Question 24.1.3: cancellation with intra-group trading P Co regularly sells g...
cancellation with intra-group trading P Co regularly sells goods to its one subsidiary company, S Co. The statements of financial position of the two companies on 31 December 20X6 are given below.
P CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
| $ | $ | $ | |
| Assets | |||
| Non-current assets | |||
| Tangible assets | 35,000 | ||
| Investment in 40,000 $1 shares in S Co at cost | 40,000 | ||
| Current assets | 75,000 | ||
| Inventories | 16,000 | ||
| Receivables: S Co | 2,000 | ||
| Other | 6,000 | ||
| 8,000 | |||
| Cash at bank | 1,000 | ||
| 25,000 | |||
| Total assets | 100,000 | ||
| Equity and liabilities | |||
| Equity | |||
| 70,000 $1 ordinary shares | 70,000 | ||
| Retained earnings | 16,000 | ||
| 86,000 | |||
| Current liabilities | |||
| Payables | 14,000 | ||
| Total equity and liabilities | 100,000 |
S CO S
TATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
| $ | $ | ||
| Assets | |||
| Non-current assets | |||
| Tangible assets | 45,000 | ||
| Current assets | |||
| Inventories | 12,000 | ||
| Receivables | 9,000 | ||
| 21,000 | |||
| Total assets | 66,000 | ||
| Equity and liabilities | |||
| Equity | |||
| 40,000 $1 ordinary shares | 40,000 | ||
| Retained earnings | 19,000 | ||
|
|||
| Current liabilities | |||
| Bank overdraft | 3,000 | ||
| Payables: P Co | 2,000 | ||
| Payables: other | 2,000 | ||
| 7,000 | |||
| Total equity and liabilities | 66,000 |
The cancelling items are:
(a) P Co’s asset ‘investment in shares of S Co’ ($40,000) cancels with S Co’s liability ‘share capital’ ($40,000)
(b) P Co’s asset ‘receivables: S Co’ ($2,000) cancels with S Co’s liability ‘payables: P Co’ ($2,000).
The remaining assets and liabilities are added together to produce the following consolidated statement of financial position.
Note the following.
(a) P Co’s bank balance is not netted off with S Co’s bank overdraft. To offset one against the other would be less informative and would conflict with the principle that assets and liabilities should not be netted off.
(b) The share capital in the consolidated statement of financial position is the share capital of the parent company alone. This must always be the case, no matter how complex the consolidation, because the share capital of subsidiary companies must always be a wholly cancelling item.
P CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
| Assets | $ | $ |
| Non-current assets | ||
| Tangible assets | 80,000 | |
| Current assets Inventories | ||
| 28,000 | ||
| Receivables | 15,000 | |
| Cash at bank | 1,000 | |
| 44,000 | ||
| Total assets | 124,000 | |
| Equity and liabilities | ||
| Equity | ||
| 70,000 $1 ordinary shares | 70,000 | |
| Retained earnings | 35,000 | |
| 105,000 | ||
| Current liabilities | ||
| Bank overdraft | 3,000 | |
| Payables | 16,000 | |
| 19,000 | ||
| Total equity and liabilities | 124,000 |