1. HUANG HUAI UNIVERSITY Financial Accounting II
Lectures 3 & 4
Consolidated Income Statement/
Consolidated Statements of Comprehensive Income
DR AZIZ JAAFAR

2. Consolidated Income Statements
Treatment in Consolidated Income Statement of
Unrealised profit on inter-company inventories
Pre-acquisition profits
Dividends or interest paid out of pre-acquisition profits

3. Example – Ante Group At the date of acquisition on 1 January 20X1
Ante acquired
75% of the common shares and
20% of the preferred shares in Post
the retained earnings of Post were £30,000.
Ante paid £10,000 more than the fair value of the net assets acquired.

4. Example – Ante Group During the year ended 31 December 20X2
Ante had sold Post goods at their cost price of £9,000 plus a mark up of a third.
At the end of the financial year on 31 December 20X2, half of these goods were still in the inventory at the end of the year
and,
20% is to be written off goodwill as an impairment loss.

5. Income statements for the year ended 31 December 20X2
Example – Ante Group
Income statements for the year ended 31 December 20X2
Ante Post
Sales , ,000
Cost of sales , ,000
Gross profit , ,000
Expenses , ,000
Impairment of goodwill – –
Profit from operations , ,000
Div. received - common ,
Div. received - preferred _______
Profit before tax , ,000
Income tax expense , ,000
Profit for the period , ,000

6. Example – Ante Group Ante Post
Profit for the period , ,000 (from previous slide)
Profit att. to min. interests
Profit att. to the parent
Div. paid – common , ,000
Div. paid – preferred ,000
31, ,000
Retained earnings brought
forward from previous yr , ,000
Retained Earnings
carried forward , ,000

7. Ante example – Notes 1
1. Eliminate inter-company sales on consolidation
Cancel the inter-company sales of 12,000 (9, /3) by
(i) reducing the sales of Ante from 200,000 to ,000; and
(ii) reducing the cost of sales of Post by the same amount from 60,000 to 48,000.

8. Ante example – Notes 2
2. Eliminate unrealized profit on inter-company goods that were still
in inventory
(i) Ante had sold the goods to Post at a mark up 3,000
(ii) Half the good remain in the inventories of Post at the year-end
(iii) From the Group’s view there is an unrealized profit of half of the mark up i.e. 1,500. Therefore:
- Deduct 1,500 from the gross profit of Ante by adding this amount
to the cost of sales
- Add this amount to a provision for unrealized profit
- Reduce the inventories in the consolidated balance sheet by
the amount of the provision (as explained in the previous lecture)

9. Ante example – Notes 3
3. Aggregate the adjusted sales and cost of sales figures for items in Notes 1 and 2
(i) Add the adjusted sales figures
[(200,000 – inter-co. sales) ] =
(ii) Add the adjusted cost of sales figures;
( – ) provision =

10. Ante example – Notes 4 and 5
4. Aggregate expenses
No adjustment is required to the parent or subsidiary total figures
5. Deduct the impairment loss on Goodwill = 2 000

11. Ante example – Note 6 6. Accounting for the inter-company dividends
(i) The common dividend 3,750 received by Ante is 75% of the 5,000 dividend payable by Post.
(ii) Cancel the inter-company dividend receivable by Ante with 3,750 dividend payable by Post, leaving the 1,250 dividend payable by Post to the minority (the 1,250 will be included in the consolidated balance sheet minority interest figure).

12. Ante example – Note 6
(iii) The preferred dividend of 600 received by Ante is 20% of the 3,000 payable by Post.
(iv) Cancel 600 preferred dividend receivable by Ante with 600 of the preferred dividend payable by Post.
(v) the balance of 2,400 remaining is payable to the minority and 2,400 will be included in the consolidated balance sheet minority interest figure.

13. Ante example – Note 7 7. Aggregate the taxation figures.
No adjustment is require to the parent or subsidiary total figures
Net profit from ordinary activities
Adjustment is required to establish how much of the profit after tax is available for the parent company’s common shareholders and represents their share of the profit for the year. This entails deducting the minority interest in the subsidiary company as a percentage of the subsidiary’s after tax figure, as adjusted for any preference dividend.

14. Ante example – Note 8
8. Calculate the share of post-taxation profits belonging to the minority interest
Preferred shares – dividend on these shares
Minority shareholders hold 80% of preferred shares ( 80% x 3 000) =
Common shares - % of profit after tax of the subsidiary less preferred
share dividend.
Minority shareholders hold 25% of common shares 25% x ( – 3 000) =
Total minority interests in the profit after tax of the subsidiary 5 150

15. Ante example – Note 9
9. Dividends paid and payable to parent common s/holders:
The dividends paid and payable in the consolidated accounts will always be the parent’s company’s dividends.
This is because the dividends payable to the minority are payable out of the minority’s share of the profit after taxation, which has been deducted in arriving at the group’s share of the profit after taxation.
To deduct the 1250 common and preference dividends payable to the minority would be double counting.
The dividend payable: In this example, there is a dividend payable and no interim dividend has been paid during the year.

16. Ante example – Note 10 10. Retained earnings
The retained earnings at the beginning of the year is added to the net profit for the period. It is calculated as:
Ante retained earnings brought forward
The group’s share of Post’s post-acquisition
Retained earnings 75% x ( – )
87 336

17. Consolidated Income statements for the year ended 31 December 20X2
Example – Ante Group
Consolidated Income statements for the year ended 31 December 20X2
Sales Notes 1/3
Cost of sales Notes 1/2/3
Gross profit
Expenses Note 4
Impairment of goodwill Note 5
Profit from operations
Div. received - common Note 6
Div. received - preferred Note 6
Profit before tax
Income tax expense Note 7
Profit for the period ,414

18. Example – Ante Group
Profit for the period (from previous slide)
less
Profit attributable to minority interests Note 8
Profit attributable to the parent
Div. paid – common Note 9
Div. paid – preferred Note 9
32 264
Retained earnings brought
forward from previous yr Note 10
Retained Earnings carried forward