Fred Ltd owns 140,000 shares in Ginger Ltd, which it purchased for £450,000 cash on 1 January 2018.  The results for the year ended 31 December 2020 are as follows:

Statement of Profit or Loss

	Fred Ltd	Ginger Ltd
	£’000	£’000
Revenue	1,400	780
Cost of Sales	(650)	(330)
Gross Profit	750	450
Administrative and distribution costs	(175)	(133)
Investment Income	50	4
Profit before tax	625	321
Tax expense	(138)	(97)
Profit for the year	487	224

 

Extracts from Statements of Changes in Equity:

Retained earnings brought forward	593	455
Profit for the period	487	224
Dividends paid	(155)	(70)
Retained earnings carried forward	925	609

 

Additional information:

1. During the year Ginger Ltd sold goods which originally cost £30,000 to Fred Ltd for £ 60,000.  At 31 December 2020, one third of these goods had not yet been sold by Fred Ltd

2. On the date of acquisition, the fair value of the plant of Ginger Ltd exceeded its book value by £100,000.  The plant had a remaining useful life of five years as at that date.  This adjustment has not been reflected in the books of Ginger Ltd, however it should be reflected in the consolidated statements.  It is group policy to calculate depreciation on a straight- line basis and charge it to administrative and distribution costs.

3. Ginger Ltd has an issued share capital of 200,000 ordinary shares of £1 each.

4. The fair value of the effective non-controlling interest in Ginger Ltd   as at the date of acquisition was £220,000 and the retained earnings at that date were £250,000

5. It is group policy to record goodwill and non-controlling interest in full

6. Goodwill in the consolidated statement of financial position in respect of the acquisition of Ginger Ltd was carried at £80,000 at the start of the year, and at £50,000 as at the end of the year

 

Required:

a) For the Fred Ltd Group in respect of the year ended 31 December 2020, prepare the Consolidated  Statement of Profit or Loss and an extract from the Group Statement of Changes in Equity that reconciles the opening and closing balances of Retained Earnings

b) Explain why the adjustments you have made regarding the intercompany sales and fair value of plant are required

Answer rating: 100% (QA)

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