Case Study Consolidated Financial Statements

Oak plc acquired 70% of Elm Ltds equity shares for 300,000 on 1 January 2021. 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 2021:

Statements of Financial Position as at 31 December 2021

Assets

Non-current assets

Property, plant and equipment Investment Elm Ltd

Current assets

Inventories Trade receivables Cash and bank

Total assets

Equity and liabilities

Equity

Share capital, 1 Retained earnings Revaluation surplus

Noncurrent liabilities

Oak plc '000

1,940 300 2,240

400 450 270

1320

3,360

2,000 500 20 2,520

Elm Ltd '000

200 ____ 200

220 240 - 260 660

100 240 ___ 340

65 230 25 320 660

Convertible loan 6% 500

Current liabilities

Overdraft Trade payables Tax payable

Total equity and liabilities

- 250 90 740 3,360

Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2021

Oak plc '000 5,000 2,900 2,100 1,710 Profit before interest and tax 390 Interest expense 30

Elm Ltd '000 1,000 600 400 325

75

25

50

Sales revenue Cost of sales Gross profit Other expenses

Profit before tax

Income tax expense

Profit for the year

Other comprehensive income:

360

90

270

Gain on revaluation of property 20

Total comprehensive income for the year 290

Additional information:

In mid-December 2021 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.

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.

It is the group policy to value the non-controlling interest at fair value. The fair value of the non-controlling interest in Elm Ltd at the date of acquisition was 70,000.

Goodwill has suffered no impairment.

Elm Ltd has issued no shares since the acquisition.

Elm Ltd has not declared or paid any dividends in 2021.

There are no depreciation consequences of the fair value adjustment (as the

underlying item was land).

Oaks loan stock is convertible into a total of 500,000 ordinary shares in 2024.

Consider Oaks income tax rate at 25%.

REQUIRED:

Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2021 and the statement of financial position as at 31 December 2021 for Oak plc group. NB! It is essential that you show all your workings.

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.

Calculate the 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.