1. **State the problem:** Prepare a consolidated income statement for Nairobi and its subsidiary Mombasa for the year ended 31 December 2017, incorporating adjustments for intra-group transactions, goodwill impairment, fair value depreciation, and non-controlling interests. 2. **Identify key data and adjustments:** - Nairobi owns 80% of Mombasa (800,000 shares). - Purchase price for 80% shares: 1,500,000. - Goodwill impairment: 152,000 at start + 40,000 additional. - Intra-group sales: 600,000 with unrealized profit in closing inventory 30,000. - Fair value depreciation: 10,000 charged to cost of sales. - Mombasa interim dividend: 200,000. - Non-controlling interest (NCI) valued at fair value. 3. **Calculate goodwill:** Purchase consideration for 80% = 1,500,000 Implied total value = $\frac{1,500,000}{0.8} = 1,875,000$ Net assets of Mombasa (equity) = Share capital + retained earnings (not given explicitly, assume profit for year as proxy) Profit for year Mombasa = 400,000 Assuming no other reserves, net assets approx = 400,000 Goodwill = Implied value - net assets = 1,875,000 - 400,000 = 1,475,000 Less impairments = 152,000 + 40,000 = 192,000 Net goodwill = 1,475,000 - 192,000 = 1,283,000 4. **Eliminate intra-group sales and unrealized profit:** Sales elimination: Reduce consolidated revenue by 600,000 Cost of sales reduction: Reduce by cost element of intra-group sales Unrealized profit in closing inventory = 30,000 (reduce profit) 5. **Adjust for fair value depreciation:** Increase cost of sales by 10,000 6. **Calculate consolidated revenue:** Nairobi revenue + Mombasa revenue - intra-group sales = 3,200,000 + 2,560,000 - 600,000 = 5,160,000 7. **Calculate consolidated cost of sales:** Nairobi cost + Mombasa cost - intra-group cost + fair value depreciation Mombasa cost of sales = 1,480,000 Intra-group cost = 600,000 - profit margin (assumed from gross profit) Profit margin on sales = (600,000 - cost) = profit element Given unrealized profit 30,000, so cost element = 600,000 - 30,000 = 570,000 Consolidated cost = 2,200,000 + 1,480,000 - 570,000 + 10,000 = 3,120,000 8. **Calculate gross profit:** Revenue - cost of sales = 5,160,000 - 3,120,000 = 2,040,000 9. **Calculate distribution and administrative expenses:** Sum Nairobi and Mombasa expenses Distribution costs = 160,000 + 120,000 = 280,000 Administrative expenses = 400,000 + 80,000 = 480,000 Less goodwill impairment included in admin expenses = 40,000 (already accounted) Adjusted admin expenses = 480,000 - 40,000 = 440,000 10. **Calculate profit from operations:** Gross profit - distribution costs - adjusted admin expenses = 2,040,000 - 280,000 - 440,000 = 1,320,000 11. **Add investment income:** Nairobi investment income = 160,000 Mombasa has none Total = 160,000 12. **Calculate profit before tax:** Profit from operations + investment income = 1,320,000 + 160,000 = 1,480,000 13. **Calculate taxation:** Sum Nairobi and Mombasa tax = 400,000 + 480,000 = 880,000 14. **Calculate profit for the year:** Profit before tax - tax = 1,480,000 - 880,000 = 600,000 15. **Calculate non-controlling interest (NCI):** NCI % = 20% NCI share of Mombasa profit = 20% of 400,000 = 80,000 Adjust for unrealized profit in inventory (20% of 30,000) = 6,000 NCI share of goodwill impairment = 20% of 40,000 = 8,000 NCI profit = 80,000 - 6,000 - 8,000 = 66,000 16. **Calculate profit attributable to owners of Nairobi:** Consolidated profit - NCI profit = 600,000 - 66,000 = 534,000 **Final consolidated income statement summary:** - Revenue: 5,160,000 - Cost of sales: (3,120,000) - Gross profit: 2,040,000 - Distribution costs: (280,000) - Administrative expenses: (440,000) - Profit from operations: 1,320,000 - Investment income: 160,000 - Profit before tax: 1,480,000 - Taxation: (880,000) - Profit for the year: 600,000 - Attributable to NCI: 66,000 - Attributable to owners: 534,000 This completes the consolidated income statement preparation with all adjustments.