Consolidation and intercompany sales

(1) At the start of year 8, Fireball Company pays 10/share in cash for all 3 million of Slowcoach Company’s shares. Slowcoach has assets of 40 million and liabilities of 10 million at that date.

Fireball’s assets before the acquisition are 150 million and its liabilities 50 million.

Required Draw up a summarised consolidated balance sheet for the Fireball Group at the start of year 8.

Assume Slowcoach follows the same accounting policies as Fireball and its assets and liabilities are stated at fair value.

(2) In year 8, Fireball reports revenues of 80 and expenses of 60. (All amounts are in million.) Slowcoach’s reported revenues and expenses are 37 and 34 respectively. During year 8, Fireball sells goods to Slowcoach on account for 10 which cost it 7 to make and for which Slowcoach has paid Fireball only 5 by year-end. Slowcoach sells all the goods to outside customers for 12 in year 8.

Fireball pays a dividend of 8 to its shareholders in year 8; Slowcoach pays a dividend of only 2 that year. The two companies’ total liabilities at end-year 8 are unchanged from the start of the year.

Required

(a) Draw up summarised consolidated accounts for year 8 for the Fireball Group.

(b) How would your answer to

(a) differ if Slowcoach had sold to outside customers only half of the goods purchased from Fireball and recognised revenues of 6 on them? ([Assume] Slowcoach’s total reported revenues and expenses are still 37 and 34 respectively.)

Check figures:

(2)

(a) Year 8 group profit 23.0m

(b) End-year 8 shareholders’ equity 113.5m AppenedixLO1