Identify the correct treatment of the investments in Harbour Ltd, Inlet Ltd and Bay Ltd in the...

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Both the Statement of Principles for Financial Reporting and individual Accounting Standards make it clear that the treatment in consolidated financial statements of investments in other undertakings is dependent on the extent of the control or influence the investing entity is able to exercise over the other undertaking. Port plc has investments in three other undertakings: On 15 May 1990, Port plc purchased 40 million 50p equity shares in Harbour Ltd. The called-up equity share capital of Harbour Ltd on 15 May 1990 was 50 million 50p equity shares. On 15 June 1991, Port plc purchased 30 million £1 equity shares in Inlet Ltd. The called-up equity share capital of Inlet Ltd on 15 June 1991 was 75 million £1 equity shares. The remaining equity shares in Inlet Ltd are held by a large number of investors – none with more than 5 million equity shares. On 15 July 1992, Port plc purchased 25 million 50p equity shares in Bay Ltd. The called up equity share capital of Bay Ltd on 15 July 1992 was 80 million 50p equity shares. Another investor owns 50 million equity shares in Bay Ltd. This investor takes an active interest in directing the operating and financial policies of Bay Ltd and on a number of occasions has required Bay Ltd to follow policies that do not meet with the approval of Port plc. Equity shares in all of the companies carry one vote per share at general meetings. No party can control or influence the composition of the board of directors of any of the companies other than through its ownership of equity shares. There have been no instances where shareholders in any of the companies have acted together to increase their control or influence. None of the companies has issued any additional equity shares since Port plc purchased its interests. Extracts from the profit and loss accounts of the four companies for their year ended 30 June 2001 are given below: Port plc Harbour Ltd Inlet Ltd Bay Ltd £000 £000 £000 £000 Turnover 65000 45000 48000 40000 Cost of sales (35000) (25000) (26000) (19000) Gross profit 30000 20000 22000 21000 Note 1 Port plc manufactures a product that is used by Harbour Ltd and Inlet Ltd. During the year ended 30 June 2001, sales of the product to Harbour Ltd and Inlet Ltd were: to Harbour Ltd – £8 million
to Inlet Ltd – £7.5 million. Opening and closing stocks of this product in the financial statements of Harbour Ltd and Inlet Ltd (all purchased from Port plc at cost plus 25% mark up, unchanged during the year) were as follows: Company Closing stock Opening stock £000 £000 Harbour Ltd 3000 2400 Inlet Ltd 2500 Nil At 30 June 2001, there were no amounts payable by Harbour Ltd and Inlet Ltd in respect of stocks purchased from Port plc before 30 June 2001. Note 2 There was no other trading between the companies other than the payment of dividends. Required: (a) State the alternative treatments of investments in consolidated financial statements that are set out in the Statement of Principles for Financial Reporting and UK Accounting Standards. Do NOT describe the mechanics of the methods. (b) Identify the correct treatment of the investments in Harbour Ltd, Inlet Ltd and Bay Ltd in the consolidated financial statements of Port plc. (c) Compute the consolidated turnover, cost of sales and gross profit of the Port group for the year ended 30 June 2001. You should ensure that your computations are fully supported by relevant workings. (d) Compute the adjustments that need to be made in respect of the transactions described in Note 1 above when preparing the consolidated balance sheet of Port plc at 30 June 2001. You should explain the rationale behind each adjustment you make.

 

Solution ID:565834 | This paper was updated on 26-Nov-2015

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