spoon net assets ([500opening net assets + 200profit for year] @ 30%group share) 210.00
Goodwill on acquisition
(30%retained/80%acquired (300 cost [200 share capital + 100 pre-acquisition reserves]) @ 80%group share) 22.50
232.50
(W10) Simple investment at surrogate cost balance sheet workings (C only)
B
Actual cost 5/80 B300 18.75
Post-acquisition retained earnings (W3) 15.00
33.75
Consolidated balance sheets
(A) (B) (C) (D)
B B B B
Share capital 600 600 600.00 600.00
Revenue reserves (W5) 1,375 1,320 1,308.75 1,407.50
1,975 1,920 1,908.75 2,007.50
Minority interest (W6) 275 555 275.00 275.00
2,250 2,475 2,183.75 2,282.50
Net assets (W7) 1,500 2,200 1,500.00 1,500.00
Cash proceeds 700 180 600.00 500.00
Investments (W10) 33.75
Goodwill (W8) 50 95 50.00 50.00
Investment in associate (W9) _____ _____ ________ 232.50
2,250 2,475 2,183.75 2,282.50

16.1 Cormorant and Albatross


(i) Conditions for merger accounting under the Seventh Directive
The Seventh Directive specifies three conditions that must be met for a business combination to be accounted for as a merger.
These are:
1 At least 90% of the nominal value of the relevant shares (i.e., shares carrying unrestricted rights to participate in distributions
and assets on liquidation) in the undertaking acquired is held by the group.
2 The 90% holding was obtained by an issue of shares to the parent or its subsidiaries.
3 The cash value of any non-share consideration does not exceed 10% of the nominal value of the shares issued as part consideration.
Even if these criteria are satisfied, the Seventh Directive does not compel companies to adopt merger accounting. The decision
rests with the business in question, once it qualifies under the criteria.
Albatross
The shares and cash issued by Cormorant in consideration for Albatross are as follows:
Shares % Consideration
000 B
750 15 287,000 Cash
4,250 85 630,000 3Cormorant shares 140cent 750,000/5Albatross shares = B630,000
5,000 100 917,000

Are Seventh Directive conditions complied with?


Merger accounting would not be permitted under the conditions of the Seventh Directive because the cash element of the
purchase consideration is too high the cash value of any non-share consideration should not exceed 10% of the nominal value
of the shares issued as part consideration. As is now shown, the cash element comprises 21.3% of the nominal value of the
shares issued as part consideration:
Nominal value of shares issued: 4,250,000 3issued/5acquired = 2,550,000nominal value of shares issued
Cash: 4,250,000/5 30 cent = B255,000 + B287,000 = B542,000cash element of consideration
(i.e., 21.3% [542,000cash/2,550,000nominal value of shares issued]of the nominal value of the shares issued).

(ii) Conditions for merger accounting under FRS 6


Under FRS 6, there are five criteria which must be satisfied for merger accounting to apply:
1 No party to the combination is portrayed as either acquirer or acquired.
2 All parties to the combination participate in establishing the management structure for the combined entity.
3 The relative sizes are not so disparate that one party dominates.

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4 Consideration received comprises primarily equity shares and any non-equity consideration or shares carrying reduced voting
rights represent an immaterial proportion of the fair value of consideration.
5 No equity shareholders retain any material interest in the future performance of only a part of the combined entity.
Where the five criteria for merger accounting under FRS 6 are satisfied the combination must be accounted for as a merger. These
criteria are more restrictive than the conditions in the Seventh Directive.

Are FRS 6 conditions complied with?


Size criterion
There is a rebuttable presumption in FRS 6 that one party will dominate the combined entity if it is more than 50% larger than
each of the other parties to the combination, judged by reference to ownership interests i.e., by considering the proportion of
equity of the combined entity attributable to the shareholders of each of the combining parties.
A proportional split up to a maximum of 60:40 between parent and subsidiary shareholders is acceptable to meet the size
criterion for merger accounting. In this example, Cormorant is only 17% larger than Albatross so the size criterion for merger
accounting under FRS 6 is met.
Voting shares %
000
Cormorant (per Q) 3,000 54
Albatross 2,550 46
5,550 100

Non-equity consideration
Under FRS 6, the condition whereby no party to the combination is portrayed as either acquirer or acquired appears (from the
wording of the question) not to be complied with. In addition, FRS 6 requires that the consideration comprise primarily equity
shares and any non-equity consideration should represent an immaterial proportion of the fair value of the consideration.
FRS 6 provides guidance on what constitutes immaterial. Under FRS 6, the non-equity consideration should represent an
immaterial proportion of the fair value of consideration. In assessing this, any acquisition of shares by one combining party of
shares in the other party within two years before the combination should be taken into account in determining whether the non-
equity consideration is an immaterial proportion.
Consideration is: 4,250,000shares 5 B4.50 ([3shares 140cent]+ 30cent)
= B3,825,000 + B287,000earlier purchase = B4,112,000 consideration
Cash element of the consideration:
4,250,000shares/5 30cent = B255,000 + B287,000earlier purchase = B542,000 cash element of consideration

Proportion of consideration comprising cash:


B542,000 cash element of consideration = 13%
B4,112,000 fair value of consideration
This (13%) would not meet the criterion of immateriality.

16.2 Bogart and Bacall


Conditions for merger accounting under FRS 6
Under FRS 6, there are five criteria which must be satisfied for merger accounting to apply:
1 No party to the combination is portrayed as either acquirer or acquired.
2 All parties to the combination participate in establishing the management structure for the combined entity.
3 The relative sizes are not so disparate that one party dominates.
4 Consideration received comprises primarily equity shares and any non-equity consideration or shares carrying reduced voting
rights represent an immaterial proportion of the fair value of consideration.
5 No equity shareholders retain any material interest in the future performance of only a part of the combined entity.
Where the five criteria for merger accounting under FRS 6 are satisfied the combination must be accounted for as a merger. These
criteria are more restrictive than the conditions in the Seventh Directive.
The shares and cash issued by Bogart in consideration for Bacall are as follows:
Shares % Consideration
000 B
1,910 95.5 2,674,000 1Bogart share B2.80 1,910,000/2Bacall shares = B2,674,000
2,000 100.0

Are FRS 6 conditions complied with?


Size criterion
There is a rebuttable presumption in FRS 6 that one party will dominate the combined entity if it is more than 50% larger than
each of the other parties to the combination, judged by reference to ownership interests i.e., by considering the proportion of
equity of the combined entity attributable to the shareholders of each of the combining parties.
A proportional split up to a maximum of 60:40 between parent and subsidiary shareholders is acceptable to meet the size
criterion for merger accounting. In this example, Bogart is not 50% larger (is only 36% larger to be precise) than Bacall so the size
criterion for merger accounting under FRS 6 is met.

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Voting shares %
000
Bogart (per Q) 1,300 58
Bacall 955 42
2,255 100
Non-equity consideration
Under FRS 6, the condition whereby no party to the combination is portrayed as either acquirer or acquired appears (from the
wording of the question) not to be complied with. In addition, FRS 6 requires that the consideration comprise primarily equity
shares and any non-equity consideration should represent an immaterial proportion of the fair value of the consideration.
FRS 6 provides guidance on what constitutes immaterial. Under FRS 6, the non-equity consideration should represent an
immaterial proportion of the fair value of consideration. In assessing this, any acquisition of shares by one combining party of
shares in the other party within two years before the combination should be taken into account in determining whether the non-
equity consideration is an immaterial proportion.
As can be seen from the calculations that follow, the cash (non-equity) elements of the consideration proposed would both
amount to 12.5% of the total consideration, which would not be considered immaterial. Thus, condition 4 in the list is not met.
(1) Cash consideration 20 cent 1,910,000equity shares acquired 382,000
(2) Non-equity consideration Non-equity: 1,910,000shares acquired 6 = 318,333preference shares @ B1.20 = 382,000
Equity 955,000 B1 shares (1,910,000 2) @ B2.80 = 2,674,000
Total consideration 3,056,000
Proportion of fair value of consideration
(1) B382,000cash / B3,056,000fair value of consideration = 12.5% Material/not immaterial
(2) B382,000preference shares / B3,056,000fair value of consideration = 12.5% Material/not immaterial

17.1 Charlton
(W1) Group structure
75%
1.4.20X4
Charlton Venables

(W2) Dividends paid out of pre-acquisition profits


B000
Venables dividends for year ending 30/6/20X4 (160interim + 400proposed) 560
Pre-acquisition (9/12) 420
From interim dividend (160)
From final dividend 260
Group share (75%) 195
Post-acquisition (3/12 560) 140
Group share (75%) 105

(W3) Calculation of goodwill on acquisition


Cost of control
B000 B000
Cost immediate 3,500 Share capital (500 @ 75%group share) 375
Deferred consideration 750 Reserves ([2,000Venables 180post-acquisition 1,170
260dividend pre-acquisition ] 75%group share)
Less: Pre-acquisition dividends (W2) (195)
_____ Goodwill Balance c/d 2,510
4,055 4,055
Balance b/d 2,510 Goodwill amortisation (2,510 3/12 20%) 125
_____ Balance c/d 2,385
2,510 2,510
(W4)
Consolidated revenue reserves
B000 B000
Cost of control ([2,000Venables 180post-acquisition Charlton 7,800
260dividend pre-acquisition ] 75%Group share) 1,170
Proposed dividend Venablesto dividend elimination account W6 400 Venables 2,000
Proposed dividend Charlton 600 Post-acquisition dividend
(140 75%) W2 105
Reorganisation costs 450
Minority interest ([2,000 400proposed dividend 450reorganisation costs] 25%) 287
Goodwill amortisation (W3) 125
Balance c/d 6,873 _____
9,905 9,905

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(W5)
Minority interest
B000 B000
Share capital (500 25%minority share) 125
Consolidated balance sheet 412 Reserves ([2,000 400proposed dividend 450reorganisation costs 25%) 287
412 412

(W6)
Dividend elimination account
B000 B000
Cost of control (Pre-acquisition dividend) 195 Proposed dividend Venables 400
Consolidated reserves 105
Consolidated balance sheet 100 ____
400 400

(a) Journal entries


B000 B000
1 Dr Investment in Venables 750
Cr Long-term creditors 750
Being the additional purchase consideration due on the acquisition of Venables
2 Dr Debtors (75% 400) 300
Cr Investment in Venables 195
Cr Reserves post-acquisition 105
Being recognition in Charlton of the dividend due from Venables
3 Dr Reserves pre-acquisition 260
Dr Reserves post-acquisition 140
Cr Creditors 400
Being recognition in consolidation workings of dividends payable by Venables
4 Dr Reserves post-acquisition 450
Cr Provision for liabilities and charges 450
Being recognition of reorganisation costs at 30 June 20X4
5 Dr Reserves 600
Cr Share capital 300
Cr Share premium 300
Being scrip dividend proposed by Charlton at 30 June 20X4

(b)
Charlton and its subsidiary
Consolidated balance sheet as at 30 June 20X4
B000 B000
Fixed assets
Intangible assets: Goodwill (W3) 2,385
Tangible assets (5,250Charlton + 1,600Venables) 6,850
9,235
Current assets
Stocks (2,150Charlton + 800Venables) 2,950
Debtors (1,500Charlton + 600Venables) 2,100
Cash (200Charlton + 500Venables) 700
5,750
Creditors: Amounts falling due in less than one year
(1,800Charlton+1,000Venables + 450reorganisation costs +100dividends Venables) 3,350
Net current assets 2,400
Total assets less current liabilities 11,635
Creditors: Amounts falling due after more than one year (750deferred purchase consideration) (750)
10,885

Capital and reserves


Called up share capital (3,000 + 300) 3,300
Share premium 300
Reserves (W4) 6,873
10,473
Minority interest (W5) 412
10,885

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17.2 Palma International
(a)
Palma International and its subsidiaries
Summarised consolidated balance sheet as at 31 March
20X1 20X2 20X3 20X4
Bm Bm Bm Bm
Goodwill W8
669 W11
688
Investment in Pizza W5
149 W5
437 -
Other net assets 4,240 4,190 4,780 4,777
4,389 4,627 5,449 5,465
Ordinary B1 shares 1,000 1,000 1,000 1,000
Reserves W2
3,389 W6
3,627 W9
3,963 W12
4,171
4,389 4,627 4,963 5,171
Minority interest W10
486 W13
294
4,389 4,627 5,449 5,465

Notes for the year ended 31 March 20X2


Investment in associated company Bm
Share of net assets (W5) 161
Goodwill (W5) 276
437

(W1) Group structure


+10%first acquisition
+15%second acquisition
+30%third acquisition
+20%fourth acquisition
Palma Pizza

(W2) Correction to treatment of pre-acquisition dividend


Dividend received = 10% B10 million = B1 million
Dr. Profit and loss account 1
Cr. Investment account 1
Bm
Reserves Palma 3,390per Q
Less: Pre-acquisition dividend (1)
Net reserves 3,389

(W3) Palmas investment in Pizza


Year of acquisition Number of shares held as a proportion of total % Status
shares in issue holding
Year ended 31.3.X1 50purchased /500total Pizza shares 10 Investment
Year ended 31.3.X2 50holding+75purchased /500total Pizza shares 25 Associate
Year ended 31.3.X3 50 holding +75 holding +150purchased /500total Pizza shares 55 Subsidiary
Year ended 31.3.X4 50holding +75holding +150holding +100purchased /500total Pizza shares 75 Subsidiary

(W4) Groups share of post-acquisition reserves for the year ended 31 March 20X2
25% B32 million = B8 million
Dr. Investment account 8
Cr. Consolidated reserves 8
This treatment accords with FRS 9 on associates

(W5) Analysis of investment in associated company


Bm Bm
Cost (150cost 30.9.X21pre-acquisition dividend w2+300cost 1.4.X3) 449
Share of post-acquisition reserves (W4) 8
Amortisation of goodwill (one-tenth) (20)
437
Share of net assets (25% B645 million) 161
Share of goodwill (25% B400 million) 100
Goodwill on acquisition
Cost 449
Share of capital and reserves at date of acquisition (25% B1,013 million) (253)
196
Less: Amortisation (over ten years, i.e., one-tenth) 20 176
437

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(W6) Consolidated reserves for year ending 31 March 20X2 Bm
Draft Palma 3,640
Less: Pre-acquisition dividend W2
(1)
Add: Share of post-acquisition reserves of associated company W4
8
Less: Amortisation of goodwill arising on acquisition W5
(20)
3,627

(W7) Elimination of unrealised profit: Year ended 31 March 20X3


Bm Bm
Sales value 100
Mark up on transfer price (20%) 20
Profit made by subsidiary:
Dr Consolidated revenue reserves 11
Dr Minority interest 9
Cr Stock 20

(W8) Goodwill arising on acquisition in year ending 31 March 20X3


Cost of control account
Bm Bm
Investment at cost Ordinary share capital (55% 500) 275
10% 149 Pre-acquisition reserves: (25% 513) 128
15% 300 Pre-acquisition reserves: (30% 545) 164
30% 550 Balance c/d Goodwill 432
999 999
Goodwill 432 Profit and loss account (20X2 W5 196 10%) 20
Profit and loss account (20X3 432 10%) 43
___ Balance 369
432 432

Balance sheet amount: 369 + 300 = B669 million

(W9) Consolidated reserves at 31 March 20X3


Consolidated reserves account
Bm Bm
Cost of control 292 Palma 4,000
Pre-acquisition dividend (W2) 1 Pizza 600
Unrealised profit (W7) 11
Goodwill 20X2 20
Goodwill 20X3 43
Minority interest (45% 600) 270
Balance c/d 3,963 _____
4,600 4,600

(W10) Minority interest at 31 March 20X3


Minority interest
Bm Bm
Unrealised profit (W7) 9 Ordinary share capital (45% 500) 225
Consolidated balance sheet 486 Reserves (45% 600) 270
495 495

(W11) Goodwill arising on acquisition in year ending 31 March 20X4


Bm
Cost of additional 20% 400
Share of share capital at date of acquisition (20% B500 million) (100)
Share of reserves at date of acquisition (20% B600 million) (120)
Goodwill 180
Goodwill b/f W8
432
612
Amortise over ten years (612 10%) (61)
Goodwill written off 20X2 (20)
Goodwill written off 20X3 (43)
488
Add goodwill in Pizza balance sheet 200
688

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Cost of control account
Bm Bm
Investment at cost (W8) 999 Ordinary share capital (500 75%) 375
Cost in 20X4 400 Pre-acquisition reserves (292W8/W9 + [20% 600]) 412
_____ Goodwill 612
1,399 1,399
Profit and loss account 20X2 20
Balance b/d 612 Profit and loss account 20X3 43
Profit and loss account 20X4 61
___ Balance c/d 488
612 612

(W12) Consolidated reserves at 31 March 20X4


Consolidated reserves
Bm Bm
Cost of control (292 + 120) 412 Palma 4,200
Pre-acquisition dividend (W2) 1 Pizza 677
Goodwill written off 20X2 20
Goodwill written off 20X3 43
Goodwill written off 20X4 61
Minority (25% 677) 169
Consolidated balance sheet 4,171 _____
4,877 4,877

(W13) Minority interest at 31 March 20X4


Minority interest
Balance c/d 294 Ordinary share capital (25% 500) 125
___ Reserves (25% 677) 169
294 294

(b) Outline draft reply


The treatment of purchased goodwill which allows it to be capitalised is based on the view of goodwill as one of the assets,
either tangible or intangible, that a business may acquire in order to generate a stream of economic benefits. This view of
goodwill sees it as quite similar to other tangible assets except that goodwill is, by definition, physically unidentifiable. The
identifiability of the transaction that gave rise to an asset is seen as essential for its inclusion in the balance sheet, which is why
internally generated goodwill should not be recorded in the balance sheet. It is regarded as more important that purchased
goodwill should be treated consistently with other purchased intangible and tangible fixed assets than that purchased and non-
purchased goodwill be treated consistently

18.1 Cole and Palm


(a) (i) Translated balance sheet using closing rate method
Balance sheet as at 31 December 20X1 $ Rate B
Fixed assets cost 200,000 1.3 153,846
Fixed assets depreciation (90,000) 1.3 (69,231)
110,000 84,615
Net current assets 170,000 1.3 130,769
280,000 215,384
Long-term liability (60,000) 1.3 (46,154)
220,000 169,230
Capital and reserves
Ordinary share capital 100,000 1.25 80,000
Reserves at acquisition 30,000 1.25 24,000
Reserves 90,000 Bal 65,230
220,000 169,230
(ii) Movement on reserves
(on consolidation only post-acquisition reserves are included)
$ Rate B
Balance at beginning 30,000 1.28 23,437
Net assets at acquisition retranslated
(130,000 @1.28) (130,000 @ 1.25) (2,437)
Profit for year 60,000 1.30 46,153
Net assets at beginning retranslated
(160,000 @1.30) (160,000 @ 1.28) (1,923)
65,230

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Alternative approach to calculation
Opening reserves B
Net assets at 1.1.20X1 125,000 (160,000 at 1.28)
Less initial investment 104,000 (130,000 at 1.25)
21,000
Foreign exchange differences
(160,000 at 1.30 less 160,000 at 1.28) (1,923)
Retained profit (60,000 at 1.30) 46,153
65,230

(iii) Fixed assets $ Rate B


Cost at 1.1.20X1 200,000 1.28 156,250
Exchange difference (2,404)
Cost at 31.12.20X1 200,000 1.3 153,846
Depreciation at 1.1.20X1 50,000 1.28 39,063
Exchange difference (601)
Charge for year 40,000 1.30 30,769
Depreciation at 31.12.20X1 90,000 1.30 69,231
Net book value at 31.12.20X1 84,615

(b) Foreign subsidiaries policy note


The accounts of foreign subsidiaries are included in the group accounts at the exchange rate ruling at the balance sheet date. All
translation differences arising on consolidation are dealt with through reserves.

18.2 Athgoe
(a)
Consolidated balance sheet
B000
Tangible fixed assets (17,658Athgoe + 55,000Bergin W3) 72,658
Stock (22,454Athgoe + 5,250Bergin W3) 27,704
Debtors (6,153Athgoe + 2,500Bergin W3) 8,653
Cash (1,562Athgoe + 13,500Bergin W3) 15,062
Creditors (22,457Athgoe + 6,250Bergin W3) (28,707)
Loan (12,310Athgoe + 12,400Bergin W3) (24,710)
70,660
Ordinary share capital 6,000
Retained earnings (W5) 41,620
Shareholders funds 47,620
Minority interest (W5) 23,040
70,660
Consolidated profit and loss account
B000
Turnover (92,253Athgoe+118,130Bergin W2) 210,383
Cost of sales (60,274Athgoe +78,750Bergin W2) (139,024)
Gross profit 71,359
Distribution costs (12,900Athgoe +9,440Bergin W2) (22,340)
Administration expenses (14,697Athgoe + 3,150Bergin W2) (17,847)
Other costs (1,913Athgoe +2,630Bergin W2) (4,543)
Profit before tax 26,629
Taxation (1,939Athgoe +9,460Bergin W2) (11,399)
Profit after tax 15,230
Minority interest (14,700 @ 40%minority share) (5,880)
Profit attributable to group 9,350
Dividends (1,830)
Profit retained for year 7,520

(b) (i) Movement on reserves B000


Consolidated reserves at beginning of year (W6) 25,900.40
Retained profit for year 7,520.00
Group share of difference on exchange (13,666 (b) (iii) @ 60%group share) 8,199.60
41,620.00
(iii) Difference on exchange
Kr 000 Rate B000 B000
Net assets at beginning 327,600 9.5 34,484
Restated at year-end rate 7.0 46,800 12,316
Profit for year 75,600 8.0 9,450
Restated at year-end rate 7.0 10,800 1,350
13,666

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(W1) Group structure
60%
Athgoe Bergin

(W2) Translation of profit and loss account


Kr000 Rate B000
Turnover 945,040 8 118,130
Cost of sales 630,000 8 78,750
Gross profit 315,040 8 39,380
Distribution costs 75,520 8 9,440
Administration expenses 25,200 8 3,150
Depreciation 21,040 8 2,630
Profit before tax 193,280 8 24,160
Taxation 75,680 8 9,460
Profit after tax 117,600 8 14,700
Dividend 42,000 3,150per Q 60%group share 5,250
Retained 75,600 9,450

(W3) Translation of balance sheet


Kr000 Rate B000
Tangible fixed assets 385,000 7 55,000
Stock 36,750 7 5,250
Debtors 17,500 7 2,500
Cash 94,500 7 13,500
Creditors (43,750) 7 (6,250)
Loan (86,800) 7 (12,400)
Net assets 403,200 7 57,600
Ordinary share capital 35,000 10 3,500
Pre-acquisition profit 15,000 10 1,500
Profit forward (368,20015,00075,600) 277,600 W4 29,484
Profit for year 75,600 W2 9,450
Difference on exchange (balancing amount) _______ * 13,666
403,200 7 57,600

(W4) Net assets at beginning of year


Kr000 Rate B000
Ordinary share capital 35,000 10 3,500
Pre-acquisition profit 15,000 10 1,500
Post-acquisition profit (368,20015,00075,600) 277,600 * 29,484
Net assets 327,600 9.5 34,484

(W5) Consolidated balance sheet workings


Cost of control account
B000 B000
Investment at cost 3,050 Ordinary share capital (3,500 @ 60%) 2,100
Pre-acquisition reserves (1,500 @ 60%) 900
_____ Goodwill to profit and loss account 50
3,050 3,050

Consolidated reserves
B000 B000
Goodwill 50 Athgoe 10,110
Pre-acquisition reserves 900 Bergin
Minority interest 21,640 (1,500 + 29,484 + 9,450 + 13,666) 54,100
Consolidated balance sheet 41,620 ______
64,210 64,210

Minority Interest
B000 B000
Consolidated balance sheet 23,040 Ordinary share capital (3,500 @ 40%) 1,400
______ Reserves (54,100 @ 40%) 21,640
23,040 23,040

(W6) Consolidated reserves at beginning of year B000


Athgoe (10,110closing profit and loss account 1,850retained profit for year) 8,260.00
Group share of post-acquisition reserves of Bergin (29,484 @ 60%group share) 17,690.40
Goodwill written off (50.00)
25,900.40

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(W7) Minority interest B000
Balance at beginning (34,484W4 @ 40%minority share) 13,793.60
Share of profit for year (14,700W2 40%) 5,880.00
Share of difference on exchange (13,666 40%) 5,466.40
Dividends paid to minority (5,250 40%) 2,100.00
23,040.00

Note: No offset procedures are applied in this solution because there is no suggestion in the question that Athgoes loan is
expressed in foreign currency.

18.3 Glenmore
(a) For the year ended 30 June 20X9
Investment in Plenborg is restated using year-end rates.
DK loan of 2,100,000 is restated using year-end rates.
Differences on the borrowings are offset in reserves to the extent of the opposite difference arising on the investment.
Any balance of difference on the borrowings is taken to profit and loss account for the year.
Investment @ cost: DK 1,600,000 B
Translated at date of acquisition (@8) 200,000
Translated at 30 June 20X8 (@7) 228,570
Translated at 30 June 20X9 (@6) 266,667
Gain on exchange in 20X9 38,097
Credit to reserves 38,097
Borrowings of DK2,100,000
Translated at date of acquisition (@8) 262,500
Translated at 30 June 20X8 (@7) 300,000
Translated at 30 June 20X9 (@6) 350,000
Loss on exchange in 20X9 50,000
Debit to reserves 38,097
Charge in P&L account for year 11,903
50,000

(b) Revised amounts to be included in Glenmores balance sheet as at 30 June 20X9


B
Investment at cost 266,667
Loan of DK2,100,000 350,000
Retained earnings (1,780,000 11,903) 1,768,097

(c) (i) Paragraph 30, SSAP 20


Similar to the individual company offset rules, foreign borrowings may have been used to finance group investment in foreign
enterprises or to provide a hedge against the exchange risk associated with similar existing investments. Any increase or decrease
in the amount outstanding on the borrowings arising from exchange movements will probably be covered by corresponding
changes in the carrying amount of the net assets underlying the net investment (which would be reflected in reserves). Since in
this case the group will be covered in economic terms against any movement in exchange rates, it would be inappropriate to
record an accounting profit or loss when exchange rates change.
In the consolidated financial statements, therefore, subject to certain conditions, the exchange gains or losses on such foreign
currency borrowings, which would otherwise have been taken to the group profit and loss account, may be offset as reserve
movements against exchange differences on the retranslation of the net investments. The conditions which must apply are as
follows:
(a) The relationship between the investing company and the foreign enterprises concerned should be such as to justify the use of
the closing rate method for consolidation purposes.
(b) In any accounting period, exchange gains or losses arising on foreign currency borrowings may be offset only to the extent of
the exchange differences arising on the net investments in foreign enterprises.
(c) The foreign currency borrowings, whose exchange gains or losses are used in the offset process, should not exceed, in the
aggregate, the total amount of cash that the net investments are expected to be able to generate, whether from profits or
otherwise.
(d) The accounting treatment adopted should be applied consistently from period to period.

(c) (ii) Opening net assets of Plenborg


DK000 Rate B000
Ordinary share capital 1,600 8 200
Pre-acquisition profits 240 8 30
Post-acquisition profits 806 * 148
Net assets at 30.6.20X8 2,646 7 378
Profit retained for year 756 6 126
Difference on exchange _____ * 63
Net assets at 30.6.20X9 3,402 6 567

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Reconciliation
Net assets at 30.6.20X8 2,646
Translated at DK7 = B1 378
Translated at DK6 = B1 441
Gain on retranslation 63

(c) (iii)
Group share of difference on translation of net assets 63 @ 80%group share = 50.4
Difference on retranslation of borrowings 50
Therefore, entire difference on borrowings can be offset against difference arising on retranslation of net assets in reserves

(d)(i) B
Investment at cost 200,000
Group share of net assets at acquisition ([1,600 + 240] 8 80%group share) 184,000
Goodwill 16,000
Less: Amortisation 20X620X9 (one-eight per annum) 8,000
Written down amount at 30 June 20X9 8,000
(ii) B
Net assets of Plenborg at 30 June 20X9 567,000
Minority interest 20% 113,400

(e) (i) Consolidated balance sheet: Full consolidation B000


Tangible fixed assets (1,029 + 301working) 1,330.00
Goodwill (d(i)) 8.00
Net current assets (2,632.43 + 301working) 2,933.43
4,271.43
Loan (350 + 35working) (385.00)
3,886.43
Ordinary share capital 1,700.00
Share premium 40.00
Revaluation reserve 70.00
Retained earnings ([1,780 28.57 50]Glenmore + [(80% 337) -8]Plenborg)
1,963.03
Shareholders funds 3,773.03
Minority interest (d(ii)) 113.40
3,886.43

(e) (ii) Consolidated balance sheet: Equity accounting for Plenborg B000
Tangible fixed assets 1,029.00
Investment in Plenborg [(80% 567) + 8] or [200 + (80% 337) 8] 461.60
Net current assets 2,632.43
4,123.03
Loan (350.00)
3,773.03
Ordinary share capital 1,700.00
Share premium 40.00
Revaluation reserve 70.00
Retained earnings ([1,780 28.57 50]Glenmore + [(80% 337) -8] Plenborg
) 1,963.13
Shareholders funds 3,773.03

Translation of balance sheet


DK000 Rate B000
Tangible fixed assets 1,806 6 301
Net current assets 1,806 6 301
Loan (210) 6 (35)
Net assets 3,402 567
Ordinary share capital 1,600 8 200
Pre-acquisition profit 240 8 30
Profit forward (1,802 756 240) 806 c (ii) 148
Profit for year 756 6 126 337
Difference on exchange _____ c (ii) 63
3,402 6 567

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18.4 Carpro
(W1)
Rate Fixed asset Loan
B B
1.7.20X2 At cost (800,000/8) 100,000
1.7. 20X2 Cash (720,000/8) 90,000
30.6. 20X3 Depreciation [12% 100,000] (12,500)
30.6. 20X3 Repayment [(720,000/8) 1/3] (30,000)
30.6. 20X3 Balance sheet amount 87,500 60,000
Due within one year 30,000
Due after more than one year 30,000
60,000
(W2)

Rate B
30.6.X2 Interest accrued [(15% 720,000)/10] 10,800

(W3)
Parqs PQ=B
B1 B
Purchases 10,700 25 428
15,432 24 643
17,094 22 777
14,638 26 563
22,059 27 817
79,923 3,228

Payments 9,988 22 454


12,117 21 577
18,000 25 720
16,900 25 676
13,048 28 466
70,053 2,893

Balance owing 9,870 24 411


3,304
Exchange translation loss charged to
profit and loss (76)
3,228
Balance owing 9,870 24 411
Payment 9,870 26 380
Exchange translation gain (year
ended 30.6.20X4) 31

(W4)
B
Dividend income receivable [36,000/20] 1,800

(W5)
Skrams SK=B
B1 B
Hedging loan
at 1 January 20X3 9,600,000 24 400,000
at 30 June 20X3 9,600,000 30 320,000
Exchange translation gain 80,000

Equity investment Arlods AD=B B1 B


at 1 January 20X3 7,200,000 18 400,000
at 30 June 20X3 7,200,000 20 360,000
Exchange translation loss 40,000
Excess gain, credited to profit and loss 40,000

(W6)
B
Interest accrued on skrams loan of 9,600,000
[(6months /12months 8% 9,600,000)/30] 12,800

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(W7)
Five-year loan Parqs PQ=BB1 B
at 1 January 20X3 6,000,000 20 300,000
at 30 June 20X3 6,000,000 24 250,000
Exchange translation gain, credited to
profit and loss account 50,000

(W8)
B
Interest accrued on parqs loan of 6,000,000
[(6/12 15% 6,000,000)/24] 18,750

(a) Accounting policies


Foreign currencies
Assets, liabilities, revenues and costs denominated in a foreign currency are translated into euro at the transaction date rate.
At balance sheet date monetary items, except for those subject to fixed rates, are translated at closing rate; exchange rate
differences are then dealt with under appropriate headings within the profit and loss account.
Exchange differences on foreign currency borrowings arranged as a hedge against overseas investments are set primarily
against exchange differences on the carrying amount of these investments, as movements on reserves. Any excess of exchange
differences on such foreign currency borrowings is dealt with in the profit and loss account.

(b)
Carpro
Profit and loss account (extract) for the year ended 30 June 20X3
Transaction (1) (2) (3) (4)
B B B B
Cost of sales
Depreciation W1
12,500
Purchases of materials W3
3,228
Income from fixed asset investments W4
1,800
Other operating income/(expense) W3
(76)
Other interest receivable and similar income W5
40,000 W7
50,000
Interest payable and similar charges W2
10,800 W6
12,800 W8
18,750

Carpro
Balance sheet (extract) as at 30 June 20X3
Transaction (1) (2) (3) (4)
B B B B
Tangible fixed assets
Plant W1
87,500
Financial fixed assets
Other investments W5
360,000
Current assets
Debtors (dividends receivable) W4
1,800
Creditors: Amounts falling due within one year
Loans W1
30,000
Trade w3
411
Other creditors (interest) W6
12,800 W8
18,750
Creditors: Amounts falling due after more than one year
Loans W1
30,000 W5
320,000 W7
250,000

(c)
The rules for individual companies apply to all the transactions as follows:
(1) Translation rate
Plant at acquisition rate transaction rate
Loan at contracted rate future settlement rate
Interest at payment date (or at average rate) transaction rate
Accounting treatment
No exchange differences; translated amounts shown at appropriate lines in final accounts

(2) Translation rate


Purchases and payments at rate of each transaction
Balance owing at closing rate unsettled monetary liability
Accounting treatment
Exchange difference on settled transactions is of a trading nature and reported as another operating expense. The subsequent
gain when settlement takes place will affect that years accounts. Balance shown as trade creditor.

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(3) Foreign currency borrowings have been used as a hedge against foreign equity investments.
Translation rate
Equity investment at closing rate hedged investment rate
Hedging loan at closing rate unsettled monetary liability
Dividend receivable at closing rate unsettled monetary asset
Loan interest at payment date transaction rate
Accounting treatment
The exchange gain on retranslation of the hedging loan is partly offset in reserves by the exchange gain on the retranslation
of the equity investment; the excess gain is credited to profit and loss as other interest receivable and similar income, because
it results from a financing operation.
The subsequent gain when the dividend is remitted will affect that years accounts [B2,000 ((36,000/18) 1,800)].
The equity investment and its dividend receivable and accompanying hedging loan and interest are all included in the
balance sheet at translated amounts.

(4) Translation rate


Loan at closing rate unsettled monetary liability
Loan interest charged as accrual at closing rate unsettled monetary liability
Accounting treatment
The exchange gain on retranslation of the loan is credited to profit and loss account as other interest receivable and similar
income, because it is of a financing nature.
The loan and loan interest accrued are reported on the appropriate lines of the final accounts at the translated amounts.

19.1 Plath
Cash flow statement for the year ended 31 March 20X2
Bm
Net cash outflow from operating activities (145)
Returns on investments and servicing of finance (note 1) 24
Taxation (W2) (6)
Capital expenditure and financial investment (note 1) (239)
Acquisitions and disposals
Equity dividends paid (W1) (22)
Net cash outflow before management of liquid resources and financing (388)
Management of liquid resources 25
Financing (note 1) 286
(Decrease) in cash (77)

Reconciliation of operating profit to net cash outflow from operating activities


Bm
Operating profit 139
Depreciation charge 22
Amortisation charge 7
Gain on disposal of tangible fixed asset (W6) (6)
Premium on debenture issue (10)
Gain on disposal of short-term investment (5)
Increase in stock (118)
Increase in debtors (107)
Decrease in creditors (67)
Net cash outflow (145)

Reconciliation of net cash flow to movement in net debt


Bm
Decrease in cash in the period (77)
Cash inflow from debenture issue (211)
Cash from decrease in liquid resources (25)
Change in net debt resulting from cash flows (313)
Non-cash movement in debentures 10
Profit on disposal of investment 5
Net debt at 1 April 20X1 (596)
Net debt at 31 March 20X2 (894)
Notes to the cash flow statement
Note 1 Gross cash flows Bm Bm
Returns on investment and servicing of finance
Interest received 79
Interest paid (55) 24

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Capital expenditure and financial investment
Payments to acquire intangible fixed assets (W3) (50)
Payments to acquire tangible fixed assets (W4) (438)
Payments to acquire investments (1)
Receipts from sales of tangible fixed assets 250 (239)
Management of liquid resources
Sale of short-term investments 25
Financing
Issue of ordinary share capital (W5) 75
Issue of debentures (201 + 10) 211 286
Note 2 Analysis of changes in net debt
At 1 April Cash Other At 31 March
20X1 flows changes 20X2
Bm Bm Bm Bm
Cash in hand, at bank 124 126 250
Overdrafts (185) (203) (388)
(61) (77) (138)
Debt due within one year
Debt due after one year (555) (211) 10 (756)

Current asset investments 20 (25) 5


(596) (313) 15 (894)

(W1) Dividend paid


Dividend provision
Bm Bm
Cash 22 Balance b/f 22
Balance c/f 49 Profit and loss account 49
71 71

(W2) Taxation paid


Taxation provision
Bm Bm
Cash 6 Balance b/f 25
Balance c/f 42 Balance b/f 2
Balance c/f 3 Profit and loss account 24
51 51

(W3) Purchase of intangible fixed assets


Intangible fixed assets
Bm Bm
Balance b/f 234 Profit and loss amortisation 7
Cash purchases 50 Balance c/f 277
284 284

(W4) Purchase of tangible fixed assets


Tangible fixed assets
Bm Bm
Balance b/f 600
Revaluation reserve 251 Profit and loss account depreciation 22
Disposal (Aggregate depreciation) 1,220 Disposal (Cost) 1,464
Cash purchase 438 Balance c/f 1,023
2,509 2,509

(W5) Ordinary shares issued


Bm
Share capital: 25 million shares at 20 cent 5
Share premium: 25 million shares at B2.80 70
75

(W6) Gain on disposal of tangible fixed asset


Bm Bm
Sale proceeds 250
Cost 1,464
Accumulated depreciation (1,220) 244
Gain 6

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(b)
Depreciation
Depreciation is charged to the profit and loss account, in accordance with the accruals principle, in order not to overstate the
surplus available for distribution while maintaining capital.
It does not describe a movement in cash. It does not affect the cash newly invested in fixed assets during the year nor any cash
released by their sale.
Therefore it is not recognised in the cash flow statement but is recognised in the profit and loss account and hence becomes a
reconciling item.

Dividends paid
The profit and loss account shows dividends as an appropriation of profit. The cash flow statement shows dividends paid. The
dividends paid may be the previous years final dividend and the current years interim dividend.
However, no reconciling item is required (unlike depreciation) because the net cash inflow is being reconciled to profit before
tax which has not been influenced by appropriation. If the cash flow were being reconciled to retained profit say, then a
reconciling item would be required.

(c)
The profit and loss account is prepared under the all inclusive concept adopted by FRS 3 and therefore it explains all changes in
shareholders funds between one balance sheet date and the next, apart from share capital and reserves movements and fixed
asset revaluations.
The cash flow statement explains a selection of those changes which result in an inflow or outflow of cash.
The cash flow statement is particularly useful in evaluating liquidity and solvency because it enables a juxtaposition of cash
inflows and outflows thereby overcoming the limitations of the convention indicators which derived from a static balance sheet.
Various measures are available from the cash flow statement. For example, the ratio of working capital to net cash inflow from
operating activities or the ratio of net cash inflow to current debt. These measures all incorporate a dynamic element in
evaluation.
The standard headings prescribed by FRS 1 ensure that cash flows are reported in a form that highlights the significant
components of cash flow and facilitates comparison of the cash flow performance of different business.
A cash flow statement is considered to be more useful than a working capital based funds flow statement for the following
reasons:
1 In the assessment of short-term liquidity the business will not be alerted to a critical cash shortage where a significant
decrease in cash is masked by a compensating increase in stock, as it may be in a funds flow statement.
2 Non-accountants are more familiar with cash flows than with funds flows.
3 Cash flows can be a direct input to a business valuation model.
4 The cash flow statement and associated notes prescribed by FRS 1 may include new data i.e., not contained in balance sheet
and profit and loss account.

19.2 AZ Group
Cash flow statement for year ended 30 June 20X2
Bm
Operating activities
Cash received from customers 1,520
Cash payments to suppliers (430)
Cash paid to employees (326)
Other cash payments (237)
Net cash inflow from operating activities 527
Dividends received from associated undertakings (W1) 120
Returns on investment and servicing of finance
Interest paid (40)
Taxation paid (W2) (112)
Capital expenditure and financial investment
Purchases of tangible fixed assets (W3) (324)
Acquisitions and disposals
Purchases of subsidiary undertakings (W4) (521)
Equity dividends paid
Dividends paid (44)
Net cash outflow before use of liquid resources and financing (394)
Management of liquid resources
Financing
Repayment of amounts borrowed (38)
Decrease in cash (432)

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Reconciliation of operating profit to net cash inflow from operating activities
Bm
Operating profit 565
Depreciation charge 55
Profit on sale of tangible assets
Share of profit of associate (183)
Increase in stocks (W5) (28)
Increase in debtors (W5) (26)
Increase in creditors (W5) 144
527

Reconciliation of net cash flow to movement in net debt


Bm
Decrease in cash in the period (432)
Cash outflow to repay loan 38
Change in net debt resulting from cash flows (394)
Net debt at 1 July 20X1 (643)
Net debt at 30 June 20X2 (1,037)

Notes to the cash flow statement


Note 1 Analysis of changes in net debt
At 1 July Cash Other At 30 June
20X1 flows changes 20X2
Bm Bm Bm Bm
Cash in hand, at bank 54 (25) 29
Overdrafts (240) (407) (647)
(186) (432) (618)
Debt due within one year
Debt due after one year (457) 38 (419)
Current asset investments
(643) (394) (1,037)

Note 2 Purchase of subsidiary


Bm
Fixed assets 486
Stock 214
Debtors 130
Cash 4
Creditors (104)
730
Goodwill 30
760
Satisfied by:
Shares allotted (84 million ordinary shares of B1) 235
Cash 525
760

(W1) Dividends received from associated undertakings


Bm Bm
Opening balance 1,522
Add: Profit 183
Less: Tax (49) 134
1,656
Closing balance 1,536
Dividends received 120

(W2) Taxation paid


Bm
Opening balances (140corporation tax + 126deferred tax) 266
Add: Charge in profit and loss account (13749) 88
354
Less: Closing balances (165corporation tax + 77deferred tax) 242
Payment made *112

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(W3) Fixed assets
Bm
Opening balance 2,579
Less: Depreciation (55)
Add: Purchases during the year *324
Add: Purchased on acquisition of subsidiary 486
Closing balance 3,334

(W4) Purchase of subsidiary net outflow of cash


Bm
Cash consideration 525
Cash acquired (4)
521

(W5) Movements in working capital


Stocks Debtors Creditors
Bm Bm Bm
Balance 1.7.X1 972 1,705 1,082
Add: Acquired 214 130 104
1,186 1,835 1,186
Closing balance 1,214 1,861 *1,330
Increase 28 26 144

*Creditors adjusted for accrued interest

19.3 Hugh Group


Cash flow statement for the year ended 31 December 20X2
B000
Cash flow from operating activities (note 1) 16,022
Dividends from associated undertakings (W2) 15
Returns on investments and servicing of finance (note 2) (2,254)
Taxation (5,414closing 5,414P/L charge 2,887opening) (2,887)
Capital expenditure and financial investment (note 2) (468)
Acquisitions and disposals (note 2) (18,221)
Equity dividends paid (3,219closing 3,219P/L charge 2,606opening) (2,606)
Cash outflow before use of liquid resources and financing (10,399)
Management of liquid resources (note 2)
Financing (note 2) issue of shares 49
increase in debt 2,350
Decrease in cash in the period (8,000)

Reconciliation of net cash flow to movement in net debt (note 3)


Decrease in cash in the period (8,000)
Cash inflow from increase in debt and lease financing (2,350)
Cash inflow from decrease in liquid resources
Change in net debt resulting from cash flows (10,350)
Loans and finance leases acquired with subsidiary (3,817)
New finance leases (2,845)
Translation difference (102)
Movement in net debt in the period (17,114)
Net debt at 1.1.X2 (7,511)
Net debt at 31.12.X2 (24,625)

Notes to the cash flow statement


Note 1 Reconciliation of operating profit to operating cash flows
B000
Operating profit (per question) 19,157
Depreciation charges (per note 1 in question) 3,158
Profit on disposal of fixed asset (per note 1 in question) (50)
Translation loss on foreign exchange overdraft (per note 2 in question) 102
Increase in stocks (W7) (41,639closing 9,384subsidiary acquired 19,992opening) (12,263)
Increase in debtors (W7) (38,667closing 13,856subsidiary acquired 21,057opening) (3,754)
Increase in creditors (W7) (43,555closing trade creditors 20,579subsidiary acquired 13,304closing trade creditors) 9,672
Net cash inflow from continuing operating activities 16,022

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Note 2 Analysis of cash flows for headings netted in the cash flow statement
Returns on investments and servicing of finance B000
Interest received (W3) (100opening interest note 2+ 458interest receivable P/L 50closing interest note 2= 508interest received) 508
Interest paid (W3) (102opening interest note 3 + 2,497interest payable P/L 210closing accrued interest note 3 = 2,389interest paid) (2,389)
Interest element of finance lease rental payments (per profit and loss) (373)
Net cash outflow for returns on investments and servicing of finance (2,254)

Capital expenditure and financial investment


Purchase of tangible fixed assets (W4) (3,512)
Sale of plant and machinery (W6) 3,044
Net cash outflow for capital expenditure and financial investment (468)

Acquisitions and disposals B000


Purchase of subsidiary undertaking (cash paid) (12,705)
Net overdrafts acquired with subsidiary (1,439cash 6,955overdraft) (5,516)
Net cash outflow for additions and disposals (18,221)

Financing B000
Issue of ordinary share capital (19,902closing share capital 9,519on acquisition of subsidiary 10,334opening share capital) 49
Debt due within a year
Increase in short-term borrowings (note 4 to the question) 2,006
Increase in short-term element of long-term loans (note 4 to the question) (847)
Debt due beyond a year: (6,633closing 2,000subsidiary acquired 2,100opening) 2,533
Capital element of finance lease rental repayments (Closing [4,454short term+ 2,806long term]
New leases [2,845note 4] Subsidiary acquired [1,107short term +710long term]
Opening [2,179short term +1,761long term]) (1,342)
Net cash inflow from financing 2,350

Note 3 Analysis of net debt


At 1 Jan Cash Acquisition Other Exchange At 31
20X2 flow (excl. cash and non-cash movement Dec 20X2
overdrafts) changes
B000 B000 B000 B000 B000 B000
Cash in hand, at bank 1,279 (238) 1,041
Overdrafts (1,201) (7,762) Note 3
(102) (9,065)
(8,000)

Debt due after 1 year (2,100) (2,533) (2,000) (6,633)


Debt due within 1 year (1,549) (1,159) (2,708)
Finance leases (3,940) 1,342 (1,817) (2,845) (7,260)
______ (2,350) ______ ______ ____ _______
Total (7,511) (10,350) (3,817) (2,845) (102) (24,625)

(W1) Tangible assets B000


Opening balance 31/12/X1 (balance sheet) 13,791
Additions 6,386
Additions on acquisition of subsidiary (note 6) 12,194
Disposals (net book value note 2) (1,474)
Depreciation for year (note 2) (3,158)
Closing balance 31/12/X2 (balance sheet) 27,739
Profit on disposal of fixed assets B50,000 (note 2)

(W2) Investment in associated company B000


Opening balance 31/12/X1 (balance sheet) 429
Share of profit before tax (profit and loss account) 61
Share of tax charge (profit and loss account) (18)
Dividend received (15)
Closing balance 31/12/X2 (balance sheet) 457

(W3) Interest paid and received Paid Received


B000 B000
Per profit and loss account 2,497 458
Add: Opening accrual 102 100
Less: Closing accrual (210) (50)
Cash paid/received 2,389 508

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(W4) Purchase of tangible fixed assets B000
Additions (W1) 6,386
Less: Inception of finance leases (note 4 to the question) (2,845)
Less: Creditors at 31/12/X2 (note 3 to the question) (94)
Add: Creditors at 31/12/X1 (note 3 to the question) 65
Payments 3,512

(W5) Purchase of subsidiary undertakings B000


Cash consideration 12,705
Less: Cash acquired (1,439)
Add: Overdraft of subsidiary when acquired 6,955
Net cash outflow 18,221

(W6) Sale of plant and machinery B000


Net book value of disposals (note 1 to the question) 1,474
Profit on disposal (note 1 to the question) 50
Proceeds 1,524
Less: Debtor at 31/12/X2 (121)
Add: Debtor at 31/12/X1 1,641
Received 3,044

(W7) Increase in stocks, debtors and creditors


Stocks Trade Trade
debtors creditors
B000 B000 B000
31 December 20X2 41,639 38,667 43,555
31 December 20X1 19,992 21,057 13,304
21,647 17,610 30,251
Effect of acquisition 9,384 13,856 20,579
12,263 3,754 9,672

19.4 Barolo Group


Barolo Group
Cash flow statement for year ended 31 December 20X9 Note B000
Operating cash flows 4,200
Dividends from associate undertaking (W3) 100
Returns on investment and servicing of finance 1 (1,070)
Taxation paid (W6) (575)
Capital expenditure 1 (1,060)
Acquisitions and disposals (W8) (900)
Equity dividends paid (W9) (525)
Cash flow before management of liquid resources 170
Management of liquid resources 1 (715)
Decrease in cash flow (W1) (545)

Reconciliation of movement in net debt B000


Reduction in cash flow for year (545)
Cash outflow on liquid resources 715
Change in net debt resulting from cash flows 170
Net debt at 1 January 20X9 (W10) (185)
Net debt at 31 December 20X9 (W10) (15)

Reconciliation of operating profit to operating cash flow B000


Operating profit 2,635
Depreciation (note 3) 750
Increase in stock (W2) (500)
Increase in debtors (W2) (845)
Increase in creditors (W2) 2,160
4,200

Note 1 Analysis of headings netted in cash flow statement


Returns on investment and servicing of finance B000
Interest received (W4) 130
Interest paid (W4) (45)
Dividends paid to minority (W5) (1,155)
Cash outflow (1,070)

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Capital expenditure B000
Fixed assets purchased (W7) (1,900)
Fixed asset disposals (W7) 840
Cash outflow (1,060)

Management of liquid resources B000


Investment in government securities 140
Cash on short-term deposit 400
Investment in corporate bonds 175
Cash outflow (715)

(W1) Change in cash flow for period B000 B000


Closing: Cash at bank 120
Bank overdraft
120
Less: Opening cash at bank 665
Opening bank overdraft (665)
Reduction in cash for year (545)

(W2) Changes in working capital items


Stock Trade Trade
debtors creditors
B000 B000 B000
Balance at 1.1.20X9 3,400 2,680 4,865
Less disposal (300) (250) (525)
3,100 2,430 4,340
Balance at 31.12.20X9 3,600 3,275 6,500
Increase 500 845 2,160

(W3) Dividends from associated undertaking B000


Investment at cost (note 4 to the question) 1,125
Share of profit after tax (475share of associates profit before tax 100share of associates tax) 375
Share of surplus on revaluation (from STRGL) 75
1,575
Year-end balance (note 4 to the question) 1,475
Dividend received 100

(W4) Interest paid and received Paid Received


B000 B000
Per profit and loss account 95 135
Accrued at year-end (note 7/note 6) (200) (25)
Accrued at beginning (note 7/note 6) 150 20
45 130

(W5) Dividends paid to minority B000


Minority interest at beginning 2,850
Share of profit after tax (P/L) 375
Disposal (note 1: 2,100net assets at disposal 20%minority share) (420)
Expected balance at end of year 2,805
Actual balance at end of year 1,650
Dividend paid 1,155

(W6) Taxation paid B000


Balance at 1.1.20X9 (note 7) 750
Profit and loss account (note 2) 855
Disposal of corporation tax liability of subsidiary (note 1) (125)
1,480
Balance at 31.12.20X9 (note 7) 905
Cash outflow 575

(W7) Cash flow on capital expenditure B000 B000


Additions to tangible fixed assets (note 3) 1,900
Proceeds of disposal
Net book value of tangible fixed assets disposed
([3,400cost note 3475agg depr note 3]-1,550NBV samic fixed assets note 1500transfer of fixed assets note 4) 875
Loss on disposal (P/L) 35
Proceeds (840)
Net cash outflow (1,060)

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(W8) Cash flow on acquisitions and disposals B000
Cash proceeds of subsidiary sold (note 1) 375
Cash balance disposed of (note 1) (650)
Net cash outflow on disposal (275)
Cash consideration for associate (note 4) (625)
Cash outflow (900)

(W9) Equity dividends paid B000


Proposed dividends at 1.1.20X9 350
Appropriations for year (P/L) 575
Proposed dividends at 31.12.20X9 (400)
Cash outflow (525)

(W10) Net debt At 1.1.20X9 At 31.12.20X9


B000 B000
Cash at bank 665 120
Overdraft

Borrowings
Creditors > one year (1,070) (1,070)

Liquid resources
Government securities 115 255
Seven day deposits 105 505
Corporate bonds 175
Net (debt) (185) (15)

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