You are the consolidation accountant of Home plc. Home plc is incorporated in the United Kingdom and prepares its financial statements using UK Accounting Standards. Home plc has a subsidiary, Away Ltd. Away Ltd is incorporated in a country that has the Tot as its unit of currency. The accepted abbreviation for the Tot is ‘T’. The financial statements of Home plc and Away Ltd for the year ended 30 June 2001 are given opposite:

Balance sheets at 30 June 2001

Home plc

Away Ltd

£000

£000

£000

£000

Fixed assets:

Tangible assets

30000

50000

Investment in Away Ltd

14000

44000

50000

Current assets:

Stocks

10000

10000

Debtors

12000

12000

Cash in hand

60

60

22060

22060

Creditors failing due within one year:

Trade creditors

7000

11000

Taxation

1000

2000

Proposed dividends

1000

2000

Bank overdraft

3000

5000

12000

20000

Net current assets

10060

14080

Total assets less current liabilities

54060

64080

Capital and reserves:

Called up share capital (£1/T1 shares)

25000

40000

Profit and loss account

29060

24080

54060

64080

Home plc

Away Ltd

£000

T000

Turnover

12000

20000

Cost of sales

(6000)

(10000)

Gross profit

6000

10000

Other operating expenses

(3000)

(5000)

Operating profit

3000

5000

Interest payable

(100)

(200)

Profit before tax

2900

4800

Tax

(900)

(1600)

Profit after tax

2000

3200

Proposed dividends

(1000)

(2000)

Retained profit

1000

1200

Retained profit – 1 July 2000

28060

22880

Retained profit – 30 June 2001

29060

24080

Notes to the financial statements

1 On 1 July 1995, Home plc purchased 30 million shares in Away Ltd for 42 million Tots. The balance on the profit and loss account of Away Ltd on 1 July 1995 was 8 million Tots. Away Ltd has not issued any additional shares since 1 July 1995. Goodwill on consolidation is amortised over 10 years.

2 Home plc has not made any entries in its financial statements regarding the dividend receivable from Away Ltd.

3 On 30 June 2001, Home plc invoiced Away Ltd for a management charge of £250 000 for the year ended 30 June 2001. This amount was included in the turnover and debtors of Home plc. Away Ltd received the invoice before closing its books for the year ended 30 June 2001 and entered it using the closing rate of exchange to translate the sum into Tots. The relevant amount was included in the other operating expenses and trade creditors of Away Ltd. There was no other trading between the two companies.

4 Relevant rates of exchange are as follows:

Date

Exchange rate (Tots to £l)

1 July 1995

3

30 June 2000

3.75

30 June 2001

4

Average for the year ended 30 June 2001

3.85

5 In previous years, the financial statements of Away Ltd have been translated into sterling for consolidation purposes using the closing rate method. The average rate of exchange for the year has been used to translate the profit and loss account. Exchange differences have been recognised in the consolidated statement of total recognised gains and losses. A junior accountant is puzzled by this treatment and has approached you for clarification. He cannot understand how the consolidated financial statements show a true and fair view if possibly significant exchange differences by-pass the consolidated profit and loss account.

Required

(a) Translate the balance sheet of Away Ltd into sterling (£) using the closing rate method.

(b) Prepare the consolidated balance sheet of the Home group at 30 June 2001.

(c) Prepare the consolidated profit and loss account of the Home group for the year ended 30 June 2001. You should start with turnover and end with retained profit for the year.

(d) Prepare a statement that reconciles the opening and closing reserves of the Home group.

(e) Prepare a memorandum to the junior accountant that justifies the fact that exchange differences by-pass the consolidated profit and loss account and summarises recent developments regarding the destination of gains and losses in the performance statements.