Chapter 10The Consolidated Income Statementwww.xisu.edu.cn

Contents

1. The consolidated income statement

2. The consolidated statement of comprehensive income

The consolidated income statement

The source of the consolidated income statement is the individual accounts of the separate companies in the group.

Consolidation procedureIt is customary in practice to prepare a working paper (known as a consolidation schedule) on which the individual income statements are set out side by side and totaled to form the basis of the consolidated income statement. In the consolidated income statement non-controlling interest is brought in as a one-line adjustment at the end the income statement.

Simple example: consolidated income statement

ExampleP Co acquired 75% of the ordinary shares of S Co on that companys incorporation in 20X3. The summarized income statements and movement on retained earnings of the two companies for the year ending 31 December 20X6 are set out below.

Simple example: consolidated income statement

ExampleSales revenue Cost of sales Gross profit Administrative expenses profit before tax income tax expense profit for the year note:movement on retained earnings retained earnings brought forward profit for the year retained earnings carried forward

P Co $ 75,000 30,000 45,000 14,000 31,000 10,000 21,000

S Co $ 38,000 20,000 18,000 8,000 10,000 2,000 8,000

87,000 21,000 108,000

17,000 8,000 25,000

Simple example: consolidated income statement

Required Prepared the consolidated income and extract from the statement of changes in equity showing retained earnings and noncontrolling interest.

SolutionP CO CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X6

$ Sales revenue(75+38) Cost of sales(30+20) Gross profit Administrative expenses(14+8) profit before tax income tax expense profit for the year 113,000 50,000 63,000 22,000 41,000 12,000 29,000

Profit attributable to: Owners of the parent Non-controlling interest($8,000 x 25%) 27,000 2,000 29,000

SolutionSTATEMENT OF CHANGES IN EQUITY(EXTRACT)Retained Earnings $ Balance b/f Profit for the year 99,750 27,000 126,750 Noncontrolling Interest $ 4,250 2,000 6,250 Total Equity $ 104,000 29,000 133,000

SolutionNotice how the non-controlling interest is dealt with. (a) Down to the line profit for the year the whole of S Cos results is included without reference to group share or non-controlling share. A one-line adjustment is then inserted to deduct the non-controlling share of S Cos profit. (b) The non-controlling share($4,250)of S Cos retained earnings brought forward(17,000x25%) is excluded from group retained earnings. This means that the carried forward figure of $126,750 is the figure which would appear in the statement of financial position of group retained earnings. This last point may be clearer if we construct the working for group retained earnings.

SolutionGroup retained earningsP Co $ At balance sheet date less pre-acquisition retained earnings 108,000 S Co $ 25,000 25,000 S Co - Share of post acquisition retained earnings(25,000x75%) 18,750 126,750

SolutionThe non-controlling share of S Cos retained earnings

comprisesThe noncontrolling interest in the $17,000 profits brought forward The noncontrolling interest ($2,000) in $8,000 retained profits for the year

SolutionNotice that a consolidated income statement links up with a consolidated statement of financial position exactly as in the case of an individual companys accounts: the figure of retained earnings carried forward at the bottom of the income statement appears as the figure for retained earnings in the statement of financial position.

Intra-group trading Intra-group sales and purchases are eliminated from the consolidated income statement.

Why?

Intra-group tradingWhen one company in a group sells goods to another an identical amount is added to the sales revenue of the first company and to the cost of sales of the second. Yet as far as the entitys dealings without outsiders are concerned no sale has taken place.

In the same group

Sell to P Co

S Co

Purchase from

Intra-group trading Example: Suppose in our earlier emaplethat S Co had recorded sales of $5,000 to P Co during 20X6. S Co had purchased these goods from outside suppliers at a cost of $3,000.One half of the goods remained in P Cos inventory at 31 December 20X6. Prepare the revised consolidated income statement.

SolutionThe consolidated income statement for the year ended 31 December 20X6 would now be as follows.$ Sales revenue(75+38-5) Cost of sales(30+20-5+1*) Gross profit(45+18-1*) Administrative expenses Profit before taxation Income tax expense Profit for the year Profit attributable to: Owners of the parent Non-controlling interest 26,250 1,750 28,000 108,000 (46,000) 62,000 (22,000) 40,000 (12,000) 28,000

SolutionNote: Retained earnings brought forward Profit for the year Retained earnings carried forward $ 99,750 26,250 126,000

*Unrealised profit: x ($5,000 - $3,000) An adjustment will be made for the unrealised profit against the inventory figure in the consolidated.

Intra-group dividends As before, the non-controlling interest in the subsidiarys profit should be calculated immediately after the figure of after-tax profit. For this purpose, no account need be taken of how much of the non-controlling interest is to be distributed by S Co as dividend. Note that group retained earnings are only adjusted for dividends paid to the non-controlling interest are replaced by the allocation to the noncontrolling interest of their share of the profit for the year of the subsidiary.

Pre-acquisition profits Retained earnings in the consolidated statement of financial position comprise: The whole of parent companys retained earnings A proportion of the subsidiary companys retained earnings.

Question1

P Co acquired 60% of the equity of S Co on 1 April 20X5. The income statements of the two companies for the year ended 31 December 20X5 are set out below.

Question1P Co $ Sales revenue Cost of sales Gross profit Other income - dividend received S Co Administrative expenses Profit before taxation Income tax expense Profit for the year 170,000 65,000 105,000 3,600 43,000 65,600 23,000 42,600 12,000 32,000 8,000 24,000 9,000 24,000 6,000 18,000 S Co $ 80,000 36,000 44,000 S Co(9/12) $ 60,000 27,000 33,000

Question1P Co Note Dividends(paid 31 December) Profit retained Retained earnings brought forward Retained earnings carried forward 12,000 30,600 81,000 111,600 6,000 18,000 40,000 58,000 S Co S Co(9/12)

Prepare the consolidated income statement and retained earnings extract from the statement of changes in equity.

Answer

The shares in S Co were acquired three months into the year. Only the postacquisition proportion(9/12)of S Cos income statement is included in the consolidated income statement. This is shown above for convenience.

AnswerP CO CONDOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X5$ Sales revenue (170+60) Cost of sales (65+27) Gross profit Administrative expenses(43+9) Profit before tax Income tax expense(23+6) Profit for the year Profit attributable to: Owners of the parent Non-controlling interest(18x40%) 230,000 ( 92,000) 138,000 (52,000) 86,000 (29,000) 57,000 49,800 7,200 57,000

AnswerSTATEMENT OF CHANGES IN EQUITY Retained earnings $ Balance brought forward* Dividend paid(P) Total comprehensive income for the year Balance carried forward 81,000 12,000 49,800 118,800

*All of S Cos profits brought forward are pre-acquisition. Question 2 is on P180.

The consolidated statement of comprehensive income

The consolidated statement of comprehensive income is produced using the consolidated income statement as a basis. The only items of other comprehensive income that are included in your syllabus are revaluation gains and losses, so a consolidated statement of comprehensive income will be easy to produce once you have done the income statement.

ExampleExample: Consolidated statement of comprehensive income The consolidated income stement of the Brodrick Group is as in the answer to the last question. In addition, Lamlash made a $200,000 revaluation gain on one of its properties during the year.

SolutionBRODRICK GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 30APRIL 20X7Sales revenue Cost of sales Gross profit Administrative expenses Profit before tax Income tax expense Profit for the year Other comprehensive income: Gain on property revaluation Total comprehensive income for the year 200 540 $000 1,600 (930) 670 (255) 415 (75) 340

Solution$000 Total comprehensive income attributable to: Owners of the parent Non-controlling interest 332 8 340 Total comprehensive income attributable to: Owners of the parent(332+(200x80%)) Non-controlling interest(8+(200x20%)) 492 48 540

Consolidated statement of comprehensive income (separate statement)

If we were using the two-statement format (as explained in Chapter3) we would produce a separate income statement and statement of comprehensive income.

The example is as follows.

ExampleBRODRICK GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEProfit for the year Other comprehensive income: Gain on property revaluation Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent(332+(200x80%)) Non-controlling interest(8+(200x20%)) 492 48 540 200 540 340

Consolidated statement of changes in equityThese amounts would appear in the consolidated statement of changes in equity as follows:Noncontrol ling interes t $'000

Retained earnings

Revaluati on surplu s

Total

Total

$'000 Total comprehensive income for the year

$'000

$'000

$'000

332

160

492

48

540

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