F1 6.07 Question 2 answer

Question

L Ltd and M Ltd have a year ends of 30 June. L Ltd owns 90% of the share capital of M Ltd. In the year ended 30/06/2020, M Ltd paid dividends of £4,000 to its shareholders. In the same year, M Ltd sold goods that had cost it £20,000 to L Ltd for £30,000. Of these goods, L Ltd still held £9,000 of them at its year-end.

The two companies’ statements of profit or loss are shown below.

Prepare L Ltd’s consolidated statement of profit or loss for the year ended 30/06/2020.

Answer

When preparing the consolidated statement of profit or loss we must eliminate the value of intragroup sales from sales and cost of sales. We must also eliminate the unrealised profits made on the goods held by L Ltd and purchased from M Ltd. Lastly when calculating the consolidated dividend income we must eliminate the dividends paid to L Ltd by M Ltd.

As L Ltd does not own all of M Ltd we will have to split the consolidated profit between the equity holders of L Ltd and the non-controlling interests. As it was M Ltd that made the profits included in the value of L Ltd’s inventories we will have to adjust the subsidiary’s profits before calculating the non-controlling interests.

%d bloggers like this: