Huge plc acquired a holding of 600,000 of the 800,000 ordinary £1 shares of Large plc on 1 October 2005 when the revenue reserves of Large stood at £320,000.

On 1 October 2006, the directors of Medium plc agreed to appoint the commercial manager of Huge as one of its directors to enable Huge to participate in its commercial, financial and dividend policy decisions. In exchange, Huge agreed to provide finance to Medium for working capital. On the same day, Huge acquired its holding of 100,000 of the 400,000 ordinary £1 shares of Medium when the revenue reserves of Medium were £150,000. Three months later, the directors of Small plc, who supplied materials to Large, heard of the arrangement between Huge and Medium and suggested that they would be pleased to enter into a similar relationship. The board of Huge were interested in the proposal and showed their good faith by acquiring a 10% holding in Small which at that time had a debit balance of £2,000 on its retained profits reserve.

Required:

(a) Identify which of the four companies should be included in a group consolidation, explaining how and why the treatment of one company in the consolidation may be different from another. Mention any appropriate accounting standards or legislation applicable.

(b) Prepare the consolidated balance sheet of the group at 30 September 2007 using the purchase method of accounting.

Transcribed Image Text:

Balance Sheets of the four companies on 30 September 2007 Huge Large Medium Small 000 000 000 000 Property, plant and machinery Investment in Large Investment in Medium Investment in Small 2,004 780 553 85 900 180 12 Current a/c Medium 40 Current a/c Small 10 Inventory 489 303 72 Accounts receivable 488 235 96 Bank/cash 45 62 19 4,158 1,390 740 Current liabilities: Creditors (318) (170) (90) 3,840 1,220 650 Ordinary share capital 2,400 800 400 Revenue reserves 1,440 420 210 Current a/c Huge 40 Current a/c Large 3,840 1,220 650 140 (10)