Double Entry Accounts and Consolidated Financial Statements

Preparation of Double Entry Accounts

Please answer all questions in Answer Book provided

1. (40 marks)

Mary set up a business on 1 July 2021. She paid £20,000 in cash to the business. The following transactions took place in July.

Date	Description
1.7.21	Paid the landlord for the office £2,400 in cash as rental expense.
2.7.21	Purchased office equipment for £5,000 in cash.
2.7.21	Hired a shop assistant for £1,000 a month.
2.7.21	Purchased £4,000 goods from Supplier A on credit.
2.7.21	The business deposited £5,000 into a bank account from its cash
4.7.21	Purchased £2,500 goods from Supplier B in cash.
6.7.21	Sold goods for £5,000 to Customer X on credit.
10.7.21	Sold goods for £2,000 to Customer Y in cash.
15.7.21	Paid £2,200 for office supplies by cheque to Office Supply Limited.
22.7.21	The business returned goods originally cost £500 to Supplier A.
24.7.21	Customer X returned goods to the company. The selling price for these goods was £300. The original cost of these goods was £150.
27.7.21	The business paid £2,800 to Supplier A via a bank transfer.
28.7.21	Customer X paid £4,500 to the company by cheque and claimed an early settlement discount of £200.
31.7.21	Mary withdrew £1,500 from the business bank account for personal use.
31.7.21	The business paid the shop assistant £1,000.

Enter the above transactions in double entry accounts (i.e. T accounts) and extract the closing balances to the Trial Balance as on 31 July 2021.

The following information relates to the income statement for A, B and C for the year ended 30 September 2021.

	A £	B £	C £
Sales	3,560,000	1,030,000	170,000
Cost of sales	(1,950,500)	(537,500)	(120,000)
Gross profit	1,609,500	492,500	50,000
Operating expenses	(467,000)	(234,560)	(23,500)
Operating profit	1,142,500	257,940	26,500
Interest	(100,000)	(50,000)	(3,000)
Profit before tax	1,042,500	207,940	23,500
Tax	(356,400)	(56,000)	(8,400)
Profit after tax	686,100	151,940	15,100
Additional notes:

1. A acquired 60% of B’s outstanding share capital on 1 January 2021 and obtained overall control.

2. B sold goods for £100,000 to A on 31 December 2020. The original cost was £65,000. None of these goods were left in the closing inventory of A.

3. A sold goods for £200,000 to B on 31 March 2021. The original cost was £120,000. A quarter of these goods were left in B’s inventory as on 30 September 2021.

4. B uses the reducing balance method for depreciation. However, according to the group’s policy, all non-current assets are subject to the straight-line depreciation method. This results in an additional depreciation expense of £45,000 to B’s account.

5. A acquired 30% of C’s outstanding share capital on 1 October 2019. Significant influence was established on that date.

Prepare the consolidated income statement for the year ended 30 September 2021 for A and its group.

The following information relates to X, Y and Z plc. Statements of Financial Position as on 30 June 2021

Investment in Y	X £’000 75,000	Y £’000	Z £’000
Investment in Z	25,000
Other non-current assets	360,570	110,000	100,000
	465,570	110,000	100,000
Net current assets	145,000	60,000	35,250
Loans	(300,000)	(60,000)	(20,000)
	310,570	127,000	115,250
Ordinary shares @ £1 each	100,000	50,000	30,000
Retained profit	210,570	60,000	85,250
	305,570	110,000	115,250
Additional notes:

1. X acquired 60% of the ordinary £1 shares of Y on 1 October 2019 for £75,000,000 in cash when the balance of the retained profit in Y was £40,000,000. The fair value of Y’s non- current assets at the date of acquisition was £10,000,000 higher than their book value. Y does not account for this amount in its own accounts.

2. On 1 April 2018, X acquired 30% of Z’s issued share capital when its retained profit stood at £20,000,000. There is no difference between the book value and the fair value of the net assets at the date of acquisition.

3. On 31 May there was no inventory in Y. During the month of June, the following transactions took place:

Date	Purchased, units	Sold, units	£
01.6.2021	1,000		200
03.6.2021	4,000		210
04.6.2021		2,500
10.6.2021	3,000		220
16.6.2021		4,000
20.6.2021	1,000		210
24.6.2021	500		230
28.6.2021		1,200

Y uses the LIFO method to value its inventory. For the purpose of consolidation, X uses the FIFO method.

Prepare the consolidated statement of financial position as on 30 June 2021 showing clearly the goodwill arising from the acquisition of Y, the value for Z, the non-controlling interest and the breakdown of the retained profit in the group.

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