Question

Illustration 2 P Co acquired 75% of the ordinary shares of S Co on that company's incorporation in 20X3. The summarized income statements and movement on retained earnings of the two companies for the year ending 31 December 20X6 are set out below. P Co S Co $ $ Sales revenue 75000 38,000 20,000 Less: Cost of sales 30,000 18,000 Gross profit 45,000 Administrative expenses (14,000) 8,000) Profit before tax 31,000 10,000 Income tax expense (10,000) 21,000 Profit for the year 8,000 Note: Movement on retained earnings Retained earnings brought forward 87,000 17,000 Profit for the year 21,000 8,000 Retained earnings carried forward 108,000 25,000 Required Prepare the consolidated income statement and extract from the statement of changes in equity showing retained earnings and non-controlling interest.

Answer 1

To prepare the consolidated income statement, we add the revenue, cost, and expenses from both P Co and S Co. The consolidated income statement is $113,000 in sales revenue, $48,000 in cost of sales, and $10,000 in profit. The statement of changes in equity shows retained earnings and non-controlling interest.

Step-by-step explanation:

To prepare the consolidated income statement, we need to add the revenue, cost, and expenses from both P Co and S Co. We also need to take into account the non-controlling interest, which represents the portion of profit and loss that doesn't belong to P Co. The consolidated income statement would look like this:

P Co S Co Total

Sales revenue $75,000 $38,000 $113,000

Less: Cost of sales $30,000 $18,000 $48,000

Gross profit $45,000 $20,000 $65,000

Administrative expenses ($14,000) ($8,000) ($22,000)

Profit before tax $31,000 $10,000 $41,000

Income tax expense ($10,000) ($21,000) ($31,000)

Profit for the year $21,000 ($11,000) $10,000

To extract the statement of changes in equity showing retained earnings and non-controlling interest, we need to calculate the retained earnings for both P Co and S Co and also take into account the non-controlling interest. The statement would look like this:

P Co S Co Total

Retained earnings brought forward $87,000 $17,000 $104,000

Profit for the year $21,000 $8,000 $29,000

Retained earnings carried forward $108,000 $25,000 $133,000

Non-controlling interest ($11,000) ($11,000)

Answer 2

Non-controlling Interest in Retained Earnings: $6,750 (25% of S Co's Retained Earnings: $25,000 - 75% controlled by P Co)

Consolidated Income Statement for the year ending 31 December 20X6:

Sales Revenue: $113,000 (P Co: $75,000 + 75% of S Co: $38,000)

Cost of Sales: $48,000 (P Co: $30,000 + 75% of S Co: $18,000)

Gross Profit: $65,000

Administrative Expenses: $(22,000) (P Co: $(14,000) + 75% of S Co: $(8,000))

Profit Before Tax: $43,000

Income Tax Expense: $(31,000) (P Co: $(10,000) + 75% of S Co: $(21,000))

Profit for the Year: $12,000

Extract from the Statement of Changes in Equity:

Retained Earnings:

Retained Earnings Brought Forward: $195,000 (P Co: $87,000 + 75% of S Co: $17,000)

Profit for the Year: $21,000 (P Co: $21,000 + 75% of S Co: $8,000)

Retained Earnings Carried Forward: $216,000 (P Co: $108,000 + 75% of S Co: $25,000)

Non-controlling Interest:

Non-controlling Interest in Profit for the Year: $3,000 (25% of S Co's Profit: $8,000 - 75% controlled by P Co)

Non-controlling Interest in Retained Earnings: $6,750 (25% of S Co's Retained Earnings: $25,000 - 75% controlled by P Co)