Question 3

You work for a large accounting firm KMPG as a Senior Accountant. Your client Paddington plc acquired shares in Winnie plc several years back and you are responsible for the preparation of the year end work.

The following are the Statements of financial position for Paddington plc and Winnie plc as at 31 March 2020, together with the additional information provided below.

Notes to the above financial statements:

i) Paddington acquired 84,000 ordinary shares in Winnie on 31 March 2017. They also acquired 15% of the preference shares.

ii) At the date of acquisition, the retained earnings of Winnie plc were £205,000.

iii) During the year, Paddington sold goods to Winnie for £10,400 which included a mark-up on cost of 30%. At the end of the year, 50% of this stock was still held by Winnie plc.

iv) At the date of acquisition, the land and buildings of Winnie plc had a fair value of £50,000 more than their book value. This fair value increase has not been incorporated into the statement of financial position for Winnie plc. Land accounts for 20% of this amount. Winnie acquired the building on 1 April 2012. The group policy is to depreciate buildings over a period of 50 years.

v) Winnie spent £42,000 on developing a new and innovative product. Winnie’s policy is to expense development costs, however, it is Paddington’s policy to capitalise development costs (i.e. treat it as an asset). The following provides a breakdown of expenditure by Winnie:

Development costs up to 31 March 2017     £32,000

Development costs after 31 March 2017     £10,000

vi) On the 31 March 2020, an impairment test was carried out on the goodwill arising from the acquisition of Winnie plc. The report indicated that the goodwill needs to be written down by £10,000.

vii) Winnie declared a dividend to its ordinary shareholders on 15 March 2020 which remained unpaid by 31 March 2020. Paddington has not accounted for this income in their financial statements.  

YOU ARE REQUIRED TO: 

a) Prepare the consolidation schedule for Winnie plc at 31 March 2020.

b) Calculate the equity and non-controlling interest that will appear in the consolidated statement of financial position for the Paddington Group plc at 31 March 2020.

c) Prepare a memorandum for the attention of the financial director of Paddington Plc explaining why consolidated accounts are necessary and what are the criteria regarding exemption and exclusion from preparing consolidated accounts.

d) Prepare a memorandum for the financial director of Paddington plc explaining the limitations of group accounts.