Question

Below are the income statements H Ltd, S Ltd and A Ltdfor the year ended 31 December 2010. H Ltd S Ltd A Ltd N000 N000 N000 Revenue 8,000 4,500 3,000 Operating expenses (4,750) (2,700) (2,050) Profit from operations Finance costs Profit before tax Tax 3,250 1,800 950 (750) (100) (50) 2,500 1,700 900 (700) (500) (300) 787 4,046.6 82 Profit for the year You are also given the following information: 1. H Ltd Acquired 80% of S several years ago. 2. H Ltd acquired 30% of the equity share capital of A Ltd on 1 January 2009. 3. During the year, H Ltd sold goods to A for N1 million at a mark-up of 25%. At the year-end, A Ltd Still held one quarter of these goods in inventory. 4. At 31 December 2010, it was determined that the investment in the associate was impaired by N35,000, of which N20,000 related to the current year. Required: Prepare the consolidated income statement for the group for the year ended 31 December 2010.

Answer 1

	Consoliated Income Statement as at Dec 2010
		H ltd	S Ltd	A Ltd	Total
	Particulars	(N'000)	(N'000)	(N'000)	(N'000)
	Revenue	8000	4500	3000	15500
	Less : Intra group trading(eliminated)	-1250			-1250
a	Net Consolidated Revenue	6750	4500	3000	14250
	Operating Expenses	4750	2700	2050	9500
	Add: Cost sales(provision for unrealised profit)			62.5	62.5
b	Net Operating Cost	4750	2700	2112.5	9562.5
c	Operating Profit (a-b)	2000	1800	887.5	4687.5
	Finance Cost	-750	-100	-50	-900
d	Profit Before Tax	1250	1700	837.5	3787.5
	Tax	-700	-500	-300	-1500
	Profit After Tax	550	1200	537.5	2287.5

Note :

The following items requires careful consideration is the intra-group trading. In the consolidated statement of profit or loss :

• Has there been any intra-group trading during the year, irrespective of whether the goods are still included in inventory at the year end?
• Do any of the items remain in inventory at the end of the year

First, in this question, N 1 million (plus 25% markup) of sales have been made from H ltd selling to A Ltd. This must be eliminated, irrespective of whether the items remain unsold at the year end. This is because the consolidated statement of profit or loss needs to show revenue and costs of sales which reflects group performance with external, non-group, entities.

Second, to identify the provision for unrealised profit (adjustment to the asset, inventory). H Ltd has made a profit of 25% (calculated as revenue of N1250 – cost of N1000). As only one quarter of the items remain in inventory, the inventory value is overstated by one quarter of that profit – that is, N 62.50.