The Managing Director of Alcuin is confused about the why the investments in Langwith and Halifax do not appear on the financial statements at the group level. Write a note explaining the treatment here and advising on the treatment of goodwill, relating back to the full question above, including those relevant points for the group.
Alcuin, Langwith and Halifax are firms involved in the production and sale of high-quality technical equipment for universities;
The following are draft financial statements:Statement of financial position as at 31st March 2021.
Notes to the accounts:
1.On 31stMarch 2021 Langwithentered into a four-year lease contract for a new machine used in the production with a contract requiring the payment of £14,930 per annum in arrears. This does not appear in the accounts above. The interest rate implicit in the lease is 7.5% and Langwith uses the actuarial method to allocate interest for finance leases. The Langwith’s
2.AlcuinLtd acquired twomillion of the ordinary shares of Langwith Ltd on 29thNovember 2014when the
3.AlcuinLtd acquired 75% of the ordinary shares of HalifaxLtd on 7thSeptember 2016when the retained earnings of HalifaxLtd were £500,000; Alcuin use the proportionate share (‘partial’) method of valuing the non-controlling interest in Halifax.
4.During the year goods with an original cost of £400,000 were sold by Alcuin to Langwith for £600,000. Halfof these goods are in Langwith’s inventory at the year end.
5.On 1stOctober 2020, Halifax sold units with a total sales price of £500,000 to a single large customer. Included in the contract was a two-year service warranty covering all required repairs during this time. The normal selling price of the same merchandise would be £400,000 without the warranty. As of 31stMarch2021, Halifax recognised £425,000 of revenue, included in the above accounts.
Question:
The Managing Director of Alcuin is confused about the why the investments in Langwith and Halifax do not appear on the financial statements at the group level. Write a note explaining the treatment here and advising on the treatment of
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