Exercises On Income Statement

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An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk (*).

* Question 1

The following are the financial statements of the parent company Swish plc, a subsidiary company Broom and an associate company Handle.

Balance sheets as at 31 December 20X3

Swish

Broom

Handle

ASSETS

£

£

£

Non-current assets

Property plant and equipment at cost

320,000

180,000

100,000

Depreciation

200,000

70,000

21,000

120,000

110,000

79,000

Investment in Broom

140,000

Investment in Handle

40,000

Current assets

Inventories

120,000

60,000

36,000

Trade receivables

130,000

70,000

36,000

Current account - Broom

15,000

Current account - Handle

3,000

Bank

24,000

7,000

6,000

Total current assets

292,000

1 37,000

78,000

Total assets

592,000

247,000

157,000

EQUITY AND LIABILITIES

£1 common shares

250,000

60,000

50,000

General reserve

30,000

20,000

12,000

Retained earnings

150,000

120,000

50,000

430,000

200,000

112,000

Current liabilities

Trade payables

132,000

25,000

34,000

Taxation payable

30,000

7,000

8,000

Current account - Swish

15,000

3,000

Total equity and liabilities

592,000

247,000

157,000

Income statement for the year ended 31

December 20X3

£

£

£

Sales

300,000

1 60,000

100,000

Cost of sales

90,000

80,000

40,000

Gross profit

210,000

80,000

60,000

Expenses

95,000

50,000

40,000

Dividends received

11,000

NIL

10,000

Profit before tax

126,000

30,000

30,000

Income tax expense

30,000

7,000

8,000

Profit for the period

96,000

23,000

22,000

Dividends paid

40,000

10,000

8,000

56,000

13,000

14,000

Retained earnings brought forward

from previous years

94,000

107,000

36,000

150,000

120,000

50,000

Swish acquired 90% of the common shares in Broom on 1 January 20X1 when the balance on the income statement of Broom was £60,000 and the balance on the general reserve of Broom was £16,000. Swish also acquired 25% of the common shares in Handle on 1 January 20X2 when the balance on Handle's accumulated retained profits was £30,000 and the general reserve £8,000.

During the year Swish sold Broom goods for £16,000, which included a mark-up of one-third. 80% of these goods were still in stock at the end of the year

Required:

(a) Prepare a consolidated income statement, including the associated company Handle's results,for the year ended 31 December 20X3.

(b) Prepare a consolidated balance sheet as at 31 December 20X3.

* Question 2

Set out below are the consolidated accounts of Stop Ltd and its subsidiaries as well as the individual accounts of an associated company Start Ltd.

Balance sheets of the Stop Ltd Group and Start Ltd at 31 December 20X1

Stop Ltd and Subsids

Start Ltd

£

£

ASSETS

Non-current assets

Property plant and equipment at cost

375,000

150,000

Depreciation

125,000

25,000

250,000

125,000

Investment in Start Ltd

62,500

Current assets

Inventories

160,000

62,500

Trade receivables

165,000

75,000

Current account - Start Ltd

15,000

Bank

12,500

15,625

Total current assets

352,500

153,125

Total assets

665,000

278,125

EQUITY AND LIABILITIES

£1 common shares

281,000

62,500

General reserve

31,500

22,500

Retained earnings

140,000

119,375

452,500

204,375

Current liabilities

Trade payables

187,500

47,500

Taxation

25,000

11,250

Current account - Stop Ltd

15,000

Total equity and liabilities

665,000

278,125

Profit and loss accounts for the year ended 31 December 20X1

£

£

Sales

375,000

187,500

Cost of sales

125,000

93,750

Gross profit

250,000

93,750

Expenses

150,000

50,000

Dividends received from Start and others

2,500

NIL

Profit before tax

102,500

43,750

Income tax expense

25,000

11,250

Profit for the period

77,500

32,500

Dividends paid

50,000

10,000

27,500

22,500

Retained earnings brought forward

from previous years

112,500

96,875

140,000

Notes:

1. Stop Ltd acquired 30% of the shares in Start Ltd on 31/3/20X1 when the balance of retained earnings of Start Ltd was £102,500, after accruing £2,500 dividend and the balance on the general reserve of Start Ltd was £20,000.

2. On 1/1/20X1 Stop Ltd sold Start Ltd goods for £58,500 which represented cost plus 30%. Half of these goods were still in inventory at the end of the year.

3. All income and expenditure for the year in Start Ltd's income statement accrued evenly throughout the year

4. £750 of the dividend received by Stop Ltd from Start Ltd has correctly been credited by Stop Ltd to the 'Investment in Start Ltd'. This amount represents the dividend paid out of pre-acquisition profits of Start Ltd.

Required:

(a) Show the consolidated income statement of Stop Ltd for the year ending 31/12/20X1 including the associated company, Start Ltd, on the equity method of accounting basis.

(b) Show the consolidated balance sheet of Stop Ltd as at 31/12/20X1 including the associated company, Start Ltd, on the equity method of accounting basis.

Question 3

Set out below are the financial statements of Ant Co., its subsidiary Bug Co. and an associated company Nit Co. for the accounting year-end 31 December 20X9.

Balance sheets as at 31 December 20X9

ASSETS

Non-current assets

Property plant and equipment at cost Depreciation

Investment in Bug Investment in Nit

240,000 150,000 90,000 90,000 30,000

135,000 52,500 82,500

75,000 15,750 59,250

Current assets Inventories Trade receivables Current account - Bug Current account - Nit Bank

Total current assets Total assets

EQUITY AND LIABILITIES

$1 common shares General reserve Retained earnings

Current liabilities Trade payables Taxation payable Current account - Ant Total equity and liabilities

105,000 98,250 11,250 2,250 17,250 234,000 444,000

187,500 22,500 112,500 322,500

99,000 22,500

444,000

45,000 52,500

5,250 102,750 185,250

45,000 15,000 90,000 150,000

18,750 5,250 11,250 185,250

27,000 27,000

4,500 58,500 117,750

37,500 9,000 37,500 84,000

25,500 6,000 2,250 117,750

Income statement for the year ended 31 December 20X9

Sales

225,000

120,000

75,000

Cost of sales

67,500

60,000

30,000

Gross profit

157,500

60,000

45,000

Expenses

70,500

37,500

30,000

Dividends received

7,500

NIL

7,500

Profit before tax

94,500

22,500

22,500

Taxation

22,500

5,250

6,000

72,000

17,250

16,500

Dividends paid

30,000

7,500

6,000

42,000

9,750

10,500

Retained earnings brought forward from previous years

Retained earnings brought forward from previous years

70,500 112,500

80,250 90,000

27,000 37,500

Ant Co. acquired 80% of the shares in Bug Co. on 1 January 20X7 when the balance on the retained earnings of Bug Co. was $45,000 and the balance on the general reserve of Bug Co. was $12,000. Ant Co. also acquired 25% of the common shares in Nit Co. on 1 January 20X8 when the balance on Nit's retained earnings was $22,500 and the general reserve $6,000.

During the year Ant Co. sold Bug Co. goods for $12,000, which included a mark-up of one-third. 90% of these goods were still in inventory at the end of the year.

Required:

(a) Prepare a consolidated income statement for the year ending 31/12/20X9, including the associated company Nit's results.

(b) Prepare a consolidated balance sheet at 31/12/20X9, including the associated company.

Question 4

Set out below are the consolidated accounts ofTwist pic and its subsidiaries and the individual accounts of an associated company Turn pic.

Balance sheets of the Twist Group and Turn at 31 December 20X3

Twist and Subsids

Turn

ASSETS

£000

£000

Property plant and equipment at cost

450

180

Depreciation

150

30

300

150

Investment in Turn

75

Current assets

Inventories

180

75

Trade receivables

207

90

Current account - Turn

18

Bank

18

18

Total current assets

423

183

Total assets

798

333

EQUITY AND LIABILITIES

£1 common shares

200

70

General reserve

37

32

Retained earnings

168

142

405

244

Minority interest

138

Current liabilities

Trade payables

225

57

Taxation

30

14

Current account - Twist

18

798

333

Income statements for the year

ended 31 December 20X3

£000

£000

Sales

450

246

Cost of sales

150

112

Gross profit

300

134

Expenses

171

60

Dividends received

3

NIL

Profit before tax

132

74

Taxation

30

14

102

60

Minority interest

10

92

60

Dividends paid

60

40

32

20

Retained earnings brought forward

from previous years

136

122

168

142

-

1. Twist acquired 30% of the shares in Turn on 30/9/20X3 when the balance on the retained earnings of Turn was £137,000 after providing for £30,000 dividend and the balance on the general reserve ofTurn was £32,000.

2. On 1/1/20X3 Turn sold Twist goods for £30,000, at cost plus 25%. At the end of the year 75% of these goods were still in inventory

3. All income and expenditure for the year in Turn's income statement accrued evenly throughout the year.

4. £9,000 of the dividend receivable by Twist from Turn has correctly been credited by Twist to the 'Investment in Turn.'This amount represents the dividend receivable out of pre-acquisition profits of Turn.

Required:

(a) Show the consolidated Income Statement of Twist for the year ending 31/12/20X3 INCLUDING the associated company,Turn, on the equity method of accounting basis.

(b) Show the consolidated balance sheet of Twist as at 31/12/20X3 INCLUDING the associated company,Turn, on the equity method of accounting basis.

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