1. Explain why intra-group transactions and balances are eliminated in consolidation. Use the relevant examples from the statements that you have prepared in Requirement 1 to illustrate your explanation.

2. Calculate consolidated basic and diluted EPS. Explain the importance of EPS for the existing and potential shareholders of listed companies and discuss why it is necessary to show also diluted EPS.

Oak plc acquired 70% of Elm Ltds equity shares for 300,000 on 1 January 2018. At the date of acquisition Elm Ltd had retained earnings of 190,000.

The two companies financial statements are presented as follows as at 31 December 2018:

Statements of Financial Position as at 31 December 2018

	Oak plc	Elm Ltd
	'000	'000
Assets
Non-current assets
Property, plant and equipment	1,940	200
Investment Elm Ltd	300	____
	2,240	200
Current assets
Inventories	400	220
Trade receivables	450	240
Cash and bank	270	-
	1320	260
Total assets	3,360	660
Equity and liabilities
Equity
Share capital, 1	2,000	100
Retained earnings	500	240
Revaluation surplus	20	___
	2,520	340
Noncurrent liabilities
Convertible loan stock 8%	500
Current liabilities
Overdraft	-	65
Trade payables	250	230
Tax payable	90	25
	740	320
Total equity and liabilities	3,360	660

Statements of Profit or Loss and Other Comprehensive Income

for the year ended 31 December 2018

	Oak plc	Elm Ltd
	'000	'000
Sales revenue	5,000	1,000
Cost of sales	2,900	600
Gross profit	2,100	400
Other expenses	1,710	325
Profit before interest and tax	390
Interest expense	30
Profit before tax	360	75
Income tax expense	90	25
Profit for the year	270	50
Other comprehensive income:
Gain on revaluation of property	20
Total comprehensive income for the year	290

Additional information:

1. In mid-December 2018 Oak plc sold goods to Elm Ltd on credit and sent an invoice for 200,000. Elm Ltd received the goods and the invoice but has not yet paid for the goods. The goods had cost Oak plc 150,000. All the goods are in Elms inventory.
2. On the date of acquisition the fair value of one item (land) in Elms property, plant and equipment exceeded its carrying amount by 50,000. This valuation has not been reflected in the books of Elm Ltd.
3. It is the group policy to value the non-controlling interest at acquisition at fair value. The fair value of the non-controlling interest in Elm Ltd at the date of acquisition was 70,000.
4. Goodwill has suffered no impairment.
5. Elm Ltd has issued no shares since the acquisition.
6. Elm Ltd has not declared or paid any dividends in 2018.
7. There are no depreciation consequences of the fair value adjustment (as the underlying item was land).
8. The loan stock is convertible into a total of 400,000 shares in 2024. Oaks income tax rate is 25%.