The summarised Statements of income of two companies, Liverton and Everpool, for the year ended 31 May 2012 are shown. Liverton acquired 3,000,000 ordinary shares in Everpool for £3,500,000 on 1 June 2010. At that time the retained earnings of Everpool were £200,000 and its shares quoted at 110p each. Further information:

(i) Everpool’s total share capital consists of 4,000,000 ordinary shares of £1 each.

(ii) At 31 May 2011 Liverton had valued the goodwill arising from the acquisition of Everpool at £300,000. An impairment review of this goodwill at 31 May 2012 valued it at £230,000.

(iii) During the year ended 31 May 2012 Liverton sold goods costing £110,000 to Everpool for £200,000. At 31 May 2012, 60% of these goods remained in Everpool’s inventory.

Required:

(a) Calculate the goodwill arising on the acquisition of Everpool.

(b) Prepare the Consolidated Statement of income of Liverton for the year ended 31 May 2012.

(c) Explain the criteria that should be met for a company to be accounted for as an associate company.

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Statements of income year ended 31 May 2012 Sales revenue Cost of sales Gross profit Distribution cost Administrative expenses Profit from operations Dividend from Everpool Profit before tax Tax Net profit for the period Liverton Everpool £'000 £'000 6,400 2,600 (3,700) (1,450) 2,700 (1,100) (700) 900 150 1,050 (400) 650 1,150 (490) (320) 340 340 (90) 250