Large plc, a manufacturer and wholesaler, purchased 600,000 of the 800,000 issued ordinary shares of a smaller company, Small Ltd, on 1 January 19X5 when the retained earnings account of Small Ltd had a credit balance of \(£ 72,000\).

The latest accounts of the two companies are:

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.
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(a) Prepare the consolidated profit and loss account of Large plc and its subsidiary Small Ltd for the year to 30 September \(19 \mathrm{X} 6\) using the acquisition (purchase) method of consolidation.

(b) Prepare the consolidated balance sheet of Large plc and its subsidiary Small Ltd at 30 September 19X6 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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Summary Profit and Loss Accounts for the year to 30 September 19X6 (000s) Large plc Small Ltd Credit sales 10,830 2,000 Cost of sales and production services 3,570 1,100 Gross profit 7,260 900 Administrative and marketing expenses 2,592 180 (including depreciation, audit fee and directors' remuneration) Operating profit 4,668 720 Dividend received from Small Ltd 180 Net profit before tax 4,848 720 Taxation 2,304 200 Net dividend 2,400 240 4,704 440 Profit retained 144 280 Brought forward from last year 1,200 192 Carried forward to next year 1,344 472