Inter company adjustments????????


Im doing question 1.6 on the Financial statements AAT practice exam and an struggling to get my head around it!
Can anyone break down the adjustments that need to be made to consolidate the accounts?!


  • zippi
    zippi Registered Posts: 182 Dedicated contributor ? ? ?
    Hi Nicole11
    I will try my best to explain but if I have made a mistake perhaps someone here can explain you better. I don't know which books you are using but I am using BPP and they explain very well. If you have these books, I would suggest if you read chapter 9 you will understand this better.

    Let's start with 1. Goodwill is total cost of investment less fair value of subsidiaries individual assets and liabilities, this could be due to say good customer service, good quality materials sold etc. Therefore to calculate Goodwill in this example we take a figure of (investment in Hill ltd) from Beacon Plc which is price paid figure of £1400 and deduct all the 70% of net assets of Hill Ltd (which in this case is share capital, retained earnings and revaluation reserve) So all you have to do is take each individual figure of all of the above from Hill ltd for e.g.


    Price paid £1400 investment figure of Beacon Plc
    Less share capital 1000x70%. = (700) of hill ltd
    Less retained earnings 190 x 70% = (133) of hill ltd
    Revaluation figure given in adjustment _(140_of hill ltd (200 x 70%)
    Total goodwill is. £ 427

    2. Inventories:

    Take Inventory figure from both companies and just add it together, so say then if you look at further information it says beacon sold £60k inventory to hill which cost Beacon £40k, so the made a profit of 20k, however, there is 1/5th of unsold inventory left, so profits in beacons ltd are overstated by 4k which is (£20k X1/5 = £4k) and understated cost of sales in hill ltd of 4k as they bought the goods, now to eliminate this you have to do adjustment so true and fair picture in financial statement is presented

    Beacon ltd 537+221of Hill ltd = £758
    Inter company adjustments = _(£4)_
    So total inventories are =£754

    3. Retained Earnings:

    I have explained this in your previous question asked but will state here again. At the date of acquisitions Hill Ltd's retained earnings were £190k, figure of £250 is of post acquisition, in simple English when beacon ltd acquired 70% of the share capital on 1 July 20x0, retained earnings of hill Ltd were-£190. Therefore you have to take that amount out of £250k which relates to June 20x1. So (250-190) = 60x70% would give you 42k.

    Retained earnings. = £370k. (Figure taken from Beacon as they are a parent group)
    Hill ltd - attributable to beacon = £42 which is (250-190) x70%
    Intercompany adjustment =_(4)_leftover inventory you can't include as not part of profit
    Total retained earnings. = £408

    4. Non controlling interest.

    All you do here is take figures of share capital, retained earnings and revaluation reserve of hill ltd and times by 30% as this is not a part of beacon ltd.

    Share capital of hill ltd (1000x70%) = 300
    Retained earnings ". (250x70%). = 75
    Revaluation reserve. (200x30). =_60_
    Total NCI. =435

    I know how you feel when things don't make sense. There are many others here who are ready to help.

    Hope this has helped you understand better. Goodluck :)

  • zippi
    zippi Registered Posts: 182 Dedicated contributor ? ? ?
    Hi Nicole11

    I aligned all figures for you in one line but once posted they have gone either to left or right so forgive me but I am sure it will make sense.
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