Walkthrough question two
This chapter builds on the consolidation principles introduced earlier by focusing on a more complex (and commonly examined) scenario: a mid-year acquisition. You’ll see how to prepare a full consolidated statement of profit or loss, including:
- elimination of intra-group trading
- removal of unrealised profit
- pro-rating a subsidiary’s results when the acquisition happens partway through the year
Mid-year acquisition
Illustration 2: mid-year acquisition
Sunlight Ltd. acquired 60% of the equity shares of Starlight Ltd. on 1st July 2025. The following are the individual statements of profit or loss for both companies for the year ended 31st December 2025.
| Sunlight Ltd. | Starlight Ltd. | |
|---|---|---|
| $ | $ | |
| Revenue | 2,500,000 | 1,000,000 |
| Cost of sales | (1,000,000) | (400,000) |
| Gross profit | 1,500,000 | 600,000 |
| Distribution costs | (200,000) | (90,000) |
| Administrative expenses | (350,000) | (185,000) |
| Operating profit | 950,000 | 325,000 |
| Profit before financing and income taxes | 950,000 | 325,000 |
| Finance costs | (100,000) | (50,000) |
| Profit before income taxes | 850,000 | 275,000 |
| Income tax expense | (265,000) | (90,000) |
| Profit for the year | 585,000 | 185,000 |
Additional information: During the year, Starlight Ltd. sold goods worth $400,000 to Sunlight Ltd. at a profit margin of 25%, with the sale taking place after the acquisition date. Out of these goods, 50% remained unsold in Sunlight Ltd.'s inventory at year-end.
Required: Prepare the consolidated statement of profit or loss for Sunlight Ltd. and its subsidiary for the year ended 31st December 2025.
Suggested solution:
Try solving this question on your own by following the steps shown in earlier walkthroughs, then compare your answer to the suggested solution.
Hint: This is a mid-year acquisition, so you must pro-rate all the income and expense items of the subsidiary when combining like items.
W1: group structure
Work it out and compare with the suggested solution.
| Item | Detail |
|---|---|
| Parent company | Sunlight Ltd |
| Subsidiary | Starlight Ltd |
| Ownership | 60% |
| NCI holding | 40% |
| Acquisition date | 1 July 2025 |
| Reporting date | 31 December 2025 |
| Post-acquisition period | 6 months (half year) |
Since the post-acquisition period is 6 months, multiply each line of Starlight’s statement of profit or loss by 6/12 before combining it with Sunlight’s full-year figures:
| Item | Full year ($) | x 6/12 ($) |
|---|---|---|
| Revenue | 1,000,000 | 500,000 |
| Cost of sales | (400,000) | (200,000) |
| Distribution costs | (90,000) | (45,000) |
| Administrative expenses | (185,000) | (92,500) |
| Finance costs | (50,000) | (25,000) |
| Income tax expense | (90,000) | (45,000) |
| Profit for the year | 185,000 | 92,500 |
The $400,000 of intra-group sales took place after the acquisition date, so they’re eliminated in full - not pro-rated - when combining the two companies’ figures.
Setting out the group structure helps you avoid a common mistake: including pre-acquisition results in the consolidated statement.
W2: computation and adjustments
Two adjustments are required in this illustration:
- elimination of intra-group sales
- provision for unrealised profit (PURP)
These adjustments ensure the consolidated statement reflects only transactions with external parties and that no unrealised profit is recognised within the group.
For the intra-group sales, eliminate it by:
Debit: Sales $400,000
Credit: Cost of sales $400,000
(These amounts are removed on the face of the consolidated statement of profit or loss.)
This adjustment removes the intra-group revenue recorded by Starlight Ltd. and the corresponding cost recorded by Sunlight Ltd. from the consolidated figures. Without this elimination, both revenue and cost of sales would be overstated by $400,000.
For the provision for unrealised profit arising on the intra-group sales:
PURP = $400,000 x 50% x 25% = $50,000
Debit: Cost of sales $50,000
Credit: Inventory $50,000
The PURP arises because 50% of the goods sold by Starlight to Sunlight remain in Sunlight’s closing inventory.
From a group perspective, these goods have not yet been sold to an external customer. The profit of $50,000 included in Starlight’s results is therefore unrealised at the group level.
To remove it, we increase the cost of sales and reduce inventory. Because the selling company is the subsidiary (Starlight), the PURP reduces the subsidiary’s profit and therefore affects the NCI calculation.
The consolidated statement of profit or loss would look like this after all these adjustments, with profit attributed as shown in W3.
Sunlight Group Limited
Consolidated statement of profit or loss for the year ended 31st December 2025.
| Item | $ |
|---|---|
| Revenue (2,500,000 + 500,000 - 400,000) | 2,600,000 |
| Cost of sales (1,000,000 + 200,000 - 400,000 + 50,000) | (850,000) |
| Gross profit | 1,750,000 |
| Distribution costs (200,000 + 45,000) | (245,000) |
| Administrative expenses (350,000 + 92,500) | (442,500) |
| Operating profit | 1,062,500 |
| Profit before financing and income taxes | 1,062,500 |
| Finance costs (100,000 + 25,000) | (125,000) |
| Profit before income taxes | 937,500 |
| Income tax expense (265,000 + 45,000) | (310,000) |
| Profit for the year | 627,500 |
| Profit attributable to: | |
| NCI ($92,500 - 50,000) x 40% - see W3 | 17,000 |
| Owners of parent company ($627,500 - $17,000) | 610,500 |
W3: profit attributable to group and NCI
The consolidated profit for the year needs to be split between:
- the group (owners of the parent)
- the NCI
| Item | $ |
|---|---|
| Starlight Limited’s pro-rated profit for the year (185,000 x 6/12) | 92,500 |
| PURP adjustment | (50,000) |
| Adjusted profit | 42,500 |
| Profit attributable to NCI (40% x 42,500) | 17,000 |
| Profit attributable to the group (balancing figure) ($627,500 - $17,000) | 610,500 |
| Group profit for the year | 627,500 |
The PURP is deducted before calculating the NCI share because the subsidiary made the sale. Had the parent been the seller, the PURP would reduce only the parent’s share, and the NCI would be 40% x 92,500 = 37,000.