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Consolidated Financial Statements Oak plc acquired 70% of Elm Ltd’s equity shares for €300,000 on 1...

Consolidated Financial Statements

Oak plc acquired 70% of Elm Ltd’s 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 Elm’s inventory.
  2. On the date of acquisition the fair value of one item (land) in Elm’s 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. Oak’s income tax rate is 25%.

REQUIRED:

  1. Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2018 and the statement of financial position as at 31 December 2018 for Oak plc group. NB! It is essential that you show all your workings.
  2. 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.
  3. 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.

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