Consider the following draft data relating to the year ended 31 December 20X0 of Royal plc and Butler plc.

Royal plc acquired 50 per cent of the ordinary share capital of Butler plc on 1 January 20X0 for £2,000,000 when its reserves were £1,900,000 and sold this holding on 3 January 20X1 for £2,050,000.
Required:

(a) prepare the ‘group’ profit and loss account and balance sheet on three bases: when Butler is treated as (i) a subsidiary; (ii) an associated company; and (iii) an investment.

(b) comment on the validity of these three alternatives.

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Balance sheets Royal plc Butler pic 000 000 Fixed assets (net)- tangible 6,500 4,000 Investment in Butler plc - cost 2,000 Current assets 3,500 3,000 Current liabilities (4,550) (2,500) Debentures (20X9) (2,000) (1,500) 5,450 3,000 Issued ordinary share capital 2,000 1,000 Reserves 3,450 2,000 5,450 3,000 Profit and loss accounts Operating profit before tax 1,100 500 Dividend from Butler plc including tax credit 143 Taxation Profit after tax (433) 810 (200) Dividends paid (300) 300 (200) 510 100