Learning Unit 7 - Elimination of Intragroup Transactions

FAC2602
Open Rubric
LEARNING OUTCOME
You should be able to eliminate intragroup transactions in consolidated financial
statements of companies according to International Financial Reporting Standards.
OVERVIEW
7.1 INTRODUCTION ................................................................................................... 2

7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS .................. 2
7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT .............................. 3
7.4 UNREALISED PROFIT IN TRADING INVENTORIES......................................... 11
7.5 PROPERTY, PLANT AND EQUIPMENT HELD BY COMPANIES IN THE
GROUP................................................................................................................ 24
7.6 EXERCISES ........................................................................................................ 48
SELF-ASSESSMENT.................................................................................................... 60
KEY CONCEPTS
• Accounting for intragroup bills and bank overdrafts
• Elimination of intragroup transactions
• Computation of unrealised profits
• Upstream and downstream sales
• Pro forma consolidation entries
• Current year and prior year sales
1
ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:
• record intragroup bills of exchange and bank overdrafts correctly
in the consolidated annual financial statements of companies
• determine the surplus when revaluing property in respect of an
interest in a subsidiary at acquisition
• calculate the unrealised profit effect in trading inventories in both
the parent and the subsidiary
• do the pro forma consolidation journal entries
• draft the consolidated annual financial statements of a group, in
accordance with IFRS, where the sale of property, plant and
equipment or inventory has taken place between companies in the
group
7.1 INTRODUCTION
In the preceding learning units, we introduced you to the basic consolidation process for
wholly and partly owned subsidiaries.
In this learning unit, we deal mainly with other intragroup transactions that take place in
groups and therefore have to be eliminated for consolidation purposes. We will deal with
trading inventories as well as the property, plant and equipment held in a group.
We would like to emphasise that we do not deal with taxation on unrealised

intragroup profits or losses in this module.
7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS

A bill of exchange is a negotiable document. It is a written instruction directed by one
person to another instructing that person to pay, upon demand, a certain sum of money
to the person nominated in the bill of exchange.
For example:
Bill No. 111 30/10/20.8
To: P Ltd Amount: R2 000
Pay the amount of R2 000 to S Ltd on 30/11/20.8.
2
S Ltd would treat it as a bill receivable in its records, whereas P Ltd would show it as a bill
payable. Upon consolidation, the subsidiary's bill receivable would be offset against the
bill payable in P Ltd's records. From a group perspective, the group cannot enter into a
transaction with itself.
S Ltd could have converted the bill into cash before 30/11/20.8 by selling it to a financial
institution. This type of transaction is known as discounting.
On consolidation, we may only offset the bank overdraft of one company in the group
against the favourable bank balance of another company if both companies have their
accounts at the same bank and the company with the favourable balance has
guaranteed the overdraft of the other company or the bank itself would offset the two
amounts against each other in terms of an agreement between the two companies and
the bank.
7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

The assets of a subsidiary could be revalued at the date of acquisition of the interest if
the carrying amounts and market values of the assets differ.
The following two situations may arise:
• The subsidiary's assets may be revalued merely for the purposes of determining
the purchase price, without a journal entry being made in the subsidiary's financial
records.
• The assets of the subsidiary may be revalued in order to determine the purchase
price, and an adjustment is subsequently made in the subsidiary's financial
records.
Note that the revaluation of assets may lead to capital gains tax, which is ignored for the
purposes of this module.
We will use the following two examples to explain the two situations to you:
3
EXAMPLE 1
A Ltd acquired 80 000 shares in B Ltd on 1 July 20.1. Each share carries one vote. At that
date, the land belonging to B Ltd was valued at R200 000. No adjustment was made in
the financial records of B Ltd.
The retained earnings was R46 000. At 30 June 20.4, the trial balances of A Ltd and B Ltd
were as follows:
A Ltd B Ltd
R R
Credits
Share capital – ordinary shares (300 000/100 000
100 000
shares) 300 000
Retained earnings 121 000 92 000
Long-term borrowings – C Ltd 140 000 –
– A Ltd – 80 000
Current liabilities 15 000 66 000
576 000 338 000
Debits
Land at cost price 250 000 140 000
Investment in B Ltd at fair value (cost price: R164 800) 164 800 –
Loan – B Ltd 80 000 –
Current assets 81 200 198 000
576 000 338 000
Additional information
1. Consider the carrying amount of all the other assets and liabilities of B Ltd to be equal
to the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of financial position of the A Ltd Group
as at 30 June 20.4 in compliance with the requirements of IFRS.
4
SOLUTION 1
A LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.4
R
ASSETS
Non-current assets
Property, plant and equipment (250 000 + 200 000) 450 000
Current assets (81 200 + 198 000) 279 200
Total assets 729 200
EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Share capital 300 000
Retained earnings (121 000 + 36 800(b)) 157 800
457 800
Non-controlling interests(a) 50 400
Total equity 508 200
Non-current liabilities
Long-term borrowings 140 000
Current liabilities (15 000 + 66 000) 81 000
Total liabilities 221 000
Total equity and liabilities 729 200
5
Calculations
1. Analysis of owner's equity of B Ltd
A Ltd 80 %*
Total At Since NCI 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
46 000 36 800 9 200
Retained earnings
60 000
Revaluation surplus (200 000 – 140 000) 48 000 12 000
Purchase difference 206 000 164 800 41 200

Consideration and NCI - - -
206 000 164 800 41 200
Since acquisition
to end of the current year
Retained earnings
(92 000 - 46 000)
36 800 9 200
46 000
(b) (a)
252 000 36 800 50 400
* 80 000/100 000 shares x 100% = 80%
2. Entry in the separate financial records of B Ltd

Per the information, B Ltd has not yet included this in its financial records:
Dr Cr
R R
Land 60 000
Revaluation surplus 60 000
Revaluation of land
6
3. Pro forma consolidated journal entries
Dr Cr NCI
R R R
Retained earnings 46 000
Goodwill NIL
Investment in B Ltd 164 800
Non-controlling interests (SFP) 41 200 41 200
Elimination of owner's equity of B Ltd at
acquisition
Recording of non-controlling interests in
B Ltd for the period 1 July 20.1 to 30 June 20.4
Loan – A Ltd 80 000
Loan – B Ltd 80 000
Elimination of intragroup loans
50 400(a)
EXAMPLE 2
P Ltd acquired a 70% interest in S Ltd at 1 May 20.2. Each share carries one vote. At
the date of acquisition, P Ltd valued the land belonging to S Ltd with the carrying amount
of R200 000 at R300 000. It is company policy to value the land belonging to S Ltd every
second year at 31 August. At the date of acquisition, the retained earnings of S Ltd was
R20 000.
7
The following represent the condensed trial balances of P Ltd and S Ltd at 31 December
20.6:
P Ltd S Ltd
R R
Credits
Share capital – ordinary shares (20 000/16 000 shares) 100 000 80 000
Long-term borrowing – P Ltd – 100 000
Revaluation of land 100 000 150 000
500 000 390 000
Debits
Land at valuation 200 000 350 000
Investment in S Ltd at fair value (cost price: R140 000) 140 000 –
Unsecured loan – S Ltd 100 000 –
500 000 390 000
Consider the carrying amount of all the other assets and liabilities of S Ltd to be equal to
the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of financial position of the P Ltd
Group as at 31 December 20.6 in compliance with the requirements
of IFRS.
8
SOLUTION 2
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20.6
ASSETS R
Non-current assets
Current assets (60 000 + 40 000) 100 000

Other components of equity (100 000 + 35 000(1)) 135 000
Retained earnings (160 000 + 14 000(2)) 174 000
409 000
Non-controlling interests(3)/(a) 81 000
9
Calculations
1. Analysis of owner's equity of S Ltd

P Ltd 70% NCI
Total At Since 30%
R R R R
At acquisition
Share capital 80 000 56 000 24 000
Retained earnings 20 000 14 000 6 000
Revaluation surplus 100 000 70 000 30 000
(300 000 - 200 000)
200 000 140 000 60 000

Purchase difference - - -
Consideration and NCI 200 000 140 000 60 000
Since acquisition
to end of the current year
Retained earnings 14 000 RE
20 000 6 000
(40 000 - 20 000)
Revaluation surplus
50 000 35 000 OCE 15 000
(150 000 - 100 000)
(2)
270 000 14 000 RE 81 000(3)
35 000(1) OCE
RE = retained earnings
OCE = other components of equity

Dr Cr NCI
R R R
Goodwill NIL
Investment in S Ltd 140 000
Non-controlling interests 60 000 60 000
Elimination of owner's equity of S Ltd at
acquisition
Recording of non-controlling interests in S Ltd
for the period 1 May 20.2 to 31 December 20.6
10
Recording of non-controlling interests in the
revaluation surplus of S Ltd for the period
1 May 20.2 to 31 December 20.6
Loan – P Ltd 100 000
Loan – S Ltd 100 000
Elimination of intragroup loans 81 000(a)
7.4 UNREALISED PROFIT IN TRADING INVENTORIES

As mentioned previously, the purpose of consolidated annual financial statements is to
offer annual financial statements after the elimination of all intragroup transactions.
We should eliminate those profits or losses on transactions within the group, as the group
is regarded as one economic entity and will not enter into transactions with itself.
P Ltd → S Ltd → X Ltd
Suppose P Ltd sells inventories to S Ltd at a cost price of R1 000 plus 20% profit. S Ltd
packs the inventories and sells them to X Ltd, a company outside the group, at R1 500.
The following situation may arise from this scenario:
• All the inventories have been sold to X Ltd by the end of the year. There will be
no change to the consolidated annual statements as the profit is actually realised
by selling it to a company outside the group.
• If no inventories have been sold to X Ltd, we should eliminate the unrealised
profit of R200 (20% x R1 000) as the profit has not yet realised outside the
group. The inventory of S Ltd and P Ltd's profit include this amount. To eliminate
the unrealised profit, S Ltd has to subtract the R200 from its closing inventory (i.e.
inventory should be credited), whereas P Ltd has to decrease its profit by debiting
cost of sales with R200.
• If half the inventories have been sold outside the group, R100 should be
eliminated.
11
A very important aspect of consolidations is that we must start by determining which
company is selling the inventories and which company is buying them.
P Ltd
Sells to
S Ltd
If P Ltd sells inventories to S Ltd, P Ltd is making the profit, and no adjustment to non-
controlling interest is necessary.
P Ltd
Sells to
S Ltd
If S Ltd sells inventories to P Ltd, S Ltd is making the profit, and the NCI must be adjusted
by its percentage interest in profit or loss. (This adjustment is made in the analysis of the
owner's equity).
Note: Unrealised profits and losses have income tax implications, but we ignore
these for the purposes of this module. We will deal with this at third-year level.
12
EXAMPLE 3
Parent sells inventories to subsidiary

The following are the trial balances of A Ltd and its subsidiary, B Ltd, at 31 December
20.8:
A Ltd B Ltd
R R
Share capital – ordinary shares (200 000/100 000 shares) (200 000) (100 000)
Retained earnings – 1 January 20.8 (120 000) (80 000)
Profit before tax (80 000) (60 000)
Investment in B Ltd – 80 000 ordinary shares
at fair value (cost price: R80 000) 80 000 -
Property, plant and equipment 200 000 200 000
Inventories 50 000 30 000
Trade and other receivables 70 000 50 000
Trade and other payables (30 000) (60 000)
Taxation for the year 30 000 20 000
1. A Ltd acquired its interest in B Ltd at the time of the incorporation of B Ltd.
2. B Ltd purchases all its inventories from A Ltd at cost price plus 25%. The inventories
on B Ltd's financial records amounted to R20 000 at 1 January 20.8.
3. A Ltd's total sales to B Ltd during 20.8 amounted to R100 000.
REQUIRED
Draft the consolidated annual financial statements of the A Ltd Group
for the year ended 31 December 20.8 in compliance with the
requirements of IFRS.
13
SOLUTION 3
A LTD GROUP
20.8
ASSETS R
Non-current assets
400 000
Current assets
Inventories [50 000 + 30 000 - (30 000 x 25
125
)] 74 000
Trade and other receivables (70 000 + 50 000) 120 000
194 000

Retained earnings(4) 260 000
460 000
Non-controlling interests(2)/(c) 44 000

Current liabilities
Trade and other payables (30 000 + 60 000) 90 000
14
A LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.8
R
Profit before tax 138 000
[80 000 + 60 000 - 100 000 (sales) + 100 000 (purchases) -
(30 000 x 25/125 ) + (20 000 x 25/125 )]
Income tax expense (30 000 + 20 000) (50 000)
PROFIT FOR THE YEAR 88 000
Other comprehensive income for the year -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 88 000
Total comprehensive income attributable to:

Owners of the parent (88 000 - 8 000) 80 000
Non-controlling interests(3)/(b) 8 000
88 000
A LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.8
Non-
Share Retained control- Total
Total
capital earnings ling equity
interests
R R R R R
Balance at
1 January 20.8 200 000 180 000* 380 000 36 000(a) 416 000
Changes in equity for
20.8
Total comprehensive
income for the year
Profit for the year 80 000 80 000 8 000(b) 88 000
Balance at (4)
200 000 260 000 460 000 44 000(c) 504 000
31 December 20.8
* [120 000 - (20 000 x 25/125) + 64 000(1)]
15
Calculations
A Ltd 80 %* NCI
Total At Since 20%
R R R R
At acquisition
Share capital 100 000 80 000 20 000
Since acquisition
• To beginning of current year
(1)
• Current year (3)
Profit for the year (60 000 - 40 000 32 000 8 000
20 000)
(2)
220 000 96 000 44 000
* 80 000/100 000 share x 100% = 80%

Dr Cr NCI
R R R
Goodwill NIL
Elimination of owner's equity of B Ltd at acquisition
Recording of non-controlling interests in B Ltd for
(a)
the period ended 31 December 20.7 36 000
Non-controlling interests (SCI) 8 000
(b)
Recording of non-controlling interests in profit after
tax
Income – sales (A Ltd) 100 000
Cost of sales (B Ltd) 100 000
Elimination of intragroup sales
16
Cost of sales (A Ltd) 6 000
Inventory (B Ltd) 6 000
Elimination of unrealised intragroup profit included
in closing inventory of
Ltd (30 000 x 25/125 )
Retained earnings (A Ltd) 4 000
Cost of sales (A Ltd) 4 000
in opening inventory of
(c)
B Ltd (20 000 x 25/125) 44 000
17
COMMENT
Note that in this example, the parent sold inventories to the subsidiary. The unrealised
profit was therefore included in the profit of A Ltd, and there were consequently no
adjustments in the analysis of owner's equity of B Ltd, but only in the consolidated
statement of profit or loss and other comprehensive income.
Also note that sales and cost of sales are not always given in questions. You will then
have to make all adjustments against profit before tax.
It is very important to understand the journal entries. When you know which accounts
need to be debited or credited, you will know where the amounts should be added or
subtracted in the statements.
We need to eliminate all intragroup transactions. When a shareholder or outsider

evaluates the group's statements, the group is regarded as one economic entity. As the
single entity will not enter into transactions with itself, we should eliminate any sales
between companies in the group. Therefore, we need to eliminate the intragroup sales
of R100 000 mentioned in point 3 of the additional information. When these sales took
place, A Ltd credited sales as it sold these goods. B Ltd debited its inventory with the
purchase. We assume B Ltd sold this inventory and therefore had already affected cost
of sales. To eliminate the intragroup sales, we will debit the sales of A Ltd with R100
000, thus subtracting the amount from sales. We will credit the cost of sales of B Ltd,
thus decreasing cost of sales.
A Ltd sells inventory to B Ltd at a profit of 25%. Both B Ltd's inventory left at year-end
and A Ltd's profit include this intragroup profit. Since we evaluate the companies as a
single entity, we need to eliminate the intragroup profit (unrealised profit) as it was profit
earned from within the group but had not yet been realised outside the group.
At year-end, B Ltd has inventory obtained from A Ltd in its financial records amounting
to R30 000. A Ltd made a profit of 25%. To calculate the unrealised profit portion, we
have to recognise that the R30 000 already includes 25% profit, which makes it 125%.
We calculate the profit of 25% as follows: R30 000 x 25 /125 = R6 000.
To eliminate the unrealised profit, B Ltd has to subtract the R6 000 from its closing
inventory in the statement of financial position. We therefore credit inventory to
decrease it. We should also decrease A Ltd's profit by debiting cost of sales. Profit
decreases when we debit cost of sales, but the R6 000 is added to cost of sales. Refer
to the journal entries.
18
In the previous year, the journal entry for eliminating the unrealised profit of R4 000 was
performed similar to what is described above. On consolidation, we have to repeat all
the entries annually because we combine the individual companies' financial records
annually and these current records do not contain the consolidation entries of the
previous year. If profit was affected in the previous year, we need to adjust the retained
earnings in the current year. Therefore, the cost of sales of R4 000 that would have
been debited in the previous year will be debited against the retained earnings in the
current year. Due to the general view that the operating cycle of entities is normally a
year, we assume that B Ltd actually sold this inventory to outside parties within a year;
hence the profit is realised. Therefore, we credit cost of sales in A Ltd to increase the
profit again. Crediting the cost of sales implies that the cost of sales decreases, so the
R 4 000 is subtracted from cost of sales in the statements.
EXAMPLE 4
Subsidiary sells inventories to parent

The following are the trial balances of D Ltd and its subsidiary, E Ltd, at 31 December
20.8:
D Ltd E Ltd
R R
(200 000) (100 000)
shares)
Retained earnings – 1 January 20.8 (120 000) (80 000)
Profit before tax (80 000) (60 000)
Investment in E Ltd – 80 000 ordinary shares
at fair value (cost price: R80 000) 80 000 -
Trade and other payables (30 000) (60 000)
Taxation for the year 30 000 20 000
1. D Ltd acquired its interests in E Ltd at the time of the incorporation of E Ltd.
2. D Ltd purchased all its inventories from E Ltd at cost price plus 25%. The inventories
on D Ltd's books amounted to R40 000 at 1 January 20.8.
3. Total sales of E Ltd to D Ltd amounted to R100 000 during 20.8.
18
REQUIRED
Draft the consolidated annual financial statements of the D Ltd Group
for the year ended 31 December 20.8 in compliance with the
requirements of IFRS.
SOLUTION 4
D LTD GROUP
20.8
ASSETS R
Non-current assets
400 000
Current assets
Inventories [50 000 + 30 000 − (50 000 x 25/125 )] 70 000
190 000

458 000
Current liabilities
Trade and other payables (30 000 + 60 000) 90 000
20
D LTD GROUP
R
[80 000 + 60 000 − 100 000 (sales) + 100 000 (purchases) –
(50 000 x 25/125) + (40 000 x 25/125 )]

Owners of the parent (88 000 – 7 600) 80 400
88 000
D LTD GROUP
31 DECEMBER 20.8
Non-
Total
interests
R R R R R
Balance at
200 000 177 600* 377 600 34 400(a) 412 000
1 January 20.8
20.8
Total comprehensive
income for the year
Balance at
200 000 258 000 458 000 42 000(c) 500 000
31 December 20.8
* (120 000 + 57 600(1))

(a) (20 000(4) + 14 400(5))
21
Calculations
1. Analysis of owner's equity of E Ltd
D Ltd 80 %* NCI
Total At Since 20%
At acquisition R R R R
Share capital 100 000 80 000 20 000
(4)
Since acquisition
(1) (5)
[80 000 – (40 000 x 25/125)]
• Current year
(3)
Profit for the year [(60 000 - 38 000 30 400 7 600
20 000 + (40 000 x 25/125) –
(50 000 x 25/125)]
(2)
210 000 88 000 42 000
* 80 000/100 000 shares x 100% = 80%

Dr Cr NCI
R R R
Goodwill NIL
Investment in E Ltd 80 000
Elimination of owner's equity of E Ltd at
acquisition
Recording of non-controlling interests in E
Ltd for the period ended 31 December 20.7
(a)
34 400
(b)
profit after tax
22
Income – sales (E Ltd) 100 000
Cost of sales (D Ltd) 100 000
Elimination of intragroup sales
Cost of sales (E Ltd) 10 000
Inventory (D Ltd) 10 000
Elimination of unrealised intragroup profit
included in closing inventory of D Ltd
(50 000 x 25/125)
Retained earnings (E Ltd) 8 000
Cost of sales (E Ltd) 8 000
Elimination of unrealised intragroup profit
included in opening inventory of D Ltd
(c)
(40 000 x 25/125) 42 000
COMMENT
Since the subsidiary in this example has sold the inventories and made the profit, we
should also bring into account the adjustments in respect of unrealised profit in the
analysis of owner's equity.
You have probably realised that we can quickly test whether the analysis of owner's
equity balances.
• To see whether the columns have been correctly added up, we can say:
80 000 (at acquisition)

88 000 (since acquisition)
42 000 (non-controlling interests)
R210 000 (total)
• To see whether the NCI column has been correctly calculated, we can say:
Total = R210 000
NCI = 20%
Therefore, the NCI column must be equal to
R210 000 x 20% = R42 000
23
7.5 PROPERTY, PLANT AND EQUIPMENT HELD BY COMPANIES IN
THE GROUP
We should eliminate any profit realised when an asset belonging to one company in the
group is sold to another company in the group. However, the company that purchased
the asset is still providing for too much depreciation because the profit is included in the
cost price of the asset in its books. We should write back this portion of the depreciation
for consolidation purposes.
The unrealised profit on assets is realised either through the sale of the asset to an
outsider or the use of the asset at the rate of depreciation.
The following four situations may arise where assets are sold within a group:
• The parent sells non-depreciable assets to the subsidiary

• The subsidiary sells non-depreciable assets to the parent
• The parent sells depreciable assets to the subsidiary
• The subsidiary sells depreciable assets to the parent
Note: Unrealised profits and losses have income tax implications, which we ignore
for the purposes of this module. We will deal with this at third-year level.
Study the following examples carefully as they provide a detailed explanation of the sale
of assets within a group:
24
EXAMPLE 5
Parent sells non-depreciable asset to subsidiary

The following represent the abridged statements of D Ltd and its subsidiary, E Ltd,
at 31 December 20.9:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9
D Ltd E Ltd
R R
ASSETS
Investment in E Ltd
‒ 70 000 ordinary shares at fair value 77 000 -
(cost price: R77 000)
277 000 182 000
Share capital – ordinary shares 200 000 100 000
(200 000/100 000 shares)
277 000 182 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 31 DECEMBER 20.9
D Ltd E Ltd
R R
Profit before tax 20 000 30 000

Income tax expense (6 000) (9 000)
PROFIT FOR THE YEAR 14 000 21 000
Other comprehensive income for the year - -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 14 000 21 000
25
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER
20.9
Share capital Retained earnings Total

D Ltd E Ltd D Ltd E Ltd D Ltd E Ltd
R R R R R R
Balance at 1 January 20.9 200 000 100 000 15 000 16 000 215 000 116 000
Changes in equity for 20.9
Total comprehensive income for
the year
Profit for the year 14 000 21 000 14 000 21 000
Balance at
31 December 20.9 200 000 100 000 29 000 37 000 229 000 137 000
1. D Ltd acquired its interest in E Ltd on 1 January 20.7, on which date E Ltd's retained
earnings amounted to R10 000. Consider the carrying amount of the assets and
liabilities of E Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.9, E Ltd bought property with a carrying amount of R40 000 from D
Ltd. D Ltd made a profit of R10 000.
REQUIRED
Draft the consolidated financial statements of the D Ltd Group for the
year ended 31 December 20.9 in compliance with the requirements of
IFRS.
SOLUTION 5
D LTD GROUP
20.9
ASSETS R
Non-current assets
Property, plant and equipment (180 000 + 150 000 ‒ 10 000 profit) 320 000
Current assets (20 000 + 32 000) 52 000
26
237 900
D LTD GROUP
R
Profit before tax (20 000 + 30 000 - 10 000 profit) 40 000
Owners of the parent (25 000 - 6 300) 18 700
25 000
27
D LTD GROUP
31 DECEMBER 20.9
Non-
control-
Share Retained Total
Total ling
capital earnings equity
interest
s
R R R R R
Balance at
200 000 19 200* 219 200 34 800(a) 254 000
1 January 20.9
20.9
Total comprehensive
income for the year
Balance at
200 000 37 900 237 900 41 100(c) 279 000
31 December 20.9
(2)
* (15 000 + 4 200 )
(4) (5)
(a) (33 000 + 1 800 )
Calculations
1. Analysis of owner's equity of E Ltd
D Ltd 70 %* NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 100 000 70 000 30 000
110 000 77 000 33 000
(4)
Since acquisition
(2) (5)
(16 000 - 10 000 at acquisition)
• Current year
(1)
Profit for the year 21 000 14 700 6 300
(3)
137 000 18 900 41 100
* 70 000/100 000 shares x 100% = 70%
28
Dr Cr NCI
R R R
Goodwill NIL
Investment in E Ltd 77 000
Elimination of owner's equity of E Ltd at acquisition
Recording of non-controlling interests in E Ltd for
the period ended 31 December 20.8
34 800(a)
Non-controlling interests (SFP) 6 300 6 300(b)
Recording of non-controlling interests in profit after
tax
Profit from sale of property (D Ltd) 10 000
Property (E Ltd) 10 000
in E Ltd's property
41 100(c)
29
EXAMPLE 6
Subsidiary sells non-depreciable asset to parent

The following represent the abridged statements of Q Ltd and its subsidiary, R Ltd,
Q Ltd R Ltd
R R
ASSETS
Investment in R Ltd – 70 000 ordinary shares at fair value 77 000 -
277 000 182 000
277 000 182 000

Q Ltd R Ltd
R R
30
20.9

Q Ltd R Ltd Q Ltd R Ltd Q Ltd R Ltd
R R R R R R
Total comprehensive income
for the year
Balance at 31 December
200 000 100 000 29 000 37 000 229 000 137 000
20.9
1. Q Ltd acquired its interest in R Ltd on 1 January 20.7, on which date R Ltd's retained
liabilities of R Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.8, Q Ltd bought property with a carrying amount of R40 000 from R
Ltd. R Ltd made a profit of R10 000.
REQUIRED
Draft the consolidated financial statements of the Q Ltd Group for the
year ended 31 December 20.9 in compliance with the requirements
of IFRS.
31
SOLUTION 6
Q LTD GROUP
20.9
R
ASSETS
Non-current assets
Property, plant and equipment (180 000 + 150 000 ‒ 10 000 profit) 320 000
Current assets (20 000 + 32 000) 52 000

240 900
Q LTD GROUP
R
Profit before tax (20 000 + 30 000) 50 000

Owners of the parent (35 000 − 6 300) 28 700
35 000
32
Q LTD GROUP
31 DECEMBER 20.9
Non-
Total
interests
R R R R R
Balance at
200 000 12 200* 212 200 31 800(a) 244 000
1 January 20.9
20.9
Total comprehensive
income for the year
Balance at
200 000 40 900 240 900 38 100(c) 279 000
31 December 20.9
(2)
* (15 000 - 2 800 )
(4) (5)
(a) (33 000 - 1 200 )
Calculations
1. Analysis of owner's equity of R Ltd
Q Ltd 70 %* NCI
Total At Since 30%
R R R R
At acquisition
Share capital 100 000 70 000 30 000
110 000 77 000 33 000
(4)
110 000 77 000 33 000
Consideration and NCI
Since acquisition
• To beginning of current (2) (5)
year (4 000) (2 800) (1 200)
Retained earnings
(16 000 - 10 000 at
acquisition - 10 000 profit)
(1)
• Current year 21 000 14 700 6 300
Profit for the year (3)
127 000 11 900 38 100
* 70 000/100 000 shares x 100% = 70%
33
Dr Cr NCI
R R R
Goodwill NIL
Investment in R Ltd 77 000
Elimination of owner's equity of R Ltd at acquisition
Non-controlling interests 1 200 (1 200)
Recording of non-controlling interests in R Ltd for the
period ended 31 December 20.8
31 800(a)
Recording of non-controlling interests in profit after tax
Retained earnings - beginning of year (R Ltd) 10 000
Property (Q Ltd) 10 000
Elimination of unrealised intragroup profit included in Q
Ltd's property
38 100(c)
COMMENT
Note that R Ltd sold the property in a previous financial year, and the transaction
therefore has no effect on the current year's statement of profit or loss and other
comprehensive income. However, it does have an effect on the opening balance of
retained earnings in the statement of changes in equity. As the subsidiary made the
profit, we take the R4 000 into account in the analysis of owner's equity under the "since
acquisition to beginning of current year" section (R2 800), and this affects the opening
balance of retained earnings.
34
EXAMPLE 7
Parent sells depreciable asset to subsidiary

The following represent the condensed statements of A Ltd and its subsidiary, B Ltd,
A Ltd B Ltd
ASSETS R R
Investment in B Ltd – 16 000 ordinary shares 20 000 –
at fair value (cost price: R20 000)
Machinery 24 000 16 000
Cost price 30 000 20 000
Accumulated depreciation (6 000) (4 000)
80 000 35 000
80 000 35 000

A Ltd B Ltd
R R
Gross profit 20 000 10 000
Depreciation (3 000) (2 000)
35
20.9

Q Ltd R Ltd Q Ltd R Ltd Q Ltd R Ltd
R R R R R R
for the year
Balance at 31 December 20.9 50 000 20 000 30 000 15 000 80 000 35 000
1. A Ltd acquired its interest in B Ltd on 1 January 20.7, on which date B Ltd's retained
liabilities of B Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.8 B, Ltd purchased all its machinery from A Ltd at cost price plus
33.3%.
3. Both companies write off depreciation on machinery at 10% per annum according to
the straight-line method.
REQUIRED
Draft the consolidated financial statements of the A Ltd Group for the
year ended 31 December 20.9 in compliance with the requirements
of IFRS.
36
SOLUTION 7
A LTD GROUP
20.9
R
ASSETS
Non-current assets
Machinery [(30 000 + 20 000 − 5 000) − (6 000 + 4 000 − 500 − 500)] 36 000
Current assets (36 000 + 19 000) 55 000
Total assets 91 000

84 000
A LTD GROUP
Notes R
Gross profit (20 000 + 10 000) 30 000
Administrative expenses (3 000 + 2 000 − 500) (4 500)
Profit before tax 1 25 500
18 500
37
A LTD GROUP
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.9
R
1. Profit before tax
Profit before tax is arrived at after taking into account the following:
Expenses
Depreciation (3 000 + 2 000 - 500) 4 500
A LTD GROUP
31 DECEMBER 20.9
Non-
control-
Share Retained Total
Total ling
capital earnings equity
interests
R R R R R
Balance at 1 January 20.9 50 000 16 700(calc3) 66 700 5 800(a) 72 500
for the year
Balance at 31 December 20.9 50 000 34 000 84 000 7 000(c) 91 000
(4) (3)
(a)
(5 000 - 800 )
38
Calculations
A Ltd 80 %* NCI
Total At Since 20%
R R R R
At acquisition
Share capital 20 000 16 000 4 000
25 000 20 000 5 000
(4)
Since acquisition
4 000 (2) (3)
Retained earnings 3 200 800
(9 000 - 5 000)
• Current year
(1)
(5)
35 000 8 000 7 000
*16 000/20 000 shares x 100% = 80%
2. Depreciation
R
Profit from sale of machinery (20 000 x 33.3/133.3) 5 000
Depreciation – 20.8 (5 000 x 10%) 500
– 20.9 (5 000 x 10%) 500
Depreciation up to 31 December 20.9 which has to be adjusted 1 000
3. Retained earnings at the beginning of year

Retained earnings of B Ltd(2) 3 200
Retained earnings of A Ltd 13 500
Given 18 000
Profit from sale of machinery (5 000)
Depreciation realised in respect of 20.8 500
16 700
39
Dr Cr NCI
R R R
Goodwill NIL
Retained earnings 800
Non-controlling interests 800 800
B Ltd for the period ended 31 December 20.8
(a)
5 800
(b)
Recording of non-controlling interests in profit for the
year
Retained earnings ‒ A Ltd 5 000
Machinery ‒ B Ltd 5 000
Elimination of unrealised intragroup profit included in
B Ltd's assets
Accumulated depreciation ‒ B Ltd 1 000
Depreciation ‒ A Ltd 500
Retained earnings ‒ A Ltd 500
Elimination of depreciation associated with the sale
of the asset
(c)
7 000
40
COMMENT
As B Ltd purchased all of its machinery from A Ltd at the beginning of the previous year,
we should debit retained earnings to eliminate the unrealised profit. A Ltd sold the
machinery and made the profit; therefore A Ltd's retained earnings needs to decrease
(be debited) to eliminate the unrealised profit. B Ltd bought the machinery; therefore, B
Ltd's machinery needs to be credited to decrease it, as it contains the profit amount that
needs to be eliminated.
Therefore:
Dr Cr
Retained earnings – A Ltd 5 000

Machinery – B Ltd 5 000
In B Ltd's individual financial records, B Ltd depreciates machinery that still includes
the unrealised profit of R5 000. Therefore, excessive provision is made for depreciation.
To eliminate this, we debit accumulated depreciation. (We normally credit accumulated
depreciation when depreciation occurs.) The amount is calculated as follows: R5 000
(unrealised profit) x 10% (depreciation rate).
As A Ltd made the profit, and the profit was eliminated in A Ltd's records, everything
that affects profit or retained earnings will occur in A Ltd's records. As this machine is
used, the profit that was first unrealised now becomes realised each year through use
of the asset, over the remaining useful life of the machine at the rate of depreciation.
Therefore, we should credit the retained earnings or profit again since the profit is being
realised gradually through the use of the asset. In the current year, we credit A Ltd's
depreciation and we credit the retained earnings of A Ltd for the previous years.
Therefore:
Dr Cr
Accumulated depreciation – B Ltd 1 000

Depreciation – A Ltd 500
Retained earnings – A Ltd 500
41
EXAMPLE 8
Subsidiary sells depreciable asset to parent

The following represent the condensed statements of X Ltd and its subsidiary, Y Ltd,
at 30 June 20.9:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.9
X Ltd Y Ltd
R R
ASSETS
Investment in Y Ltd ‒ 15 000 ordinary shares 19 500 -
at fair value (cost price: R19 500)
Machinery 8 000 16 000
Cost price 14 000 20 000
Accumulated depreciation (6 000) (4 000)
80 000 35 000
Share capital - ordinary shares (50 000/20 000 shares) 50 000 20 000
80 000 35 000

THE YEAR ENDED 30 JUNE 20.9
X Ltd Y Ltd
R R
Gross profit 20 000 10 000
Depreciation (3 000) (2 000)
42
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.9
X Ltd Y Ltd X Ltd Y Ltd X Ltd Y Ltd
R R R R R R
Balance at 1 July 20.8 50 000 20 000 18 000 9 000 68 000 29 000
for the year
Balance at 30 June 20.9 50 000 20 000 30 000 15 000 80 000 35 000
1. X Ltd acquired its interest in Y Ltd on 1 January 20.6, on which date Y Ltd's retained
liabilities of Y Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.8, X Ltd purchased all its machinery from Y Ltd at cost price plus
25%.
3. Both companies write off depreciation on machinery at 20% per annum according to
the straight-line method.
REQUIRED
Draft the consolidated financial statements of the X Ltd Group for the
year ended 30 June 20.9 in compliance with the requirements of IFRS.
43
SOLUTION 8
X LTD GROUP
ASSETS R
Non-current assets
Machinery [(14 000 + 20 000 − 2 800) − (6 000 + 4 000 − 840)] 22 040
Current assets (52 500 + 19 000) 71 500
Total assets 93 540

85 280
X LTD GROUP
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.9
Notes R
Gross profit (20 000 + 10 000) 30 000
Administrative expenses (3 000 + 2 000 − 560) (4 440)
1

18 560
44
X LTD GROUP
NOTES FOR THE YEAR ENDED 30 JUNE 20.9
R
Expenses
Depreciation (3 000 + 2 000 - 560) 4 440
X LTD GROUP
30 JUNE 20.9
Non-
Total
interests
R R R R R
(a)
Balance at 1 July 20.8 50 000 18 360* 68 360 6 620 74 980
Total comprehensive income for the
year
(b)
(c)
Balance at 30 June 20.9 50 000 35 280 85 280 8 260 93 540
* (18 000 + 360(2))

(a)
(6 500(4) + 120(5))
45
Calculations
1. Analysis of owner's equity of Y Ltd
X Ltd 75% NCI
Total At Since 25%
R R R R
At acquisition
Share capital 20 000 15 000 5 000
26 000 19 500 6 500
(4)
Since acquisition
Retained earnings 480 360(2) 120(5)
[9 000 - 6 000 - 2 800 (profit)
+ 280 (depreciation)]
• Current year (1)
(6 000 + 560 depreciation)
(3)
33 040 5 280 8 260
* 15 000/20 000 shares x 100% = 75%
2. Depreciation
R
Profit from the sale of machinery (14 000 x 25/125 ) 2 800
Depreciation – 1/1/20.8 to 30/6/20.8 (6 months)
2 800 x 20% x 6/12 280
– 1/7/20.8 to 30/6/20.9 (12 months)
2 800 x 20% 560
Depreciation for 18 months up to 30 June 20.9 for which an
adjustment has to be made 840
46
Dr Cr NCI
R R R
Goodwill NIL
Investment in Y Ltd 19 500
Elimination of owner's equity of Y Ltd at acquisition
Retained earnings ‒ Y Ltd 2 800
Machinery ‒ X Ltd 2 800
Elimination of unrealised intragroup profit from sale of
machinery
Accumulated depreciation ‒ X Ltd 840
Depreciation ‒ Y Ltd 560
Retained earnings ‒ Y Ltd 280
Elimination of depreciation associated with the sale of
the machinery
Retained earnings 120
Non-controlling interests 120 120
Y Ltd for the period ended 30 June 20.8
6 620(a)
Recording of non-controlling interest in profit after tax
8 260(c)
47
7.6 EXERCISES
You should have mastered all the different aspects of consolidated annual financial
statements by now. You will find that the individual questions in the exercises are
becoming more integrated in the sense that they include more and more sections of the
work we have covered. It is therefore very important for you to work through each
question before comparing your own solution with our proposed solution. Your e-tutor can
guide you in answering these questions.
QUESTION 1
You receive the following trial balances of A Ltd and B Ltd at 30 June 20.8:
A Ltd B Ltd
R R
Debits
Property, plant and equipment
– Land 574 000 408 200
– Motor vehicles 155 000 97 000
Investment in B Ltd
– 70 000 ordinary shares at fair value 290 000 -
– Unsecured loan at fair value 40 000 -
Bank - 10 600
Bills receivable 8 000 -
1 198 200 607 200
Credits
800 000 200 000
shares)
Revaluation of land - 100 000
Long-term borrowing from A Ltd - 35 000
Bank overdraft 14 200 -
Accumulated depreciation – motor vehicles 130 000 64 000
Bills payable - 10 000
1 198 200 607 200
48
1. A Ltd acquired its interest in B Ltd on 1 July 20.5, on which date B Ltd's retained
earnings was R72 000.
2. At the date of acquisition, A Ltd valued the land belonging to B Ltd, which had a
carrying amount of R308 200, at R368 200. It is company policy to revalue B Ltd's
land every two years at 30 June. B Ltd has not purchased or sold any land since 1
July 20.5. Consider the carrying amount of all the other assets and liabilities of B Ltd
to be equal to the fair value thereof at the date of acquisition.
3. A Ltd discounted R2 000 of the bills receivable from B Ltd at the bank before the
expiry date of 6 July 20.8.
4. Since A Ltd acquired its interest in B Ltd, A Ltd purchased all its inventories from B
Ltd. B Ltd supplied the inventories at cost price plus 25% profit. The inventories on
hand of A Ltd and B Ltd amounted to R36 000 and R48 000, respectively, on 1 July
20.7.
5. On 29 June 20.8, B Ltd repaid R5 000 of the existing loan from A Ltd. A Ltd received
this repayment on 3 July 20.8.
REQUIRED
Draft the consolidated statement of financial position of the A Ltd
Group as at 30 June 20.8 in accordance with the requirements of IFRS.
(Ignore taxation on unrealised profits and/or losses. Comparative
figures and notes are not required).
49
QUESTION 2
The following represent the condensed statements of profit or loss and other
comprehensive income and the statements of changes in equity of G Ltd and its subsidiary,
L Ltd, for the year ended 28 February 20.8:

THE YEAR ENDED 28 FEBRUARY 20.8
G Ltd L Ltd
R R
Gross profit 484 680 326 300
Other income 59 750 24 500
- Interest received 35 750 12 500
- Administration fees received 24 000 12 000
Expenses (270 900) (221 650)

- Depreciation 158 000 134 400
- Staff costs 60 000 48 000
- Interest paid 28 500 24 650
- Auditors' remuneration 12 400 8 600
- Administration fees paid 12 000 6 000
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY

20.8
Share capital Revaluation surplus Retained earnings Total
G Ltd L Ltd G Ltd L Ltd G Ltd L Ltd G Ltd L Ltd
R R R R R R R R
Balance at
200 000 100 000 80 000 120 000 224 690 44 000 504 690 264 000
1 March 20.7
Changes in equity
for 20.8
Total comprehensive
income for the year
Balance at
200 000 100 000 80 000 120 000 356 808 108 690 636 808 328 690
28 February 20.8
50
1. G Ltd acquired 80% of the voting rights in L Ltd on 1 March 20.5 for R250 000, at
which point L Ltd's owners' interest consisted of the following:
R
Consider the carrying amount of the assets and liabilities of L Ltd to be equal to the fair
value thereof at the date of acquisition.
2. On 1 December 20.6, L Ltd sold a machine with a carrying amount of R200 000 to G Ltd
at a profit of R50 000. It is the policy of the group to depreciate plant and machinery at
20% per annum on the straight-line method.
3. G Ltd sold some of its inventories to L Ltd at a profit of 50% on cost price. L Ltd had
the following inventories on hand, which they purchased from G Ltd:
R
28 February 20.7 210 000
28 February 20.8 315 000
4. G Ltd lent the sum of R150 000 to L Ltd at an interest rate of 18% per annum, payable
annually in arrears, on 1 August 20.7. G Ltd received and banked the cheque for
interest for the month of February on 28 February 20.8. The interest did not qualify for
capitalisation and was accounted for by both companies.
REQUIRED
Draft the consolidated statement of profit or loss and other
comprehensive income and the consolidated statement of changes in
equity for the G Ltd Group for the year ended 28 February 20.8 in
accordance with the requirements of IFRS. (Ignore taxation on
unrealised profits and/or losses. Do all calculations to the nearest
rand).
51
SOLUTIONS
QUESTION 1
A LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment [(574 000 + 408 200) +
(155 000 + 97 000) − (130 000 + 64 000)] 1 040 200
Goodwill 57 600
1 097 800
Current assets
Inventories (45 000 + 72 000 − 9 000) 108 000
Cash and cash equivalents 10 600
224 200
Total assets 1 322 000

Other components of equity 28 000
Retained earnings (213 000 + 39 620) 252 620
1 080 620
Non-controlling interests(a) 128 580
Total equity 1 209 200
Current liabilities
Trade and other payables [41 000 + 60 600 + (10 000 − 8 000)] 103 600
Bank overdraft (14 200 − 5 000) 9 200
Total liabilities 112 800
Total equity and liabilities 1 322 000
52
Calculations
A Ltd 70 %*
NCI
Total At Since 30%
R R R R
At acquisition
Share capital 200 000 140 000 60 000
Revaluation surplus
(368 200 - 308 200) 60 000 42 000 18 000
332 000 232 400 99 600
Equity represented by 57 600 57 600 -
goodwill - parent
389 600 290 000 99 600
Consideration and NCI
Since acquisition
To end of current year 40 000 12 000
Revaluation surplus 28 000 OCE
(408 200 – 368 200)
Retained earnings 56 600 39 620 RE 16 980

End of the year 137 600
At acquisition (72 000)
Unrealised profit – (9000)
closing inventories
Unrealised profit ‒ (7 200)
opening inventories
7200
‒ realised current year
28 000 OCE
486 200 39 620 RE 128 580(a)
*70 000/100 000 shares x 100% = 70%
53
2. Journal in A Ltd's financial records
Dr Cr NCI
R R R
Cash in transit 5 000
Unsecured loan to B Ltd 5 000
Recording of cash in transit

Goodwill 57 600
Revaluation surplus – B Ltd 12 000
Recording of non-controlling interests in revaluation
surplus
B Ltd for the period ended 30 June 20.8
Bills payable – B Ltd 8 000
Bills receivable – A Ltd 8 000
Elimination of intragroup bills
Gross profit – B Ltd 9 000
Inventories – A Ltd (45 000 x 25/125) 9 000
Elimination of unrealised profits in closing inventory
Retained earnings – B Ltd (36 000 x 25/125) 7 200
Gross profit/Cost of sales – B Ltd 7 200
Elimination of unrealised profits in opening inventory
(This journal is included for the sake of completeness. It
has no effect, as only the statement of financial position
is required and the net effect on retained earnings is nil.)
54
Long-term borrowing from A Ltd - B Ltd 35 000
Unsecured loan to B Ltd - A Ltd 35 000
128 580(a)
COMMENT
A Ltd holds 70 000 shares in B Ltd.
70 000 shares
= 70%
100 000 shares
R
Current value of land 408 200
Valuation value at 1 July 20.5 (368 200)
Valuation of land since acquisition 40 000
In additional information 3, you were given A Ltd and B Ltd's inventories on hand at
28 February 20.7 and 20.8. This information is irrelevant, however, since we did not
ask you to draft a statement of profit or loss and other comprehensive income. We
included both the journal for opening inventory and the calculation for R7 200 in the
analysis for illustrative purposes only.
55
QUESTION 2
G LTD GROUP
COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.8
Note R
Gross profit (calculation 1) 775 980
Other income [35 750 + 12 500 − (150 000 x 7/12 x 18%) 68 500
+ 24 000 + 12 000]
Administrative expenses [158 000 + 134 400 − (50 000 x
20%) (429 400)
+ 60 000 + 48 000 + 12 400 + 8 600 + 12 000 + 6 000]
Finance cost [28 500 + 24 650 − (150 000 x 7/12 x 18%)] (37 400)
Profit before tax 1 377 680

Owners of the parent (171 808 − 14 938(b)) 156 870
Non-controlling interests (calculation 2) 14 938(b)
171 808
G LTD GROUP
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.8

R
Income
Interest received [35 750 + 12 500 − (150 000 x 7/12 x 18%)] 32 500
Administration fees received (24 000 + 12 000) 36 000
Expenses
Depreciation [158 000 + 134 400 − (50 000 x 20%)] 282 400
Staff cost (60 000 + 48 000) 108 000
Auditors' remuneration (12 400 + 8 600) 21 000
Administration fees paid (12 000 + 6 000) 18 000
56
G LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 28 FEBRUARY 20.8
Non-
Revalua-
tion Total
surplus
interests
R R R R R R
Balance at 1 March 20.7 200 000 80 000 100 690(2) 380 690 43 300(a) 423 990
Total comprehensive income for
the year
Balance at 28 February 20.8 200 000 80 000 257 560 537 560 58 238(c) 595 798
(2)
224 690 – 54 000(d) – 70 000(1)
(a)
56 800(3) - 13 500(4)
Calculations
1. Gross profit
R
G Ltd 484 680
Unrealised profit in opening inventories (50/150 x 210 000) 70 000(1)
Unrealised profit in closing inventories (50/150 x 315 000) (105 000)
L Ltd 326 300
775 980
57
2. Analysis of owner's equity of L Ltd
G Ltd 80 %
NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
120 000 96 000 24 000
Revaluation surplus
284 000 227 200 56 800
Equity represented by goodwill -

parent 22 800 22 800 -
(3)
Since acquisition
• To beginning of current year (d) (4)
(67 500) (54 000) (13 500)
Retained earnings
(20 000)
Given (44 000 - 64 000)
(50 000)
Unrealised profit from machinery 2 500
Depreciation adjustment
(50 000 x 20% x 3/12 )
• Current year
74 690 59 752 (b)
Profit for the year 14 938
64 690
Given
10 000
Excess depreciation
(50 000 x 20%) (c)
313 990 5 752 58 238
58
Dr Cr NCI
R R R
Goodwill 22 800
Investment in L Ltd 250 000
Elimination of owner's equity of L Ltd at acquisition
Retained earnings – L Ltd 50 000
Machinery – G Ltd 50 000
Elimination of intragroup profit from sale of machinery
Accumulated depreciation – G Ltd 2 500
Retained earnings – L Ltd 2 500
Elimination of depreciation associated with sale of
machinery for the period ended 28 February 20.7
Accumulated depreciation – G Ltd 10 000
Depreciation – L Ltd 10 000
Elimination of depreciation associated with sale of
machinery for the current year
Cost of sales – G Ltd 105 000
Inventory – L Ltd 105 000
Elimination of unrealised profits in closing inventories
Retained earnings – G Ltd 70 000
Cost of sales – G Ltd 70 000
Elimination of unrealised profits in opening inventories
Non-controlling interests 13 500 (13 500)
Recording of non-controlling interests in L Ltd for the
period ended 28 February 20.7
43 300(a)
Recording of non-controlling interests in L Ltd for the
current year
59
Loan from G Ltd – L Ltd 150 000
Loan to L Ltd – G Ltd 150 000
Interest received – G Ltd 15 750
Interest paid – L Ltd 15 750
Elimination of intragroup interest on loan
58 238(c)
COMMENT
When we write off depreciation over five years on the straight-line method, it actually
means that the depreciation rate is 20% (100% ÷ 5 = 20% per annum).
With intragroup transactions, it is important to identify which entity made the profit.
When the subsidiary sells inventory or machinery to the parent, we account for the
unrealised profit by means of the calculation in the analysis of owner's equity, which
will affect retained earnings. (Remember, the analysis is a calculation to show the
allocation of the subsidiary's equity between the parent and non-controlling
shareholders.) However, in this question, the parent sold inventory to the subsidiary;
therefore we will adjust the unrealised profit of R70 000 in opening inventories
separately in the opening balance of retained earnings in the statement of changes in
equity.
SELF-ASSESSMENT
After studying this learning unit, are you able to:
• record intragroup bills of exchange and bank overdrafts correctly
in the consolidated annual financial statements of companies?
• determine the surplus when revaluing property in respect of an
interest in a subsidiary at acquisition?
• calculate the unrealised profit effect in trading inventories in both
the parent and subsidiary?
• do the pro forma consolidation journal entries?
• draft the consolidated annual financial statements of a group, in
accordance with IFRS, where the sale of property, plant and
equipment has taken place between companies in the group?
60

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FAC2602

7.1 INTRODUCTION ................................................................................................... 2

We would like to emphasise that we do not deal with taxation on unrealised

7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS

Bill No. 111 30/10/20.8

To: P Ltd Amount: R2 000

Pay the amount of R2 000 to S Ltd on 30/11/20.8.

7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

The following two situations may arise:

EQUITY AND LIABILITIES

Purchase difference 206 000 164 800 41 200

* 80 000/100 000 shares x 100% = 80%

2. Entry in the separate financial records of B Ltd

EQUITY AND LIABILITIES

1. Analysis of owner's equity of S Ltd

200 000 140 000 60 000

2. Pro forma consolidated journal entries

7.4 UNREALISED PROFIT IN TRADING INVENTORIES

P Ltd → S Ltd → X Ltd

The following situation may arise from this scenario:

Parent sells inventories to subsidiary

EQUITY AND LIABILITIES

Non-controlling interests(2)/(c) 44 000

Total equity and liabilities 594 000

Total comprehensive income attributable to:

* [120 000 - (20 000 x 25/125) + 64 000(1)]

2. Pro forma consolidated journal entries

We need to eliminate all intragroup transactions. When a shareholder or outsider

Subsidiary sells inventories to parent

EQUITY AND LIABILITIES

Non-controlling interests(2)/(c) 42 000

Total equity 500 000

Total equity and liabilities 590 000

Total comprehensive income attributable to:

* (120 000 + 57 600(1))

2. Pro forma consolidated journal entries

80 000 (at acquisition)

Total = R210 000

Therefore, the NCI column must be equal to

R210 000 x 20% = R42 000

• The parent sells non-depreciable assets to the subsidiary

Parent sells non-depreciable asset to subsidiary

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

Profit before tax 20 000 30 000

Share capital Retained earnings Total

Subsidiary sells non-depreciable asset to parent

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

Share capital Retained earnings Total

EQUITY AND LIABILITIES

Total comprehensive income attributable to:

Parent sells depreciable asset to subsidiary

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

Share capital Retained earnings Total

EQUITY AND LIABILITIES

1. Analysis of owner's equity of B Ltd