Rochester plc acquired 90% of the common shares and 10% of the 5% bonds in Paris Ltd on 31 March 2019. All income and expenses a
re deemed to accrue evenly through the year. On 31 January 2019 Rochester sold Paris goods for $6,000 plus a mark-up of one-third. 75% of these goods were still in stock at the end of the year. There was a goodwill impairment loss of $4,000. On December31,2019 Rochester increased its non-current assets by $15,000 on revaluation.
Set out below are the individual statements of comprehensive income of Rochester and Paris:
Statements of comprehensive income for the year ended 31 December 2019
Rochester Paris
$ $
Net turnover 100,000 60,000
Cost of sales 30,000 30,000
Gross profit 70,000 30,000
Expenses 20,541 15,000
Interest payable on 5% bonds 5,000
Interest receivable on Paris Ltd bonds 500 _____
49,959 10,000
Dividends received 2,160 -----
Profit before tax 52,119 10,000
Income tax expense 7,002 3,000
Profit for the period 45,117 7,000
Required:
a.)Prepare a consolidated statement of comprehensive income for the year ended 31
December 2019. Show all relevant workings
b.)Explain how unrealised profits arise from transactions between companies in a group and
why it is important to remove them
