Large plc, a manufacturer and wholesaler, purchased 600,000 of the 800,000 tesd iordinaty shares of a smaller company, Small Ltd, on 1 January 2005 when the retained earnings account of Small Ltd had a credit balance of £72,000.

The intangible asset section of the balance sheet of Large plc has not yet been amended prior to consolidation to take account of the provisions of the Companies Acts or the recommendations contained in accounting standards regarding intangible assets.
The stock of Large plc contained goods valued at £108,000 purchased from Small Ltd at production cost plus 50 per cent.

Required:

(a) Prepare the consolidated profit and loss account of Large plc and its subsidiary Small Ltd for the year to 30 September 2006 using the acquisition (purchase) method of consolidation.

(b) Prepare the consolidated balance sheet of Large plc and its subsidiary Small Ltd at 30 September 2006 using the acquisition method of consolidation.

(c) What would the reserves of the group be if the merger method of consolidation were used instead of the acquisition method? Briefly explain why there is a difference between the values of the reserves arising from the two methods of consolidation.

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The latest accounts of the two companies are: Summary Profit and Loss Accounts for the year to 30 September 2006 (000s) Credit sales Large plc 10,830 Small Ltd Cost of sales and production services (3,570) 2,000 (1,100) Gross profit 7,260 900 Administrative and marketing expenses (including depreciation, audit fee and directors' remuneration) (2,592) Operating profit 4,668 Dividend received from Small Ltd 180 Net profit before tax 4,848 Taxation 2,304 2,544 ' 180)