E Ltd owns all the issued shares of F Ltd and both companies have a year-end of 28th February. During the year, E Ltd sold goods costing £200,000 to F Ltd for £250,000. Of these goods F Ltd still held £100,000 of them in its year-end inventories.
The companies’ statements of profit or loss for the year ended 28/02/2020 are shown below.
Prepare E Ltd’s consolidated statement of profit or loss for the year ended 28/02/2020
The intragroup sales of £250,000 must be eliminated from the consolidated figures for Sales and Cost of Sales. In addition, unrealised profits in the inventories held by F Ltd at the year-end must be eliminated from the consolidated Cost of Sales.
The unrealised profits are calculated as follows:
- Profit made on intragroup sales: £250,000 – £200,000 = £50,000
- Portion of intragroup sales still in inventory: £100,000/£250,000 = 0.4
- Unrealised profit £50,000 x 0.4 = £20,000
- Unrealised profit of £20,000 must therefore be added to the consolidated cost of sales
The consolidated statement is shown below.