You are the accountant responsible for the Rag group consolidation. The profit and loss accounts of Rag plc, Tag Ltd and Bobtail Ltd for the year ended 31 March 1999 are given opposite.

\section*{Note 1}
Rag plc supplies a component which is used by both Tag Ltd and Bobtail Ltd. Because of the close relationships between the three companies, the component is supplied at a markup of only \(10 \%\) on cost. Details of inter-company sales of the product for the year to 31 March 1999 were as follows:
- Rag plc to Tag Ltd \(£ 8\) million - Rag plc to Bobtail Ltd \(£ 4\) million Details of the stocks of the component supplied by Rag plc which were included in the books of Tag Ltd and Bobtail Ltd at the beginning and end of the year were:

Details of inter-company shareholdings are as follows:
- On 15 July 1992 Rag plc purchased 4.5 million of the issued \(£ 1\) equity shares of Tag Ltd for \(£ 14\) million. The balance sheet of Tag Ltd at 15 July 1992 showed the following:

- On 8 October 1993, Tag Ltd purchased 2 million of the issued \(£ 1\) equity shares of Bobtail Ltd for \(£ 7.4\) million. The balance sheet of Bobtail Ltd at 8 October 1993 showed the following:

The policy of Rag plc is to amortise goodwill over 20 years with a full year's write-off in the year of acquisition. At the dates they joined the Rag group, the fair values of the net assets of Tag Ltd and Bobtail Ltd were the same as their book values.
Both Rag plc and Tag Ltd recognise investment income on an accruals basis. The profit and loss accounts of Rag plc and Tag Ltd show dividend income as being the cash dividend receivable.
Your assistant is responsible for preparing the draft consolidated financial statements for your review. She is aware that Tag Ltd will be dealt with as a \(75 \%\) subsidiary but is unsure of the way of dealing with Bobtail Ltd.
\section*{Requirements}

(a) Write a memorandum to your assistant which - explains how Bobtail Ltd will be incorporated into the consolidated financial statements of Rag plc;
- describes and justifies any disclosures which are required in the notes to the consolidated financial statements regarding the investment in Bobtail Ltd.
Your memorandum should refer to relevant provisions of company law and Financial Reporting Standards to support your explanations.

(b) Prepare a working schedule for the consolidated profit and loss account of Rag plc for the year ended 31 March 1999. You should start with the turnover and end with the retained profit at the end of the year.
Do not prepare notes to the consolidated profit and loss account.

Transcribed Image Text:

Rag ple 000 Tag Ltd 000 Bobtail Ltd 000 Turnover (note 1) Cost of sales 65 000 50000 100000 (35 000) (28 000) (82000) Gross profit 30000 22000 18000 Other operating expenses (15000) (11000) (9000) Operating profit 15000 11000 9000 Investment income (note 2) 3000 1200 Interest payable (3 200) (1800) (1200) Profit before taxation 14 800 10400 7800 Taxation (3 600) (2800) (2400) Profit after taxation 11 200 7600 5400 Proposed dividends (6 000) (4000) (3000) Retained profit 5200 3.600 2400 Retained profit-1 April 1998 20000 15000 12000 Retained profit - 31 March 1999 25 200 18 600 14400