Question 2.2.3: Suppose that a year has passed, and you now wish to prepare ...

FIA – Foundations of Financial Accounting FFA

Suppose that a year has passed, and you now wish to prepare the consolidated statement of financial position for the Sing group as at 31.03.X2. The individual statements of financial position are as follows.

Prepare the consolidated statement of financial position as at 31 March 20X2.

SING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X2

	$
Assets	80,000
Non-current assets	50,000
Investment in 50,000 shares of Wing Co at cost	130,000
Current assets
Total assets
Equity and liabilities
Equity
Ordinary shares	75,000
Retained earnings	55,000
Total equity and liabilities	130,000

WING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X2

	$
Current assets	80,000
Equity
50,000 ordinary shares of $1 each	50,000
Retained earnings	30,000
	80,000

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We can see from the individual statements of financial position that Wing Co has generated profits of $20,000 since being owned by Sing Co as the retained earnings balance has increased from $10,000 on acquisition to $30,000 at 31 March 20X2. These profits belong to the group and should be consolidated. The technique to adopt here is to produce a new working: Retained earnings. A proforma working is set out below.

The goodwill calculation will be the same as before as it is based on the net assets of Wing Co, which includes retained earnings, at the acquisition date.

Retained earnings

	P Co	S Co
	$	$
Per question	X	X
Pre-acquisition retained earnings		(X)
		X
Post-acquisition retained earnings of S Co	X
Group retained earnings	X

Applying this to our example the working will look like this.
Retained earnings

	Sing Co	Wing Co
	$	$
Per question	55,000	30,000
Pre-acquisition retained earnings		(10,000)
		20,000
Post-acquisition retained earnings of S Co	20,000
Group retained earnings	75,000

SING CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X2

	$
Assets
Non-current assets
Goodwill arising on consolidation	20,000
Current assets (50,000+80,000)	130,000
	150,000
Equity and liabilities
Ordinary shares (Sing only)	75,000
Retained earnings (see working above)	75,000
	150,000