The statements of profit or loss and other comprehensive income and changes in equity for XY and its subsidiary AZ for the year ended 31 December 20X5 are shown below:

Statement of profit or loss and other comprehensive income for the year ended 31 December 20X5

1.  XY acquired 80 per cent of the 1 million $1 equity shares in AZ on 1 January 20X2 when AZ’s retained earnings were $5,000,000. The non-controlling interest was valued at its fair value of $1,350,000 at the acquisition date. The consideration for the acquisition consisted of the following: 

• Cash of $1,593,000 paid on 1 January 20X2. 

• Cash of $1,000,000 paid on 1 January 20X4 (a discount rate of 8 per cent was applied to value the liability in the financial statements of XY) and

• The transfer of 1,000,000 shares in XY with a nominal value of $1 each and an agreed value on the date of acquisition of $3 each.

2. As at 1 January 20X2, the fair value of the net assets acquired was the same as the book value with the exception of property, plant and equipment that had a fair value that was $600,000 higher than its carrying value. The assets were assessed to have a remaining useful life of six years from the date of acquisition. Depreciation is charged to cost of sales.

3. On 31 December 20X5, the goodwill arising on the acquisition of AZ has been impaired by 20 per cent. There have been no previous impairments and impairments are charged to administrative expenses.

4. In the year to 31 December 20X5, AZ sold goods to XY with a sales value of $300,000. At year end, 20 per cent of the items remain in XY’s inventories. AZ earns 25 per cent gross margin on all sales.

5. The investment income recorded in XY’s financial statements relates to:

• Dividend income of $400,000 from AZ which has been correctly treated in XY’s individual financial statements.

• Income from a trade investment shareholding in LM.

Required:

(a) Prepare the consolidated statement of profit or loss and other comprehensive income for the XY Group for the year ended 31 December 20X5.

(b) On 1 February 20X6, XY acquired a further investment in LM. XY now holds a total of 60 per cent of the equity share capital of LM. Explain how this additional acquisition will impact on the preparation of the consolidated financial statements for the year to 31 December 20X6.

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Revenue Cost of sales Gross profit Administrative expenses Distribution costs Investment income (Note 5) Finance costs Profit before tax Income tax expense Profit for the year XY $000 3,200 (1,800) 1,400 (350) (300) 750 400 (140) 1,010 (160) 850 Other comprehensive income that will not be reclassified to profit or loss Revaluation of property plant and equipment 40 Tax effect of other comprehensive income (12) 28 Other comprehensive income for the year, net of tax Total comprehensive income for the year 878 AZ $000 2,400 (1,400) 1,000 (250) (150) 600 (110) 490 (150) 340 30 (10) 20 360