Parent plc owns 80% of Sub Ltd and has retained earnings of £500,000. Sub Ltd's retained earnings are £220,000 at the year end and were £120,000 at acquisition. Parent sold goods to Sub, and £8,000 of unrealised profit remains in Sub's closing inventory. Goodwill of £15,000 (non-controlling interest measured at its proportionate share) has been fully impaired. What are consolidated retained earnings?

Answer and explanation

Correct answer: A. £557,000

  1. Step 1: Group share of Sub's post-acquisition profit = 80% × (£220,000 − £120,000) = £80,000.
  2. Step 2: The unrealised profit of £8,000 arises on a sale by the parent, so it is deducted in full from group retained earnings.
  3. Step 3: The impairment (£15,000) is attributable wholly to the parent with the proportionate method: £500,000 + £80,000 − £8,000 − £15,000 = £557,000.
Answer
£557,000.
Why not the others: £580,000: This ignores both the provision for unrealised profit and the goodwill impairment. £558,600: This deducts only 80% of the unrealised profit, but profit on a parent's sales is eliminated in full against the parent. £577,000: This includes 100% of the subsidiary's post-acquisition profit instead of the group's 80% share.

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