Chapter 12. Holding Company Accounts – Corporate Accounting

12

Holding Company Accounts

LEARNING OBJECTIVES

After studying this chapter you should be able to:

  1. Define holding company and subsidiary company.

  2. Understand the legal requirements relating to presentation of accounts by a holding company.

  3. Understand the requirements of Schedule VI.

  4. Explain Consolidated financial statements.

  5. Prepare Consolidated balance sheet of a holding company and its subsidiaries.

  6. Understand the important factors and their accounting treatment such as: (i) elimination of investment account; (ii) minority interest; (iii) cost of control or goodwill; (iv) revenue profits or post-acquisition profits; (v) revenue losses or post-acquisition losses; (vi) capital profit & losses or pre-acquisition profits and losses; (vii) revaluation of assets and liabilities; (viii) bonus shares issued by subsidiary company; (ix) dividend from subsidiary company; (x) preference shares in subsidiary company; (xi) mutual obligation/mutual indebtedness (xii) debentures in subsidiary company; (xiii) contingent liabilities; (xiv) provision for unrealized profits in stocks and (xv) abnormal losses.

  7. Appreciate the various steps involved in preparation of consolidation balance sheet & consolidated profit & loss account.

  8. Explain certain key terms associated with this chapter.

As we have already discussed the different forms of merger and acquisitions in the earlier chapters (amalgamation, absorption and external reconstruction), we can understand the need for such business combinations. Combinations act as a catalyst to accelerate the growth of business. One more technique being adopted by the corporate bodies is “to acquire controlling interest in a company”. Acquiring control over other companies has become a popular method in the corporate world. The holding company’s method of business combination works on this principle, i.e., acquiring control over other (businesses) companies. In this chapter, its method, salient features and accounting treatment are discussed in detail.

12.1 HOLDING COMPANY

The Companies Act, 1956 does not lay down any definition on holding company. However, Section 4(4) of the Companies Act stipulates: “A company shall be deemed to be the holding company of another, if, but only if, that the other is its subsidiary.”

  • A holding company is a limited company
  • It acquires all or majority of equity shares of another limited company—called the subsidiary company
  • It controls the composition of Board of Directors of another company (subsidiary)
  • The subsidiary company continues to enjoy the status of a separate legal entity
  • Even though the subsidiary company is virtually controlled by the holding company, it does not necessitate liquidating subsidiary companies
12.2 SUBSIDIARY COMPANY

Section 4(1) of the Companies Act defines subsidiary company. Accordingly, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if:

  1. That other controls the composition of its Board of Directors
  2. That other
    1. Where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;
  3. The first-mentioned company is a subsidiary of any company which is that other’s subsidiary

By defining subsidiary, it unfolds the characteristics of a holding company, which can be easily comprehended by the following illustration:

Company Q is a subsidiary of Company P. That means Q is a subsidiary company and P is a holding company. Suppose Company R is a subsidiary of Company P, by virtue of clause (c) above. S is a subsidiary of company R, Company S will be a subsidiary of Company Q and consequently also of company P by virtue of clause (c) above, and so on.

This can be schematically represented as:

Company S attains the status of subsidiary companies of both Company P and Company R.

In other words, a company which is the subsidiary of a company, which in turn is a subsidiary of another company is also considered to be subsidiary of the ultimate holding company.

Control means acquiring required amount of equity share capital to ensure a majority vote. This concept of control may be explained by the following illustration.

Share Capital of P Ltd. has been raised as follows:

 

5,000

Equity Shares of 100 Each

5,00,000

5,000

12% Preference Shares of 100 Each

5,00,000

 

If, only equity shareholders have the right to vote at its general meetings as per the provisions of the Company’s Articles, and if another company acquires 2,501 equity shares, it will have majority of vote power and can control the Board of Directors thereby resulting a relationship of holding company and subsidiary company. Such an occurrence may be continued as:

Suppose, at this juncture, if any company, say T Ltd., acquires 401 shares of S Ltd., then it can exercise control over all companies (P, Q & R Ltd.) and this establishes the relationship of holding company and subsidiary company.

12.2.1 Wholly Owned Subsidiary Company

A company in which all the shares with voting rights (i.e., 100%) are owned by the holding company, it is said to be a wholly owned subsidiary company.

12.2.2 Partly Owned Subsidiary Company

A company in which only the majority of shares (more than 50%) are owned by the holding company, it is said to be a partly owned subsidiary.

Minority shareholders: In partly owned subsidiary companies, shareholders who do not sell their shares to the holding company are termed “minority shareholders”. Shares held by other than holding company, i.e., general public, represent this category.

Minority interest: Minority shareholder’s interest or share in the assets of the subsidiary company is termed “minority interest.”

12.3 LEGAL REQUIREMENTS FOR A HOLDING COMPANY

Section 212 of the Companies Act stipulates that the balance sheet of a holding company has to be accompanied by the below-mentioned documents of relating to each of its subsidiaries:

  1. A copy of the balance sheet of the subsidiary
  2. A copy of the P&L A/c of the subsidiary company
  3. A copy of the report of its Board of Directors
  4. A copy of the report of its auditors
  5. A statement containing the following particulars:
    1. the nature and extent of holding companies interest in the subsidiary at the end of the last financial year
    2. The net aggregate amount of profits or losses in the subsidiary so far as it concerns the members of the holding company and is not dealt within the holding company’s accounts
  6. If the financial year of the holding company and its subsidiary company coincide with each other, subsidiary company’s balance sheet and other documents specified above with respect to the same financial year should be attached to the balance sheet of the holding company
  7. If the financial year of the subsidiary company does not coincide with the financial year of the holding company, a statement showing the following should be attached:
    1. Whether, and to what extent, there has been a change in the holding company’s interest in the subsidiary company since the close of the financial year of the subsidiary company
    2. Details of any material changes which have occurred between the end of the financial year of the subsidiary company and the end of the financial year of the holding company in respect of:
      1. The subsidiary’s fixed assets
      2. Its investments
      3. The moneys lent by it
      4. The moneys borrowed by it for any purpose other than that of meeting its current liabilities
      5. If for any reason, the Board of Directors of the holding company is unable to obtain information on profits (capital or revenue), a report in writing to the effect.

In a nutshell, if the financial years of both the subsidiary and holding companies do not coincide, the preceding year’s balance sheet and other statements of the subsidiary company should be attached. The information attached to the balance sheet of a holding company in respect of its subsidiary companies should not be more than 6 months.

12.4 CONSOLIDATED FINANCIAL STATEMENTS

“Consolidated financial statements” means the preparation and presentation of Profit and Loss account and balance sheet of a holding company and its subsidiaries in a single format. According to the Companies Act, there is no legal provision insisting a holding company to prepare and present “group accounts” or consolidated financial statements. Even though there is no statutory provision for a holding company to prepare Consolidated financial statements, the ICAI has issued AS-21 on “consolidated financial statements”. It is not mandatory. As per AS-21, holding company means a parent company which has one or more subsidiaries. A “group” is a “parent” and all its subsidiaries. The main purpose of the preparation of consolidated statements is to reflect a true and fair view of the position and the profit or loss of the holding company “group”. Further, by preparation of consolidated financial statements, the shareholders are in a position to get firsthand information on the company authentically.

The advantages of consolidation of financial statements are as follows:

  1. Facilitates easy comprehension: Shareholders are in a position to get a clear insight about the financial position of the group (parent and all its subsidiaries) at a glance. Users of the financial statements are better informed through a single source document.
  2. Assists in ascertaining intrinsic value of shares: For various accounting procedures, intrinsic value of shares serve as an essential tool. This can be attained on the basis of consolidated financial statements of companies.
  3. Proper assessment of return on investment: Only consolidated financial statements can provide proper information on the total share of holding company in the revenue profit of its subsidiaries.
  4. Minority interests disclosure: In the consolidated balance sheets, the item shown under the head “Minority Interest” discloses the total amount payable to outside shareholders. This is liability payable to outsiders, i.e., general public. This factor is the main factor to be considered in the process of acquisition of company.
  5. Helps in the “evaluation” of holding company: As consolidated financial statements reflect a true and fair view of the position of the holding company (parent) as a group, the investors may be able to evaluate the performance of the company. Thereby, it enhances the overall performance of the group.

The following are its limitations:

  1. Varied information: All the subsidiary companies may not carry the same type of business. As their activities differ from each other, information combined together in a single format may result in confusion and alternatives.
  2. Irrelevant or concealment of facts: The data got from subsidiary companies may not be relevant in the combined form. Further, to arrive at common figures, some of the facts may be suppressed. In such a situation, a consolidated financial statement may not reflect a true and fair view of the position of the companies.

12.4.1 Contents and Format of Consolidated Balance Sheet

The Company’s Act does not specify any standard prescribed format for Consolidated Balance Sheet.

However, Schedule VI of the Company’s Act stipulates that a holding company will have to disclose the following items under the respective headings as shown below:

A: On the assets side of the balance sheet:

  1. Under the head “Investments”: Investments in equity shares, preference shares, debentures or bonds of subsidiary companies in detail.
  2. Under the head “Loans and Advances”: Loans and advances given to subsidiaries.

B: On the liabilities side of the balance sheet:

  1. Under the head “Secured Loans”: Loans and advances from subsidiaries against secured properties.
  2. Under the head “Unsecured Loans”: Other loans and advances from subsidiaries.
  3. Under the heads “Current Liabilities” & “Provisions”: Any amount due from subsidiaries.
    The most accepted format in vogue is given in the following:

Note: Any form of consolidated balance sheet should be in conformity with Schedule VI to the Companies Act, 1956.

12.4.1.1 Format

Consolidated Balance Sheet
of
Holding Company and Its Subsidiaries
as on….
NOTE: At times, “minority interest” may also be shown under the head “Share Capital”.

12.4.2 Preparation of Consolidated Balance Sheet

Various factors have to be taken into account for the preparation of consolidated balance sheet of a holding company and its subsidiaries. They are explained item wise as follows:

12.4.2.1 Investment Account—Elimination or Cancellation

In consolidated balance sheet, the financial position of the parent company (holding) and all its subsidiaries is shown. The figures are shown as a single company. In general, a holding company shows the shares acquired in a subsidiary company—on the assets side of balance sheet—as an investment.

The assets shown in the balance sheet denote the resources owned by the group (holding company + all its subsidiaries). The liabilities shown are claims on the assets (resources) of the group. These internal items—that are assets to one and liabilities of another—will not appear in consolidated balance sheet. This type of process is termed as elimination or cancellation of respective items.

In other words, the investment of a holding company in the shares of the subsidiary company is replaced by the assets and liabilities of the subsidiary company by way of cancelling the said item.

The principle of cancellation is based on the following assumptions:

  1. It should be a wholly owned subsidiary company
  2. The holding company and the subsidiary company do not indulge in trade with each other
  3. The shares are purchased at par

Illustration 12.1

Model: Cancellation of investment—Wholly owned subsidiary company

From the following balance sheet of H Ltd. (holding) and S Ltd. (subsidiary), prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd.:

Solution

Notes

  1. The balance sheet reveals that H Ltd. owns the whole of issued share capital of S Ltd. (wholly owned subsidiary).
  2. The balance sheet of H Ltd. reveals the investment in shares of S Ltd. The amount is equal to the nominal value of issued share capital of S. Ltd.
  3. These two amounts represent the same transaction but different in nature. (The issued capital of S Ltd. and investment held by H Ltd.).
  4. These two are the internal items of H Ltd. and S Ltd.
  5. Hence, these should be eliminated in the preparation of consolidated balance sheet shown in the following:
Consolidated Balance Sheet of
H Ltd. & S Ltd. as on …

Note: The investment account on the assets side of H Ltd. is replaced by the total assets of S Ltd. on the assets side of consolidated balance sheet and its liabilities are shown on the liabilities side.

12.4.2.2 Minority Interest

It will be sufficient to attain the status of holding company if that company acquires majority equity shares in a subsidiary. Here, majority means a simple majority in terms of democracy. The remaining shares naturally are in the hands of general public, i.e., outside shareholders. In such a partly owned subsidiary company, the share capital is being jointly held by the holding company and outsiders. The collective interest of such outside shareholders is termed “minority interest”.

The minority interest is to be computed and shown as a separate item on the liabilities side of the consolidated balance sheet. Minority interest is the amount payable to the outsiders with respect to share capital and accumulated profits to the extent of their share.

Minority interest may be computed as follows:

 

Add:

   

(i) Proportionate Value of Equity Shares Held:

(ii) Proportionate Value of Pref. Shares Held:

(iii) Proportionate Share in Capital Profits:

(iv) Proportionate Share in Revenue Profits:

(v) Proportionate Share of Bonus Shares:

(vi) Proportionate Share in P&L A/c (Cr.):

    Step A: Add (i) to (vi):

______
xxx
______

(vii) Less: Proportionate Share in P&L A/c (Dr.):

(viii) Proportionate Share in Capital Loss:

(ix) Proportionate Share in Revenue Loss:

      Step B: Add (vii) to (ix):

______
xxx
______

      Step C: Minority Interest (Step A – Step B):

______
xxx
______

Illustration 12.2

Model: Minority interest

From the following, prepare consolidated balance sheet of H Ltd. and its subsidiary S Ltd.

Notes:

  1. This partly owned subsidiary company H Ltd. owns to the extent:
    Issued capital of S Ltd.:               3,00,000
    Owned as investment in shares of S Ltd. : 2,40,000
  2. Outside shareholders share = (100 – 80)% = 20%
    ∴ Value of minority interest = 20% of 3,00,000
                                             = 60,000
    This amount may be shown in either of the following two ways:
    (i) As a separate item under the head “Minority Interest”
    (ii) Along with share capital of holding company
  3. As in this problem, no items relating to capital reserve profit and loss; revenue reserve profit and loss or P&L A/c balance is given—Minority interest is computed straight away in Notes 1 and 2.

Solution

Consolidated Balance Sheet of
H Ltd. & S Ltd.
as on…

12.4.2.3 Cost of Control (or) Goodwill

In general, the shares of a subsidiary company are purchased either as a premium or at a discount by the holding company. When the share capital of the subsidiary company held by the holding company is cancelled against investment in share (cost), difference will arise.

  1. When the holding company purchases the shares at a price above the nominal value, the excess price paid represents cost of control or goodwill.
    It may be said that “cost of control” is the “excess” paid by the holding company to acquire “controlling interest” in the subsidiary company.
    This may be presented in the form of equation as:
        Cost of control or goodwill = Investment (At cost) – Face or paid-up value of shares purchased
  2. When the holding company purchases shares at a price below the face value, the difference represents “capital reserve”. This may be presented in the form of equation as:
        Capital reserve = Face or paid-up value of shares purchased – Investment at cost

Method of ascertaining cost of control (or) reserve:

Notes:

  1. In Step 4, if the balance is positive it is goodwill. On the other hand, if the balance is negative it is capital reserve
  2. This amount will be merged with goodwill in the reserve balance sheets of Holding and Subsidiary companies.

Illustration 12.3

Model: Cost of control

From the following balance sheets of H Ltd. and its subsidiary S Ltd. as on 31 December 2010, prepare a consolidated balance sheet.

H Ltd. purchases shares in S Ltd. on the balance sheet date.

Solution

Computation of Cost of Control (Goodwill):

 

 

Step 1:

Cost Price of Shares in S Ltd. (Investment): Given:

3,00,000

Step 2:

Less: Face Value of Shares:

2,00,000

 

 

1,00,000

Step 3:

Less: Share in Reserves:

10,000

 

 

90,000

Step 4:

Less: Share in Profit (P&L A/c):

30,000

 

Cost of Control or Goodwill:

60,000

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 December 2010

Illustration 12.4

Model: Capital reserve

From the following balance sheets of H Ltd. and its subsidiary S Ltd. as on 31 December 2010, prepare a consolidated balance sheet.

Solution

Computation of Capital Reserve:

 

 

Step 1:

Cost Price of Shares (on 31 December 2010) :

4,10,000

Step 2:

Less: Paid-up Value of Shares (Face Value) :

4,00,000

 

Difference :

10,000

Step 3:

Less: (Proportionate) Share in Reserve 100% :

(20,000)

 

 

(10,000)

Step 4:

Less: 100% Share in Profit (P&L A/c) :

(15,000)

Step 5:

Less: Capital Reserve

(25,000)

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 December 2010

12.4.2.4 Pre-acquisition Profits–Reserves

The subsidiary company, on the date of acquisition of shares by the holding company, is having balances in the profit and loss and reserves accounts. The holding company not only purchases shares but also is entitled to purchase a certain proportion of profit and reserves. Such accumulated profits of the subsidiary company existing on the date of acquisition are known as “pre-acquisition profits” or “capital profits”. They include capital reserve, general reserve, share premium, P&L A/c reserve fund.

For calculating the share of the holding company, reserves and profits are split into the following:

  1. Pre-acquisition profit/reserve
    1. Pre-acquisition profits:
      Treatment: They are treated as capital profits. They are to be included in capital reserves and adjusted against goodwill.
    2. Pre-acquisition reserves:
      Treatment: Same as pre-acquisition profit.
  2. Post-acquisition profit/reserve
    1. Post-acquisition profits:
      Treatment: They are treated as revenue profits. They are to be added to the surplus or profits of the company.
    2. Post-acquisition reserves: They are to be added to general reserves.

Important notes:

  1. Capital reserves of the holding company must be adjusted with goodwill as both cannot be shown at a time in the balance sheet.
  2. When computing the share of minority interest, a distinction should not be made between pre-acquisition and post-acquisition profits/reserves.
  3. A distinction between the pre- and post-acquisition profit/reserves has to be made for accumulated profits/reserves of the subsidiary company for determining the share of the holding company.

Illustration 12.5

Model: Pre-acquisition profit/reserves

From the following information, prepare a consolidated balance sheet.

 

Balance Sheets
as on 31 December 2010

H Ltd. acquired its shares in S Ltd. on 1 January 2010 when reserves of S Ltd. stood at 4,000 and its profit and loss account (Cr.) was 5,000.

Solution

BASIC CALCULATIONS:

I: Calculation of H Ltd.’s Share in Capital Profit and Reserve:

 

Step 1:   Ratio of Equity Acquired and Held by Minority Interests:

Total Number of Shares =

=

10,000 Shares

Number of Shares Acquired by H Ltd.

=

6,000 Shares

Number of Shares Held by Minority Interest by H Ltd.

=

4,000 Shares

∴ Ratio of Shares Acquired and Held by Minority Interest

 

 

    6,000 : 4,000

 

 

or      6 : 4

 

 

or      3 : 2

 

 

 

 

Step 2:

Shares in Pre-acquisition Profit: 3/5 × 5,000 =

3,000

 

Share in Pre-acquisition Reserve: 3/5 × 4,000 =

2,400

Step 3:

Total Amount to Be Transferred to Capital Reserve or to

5,400

 

be Adjusted Against Goodwill

 

 

II: Calculation of Goodwill:

Step 1:

Investment in Shares of S Ltd.:

80,000

Step 2:

Less: Face Value of Shares Held (6,000 × 10):

60,000

 

 

20,000

Step 3:

Less: Company’s Share of Pre-acquisition Profit & Reserve

5,400

 

(Ref: Basic calculation I Step 3) i.e. Capital Reserve:

 

 

 

14,600

III: Calculation of H Ltd.’s Share in Revenue Profit & Reserves:

 

(i)

Balance in Reserve Account (Given):

20,000

 

Less: Pre-acquisition Reserve (Given):

4,000

 

∴ Post-acquisition Reserve:

16,000

 

of this, H Ltd.’s Share

9,600

(ii)

Balance in P& L A/c (Given):

10,000

 

Less: pre-acquisition Profit (Given):

5,000

 

∴ Post-acquisition Profit:

5,000

 

Of this, H Ltd.’s Share

3,000

 

IV: Computation of Minority Interest:

 

(i)

Nominal Value of Equity Shares Held:

 

 

4,000 Shares (10,000 − H Ltd.’s Acquisition 6,000) × 10

40,000

(ii)

Share: i.e. Minority Shareholder’s Share

 

 

Their Share in Reserve:

8,000

(iii)

Share in Profit

4,000

 

 

52,000

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 December 2010

Illustration 12.6

Model: Pre-acquisition profit and reserves

From the balance sheets given below, prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd.

At the date of acquisition by H Ltd., of 3,000 shares in S Ltd. the latter company had undistributed profits and reserves of 15,000, none of which have been distributed since acquisition.

Solution

Notes:

  1. The total of general reserves and P&L A/C (Surplus in this problem = 18,000 + 27,000
                                                                                                        = 45,000) of S Ltd.
  2. Ratio between total reserves and total profits = 18,000 : 27,000
                                                                         = 18 : 27
    In the ratio of 2 : 3
  3. No need to split accumulated profits and reserves into pre- and post-acquisition periods for determining share of minority interest in them.

    Following is the statement showing share of majority and minority interests in S Ltd.
Consolidated Balance Sheet of H Ltd.
and Its Subsidiary S Ltd. as on…

12.4.2.5 Pre-acquisition Losses

  1. Pre-acquisition losses are like capital losses relating to the share of holding company.
  2. In consolidated balance sheets, it will increase the cost of control or decrease the capital reserve.
  3. Post-acquisition losses are like revenue losses. Share of the holding company will be debited to accumulated balance in the P&L A/c of the holding company. In case sufficient profits do not exist, it will be shown as a separate item on the assets side of the balance sheet.
  4. There is no necessity for distinction between pre- and post-acquisition losses with respect to minority interest.

Illustration 12.7

Model: Pre-acquisition loss

The balance sheet of H Ltd. and its subsidiary S Ltd. as on 31 December 2010 were as follows:

The shares were purchased by H Ltd. and S Ltd. in 30 June 2010. On 1 January 2010, the P&L A/c of S Ltd. showed a loss of 15,000 which was written off from out of the profits earned during the year. Profits are earned uninformally over the year 2010. Prepare a consolidated balance sheet of H Ltd. and S Ltd. as on 31 December 2010 giving all workings.

Solution

BASIC CALCULATIONS:

I: Computation of H Ltd.’s Share in Pre-acquisition Loss:

  1. Total Pre-acquisition Loss (Given): 15,000
  2. H Ltd.’s Share = × 15,000: 10,000

Note: This 10,000 is a capital loss for H Ltd.

∴ It is to be added to the cost of control or it is to be deducted from capital reserve

II: Calculation of H Ltd.’s Share in Post-acquisition Profits:

 

 

 

Step 1:

Balance as per P&L A/c

9,000

Step 2:

Add: Pre-acquisition Losses Written off:

15,000

Step 3:

Total Profit for 2010 (Step 1 + Step 2)

24,000

Step 4:

Profits for 6 months from 1 July to December 2010:

12,000

 

 

Step 5:

H Ltd.’s share:× 12,000

8,000

III: Calculation of H Ltd.’s Share of Capital Profits:

Step 1:

Pre-acquisition Profits from 1 January 2010 to 30 June 2010:

    

 

6 months: =

12,000

Step 2:

H Ltd.’s Share: × 12,000=

8,000

This 8,000 will Be Taken to Goodwill and will be Deducted from It (OR) to be Added with Capital Reserve

IV: Computation of Cost of Control or Goodwill:
  Step 1: Investment in Shares of S Ltd.

   

  

20,000

Step 2: Less: Paid-up Value of the Said Shares

20,000

Step 3: Cost of Control or Goodwill (Step 1 – Step 2)

NILL

Step 4: Add: Pre-acquisition Loss (Ref: I)

10,000

Step 5: Less: Capital Reserve (Ref: II)

8,000

Step 6: Goodwill (Step 4 – Step 5):

2,000

Important note

  1. For determining minority interest, no need to distinguish between pre- and post-acquisition losses.

    Hence, 15,000, the pre-acquisition losses is ignored. Minority interest is determined as follows:

     

     

     

    Step 1:

    Nominal value of shares:

    10,000

    Step 2:

    Less: One-third of pre-acquisition loss of 15,000

    5,000

     

     

    5,000

    Step 3:

    Add: One-third of post-acquisition profit of 24,000

    8,000

     

     

    13,000

     

  2. Accumulated balance in P&L A/c is 9,000 (Given).
    ∴ One-third of 9,000: 3,000 will be added to minority interest.
Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 December 2010

12.4.2.6 Inter-company Transactions (Elimination of Common Transactions or Mutual Obligation or Mutual Indebtedness

The companies in a group, i.e. the holding company and the subsidiary company, may trade each other. They owe money to each other on account of common transactions like buying and selling of goods, lending and borrowing of money, rendering service to each other and the like. This will culminate in common accounts appearing in the balance sheets of holding company as well as its subsidiaries. While preparing consolidated balance sheet, all such mutual obligations should be eliminated.

12.4.2.6.1 Debtors and Creditors

Transactions with respect to sale and purchase of goods on credit take place between the holding company and its subsidiaries. This will result in mutual indebtedness as debtors in the balance sheet of the company which sells goods and as creditors in the balance sheet of the company which purchases those goods on credit.

Treatment:

  1. If the same amount appears in both the companies, they can be eliminated by deducting common amounts both from the debtors and creditors (thus by reducing on both sides of the consolidated balance sheet).
  2. If there is any difference between the two, it may be due to cash-in-transit or goods-in-transit. Such “transit” amount is to be reduced from the side on which higher amount is shown. Further, this item (cash or goods in transit) is to be shown on the assets side of the balance sheet as a separate item.

12.4.2.6.2 Loans Payable and Receivable

Loans are advanced to subsidiaries by the holding company or vice versa. It is shown as an asset in the balance sheet of the company which advances the loan and as a liability in the balance sheet of the company which receives that loan.

If interest on the loans is outstanding, the P&L A/c of the lender company will be credited with the amount of interest due. Loan account of the company that borrowed the loan will be debited.

In consolidated balance sheet, both loan and interest should be eliminated.

12.4.2.6.3 Bills Receivable and Bills Payable

Bills of exchange of the holding and subsidiary companies will include bills accepted and drawn by each other. To that extent, such bills which are included in the bills receivable should be eliminated while preparing the consolidated balance sheet. However, any bills endorsed or discounted causing a liability to a third party has to be shown as a separate item on the assets side of the balance sheet.

12.4.2.6.4 Services Rendered

Companies owing for services rendered, if entry is already passed by both the companies, should be subtracted from respective items in the balance sheet.

In case no entry is entered till now, such amount should be reduced from revenue profit of the subsidiary company and added to the P&L A/c of the holding company.

Illustration 12.8

Model: Common transactions (Bills and debtorsand creditors)

H Ltd. acquired 4,000 equity shares of S Ltd. on 31 March 2010. The following are the balance sheets of the two companies as at 31 March 2011:

  1. Bills receivable of H Ltd include 5000 accepted by S Ltd.
  2. Sundry debtors of H Ltd include 25,000 due from S Ltd.

Prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd.

[C.S. (Inter). Modified]

Solution

BASIC CALCULATIONS:

 

I.

Calculation of Share of H Ltd. in Capital Profit:

   

 

(i) General Reserve (31 March 2010)

1,00,000

 

(ii) P&L A/c (31 March 2010)

30,000

 

(iii) Total Capital Profit ((i) + (ii))

1,30,000

 

(iv) Share of H Ltd. × 1,30,000

1,04,000

II.

Calculation of Cost of Control—Capital Reserve:

 

(i) Cost of Investment in Shares of S Ltd.

5,00,000

 

(ii) Less: Paid-up Value of Equity Shares

4,00,000

 

 

1,00,000

 

(iii) Less: Capital Profit (Ref: I (iv))

1,04,000

 

(iv) Capital Reserve

(4,000)

III.

Calculation of Share of H Ltd in Revenue Profits:

 

(i) Profit for the Year 2010–11

40,000

 

(ii) Share of H Ltd.: × 40,000

32,000

IV.

Computation of Minority Interest:

 

(i) Paid-up Value of Equity Shares Held Minority Share = × 5,00,000

1,00,000

 

(ii) Share of General Reserve: × 1,00,000

20,000

 

(iii) Share of Profit (31 March 2010– 30,000 + 2010–11— 40,000)

 

 

× 70,000

14,000

 

(iv)Value of Minority Interest (Add (i) + (ii) + (iii))

1,34,000

Consolidated Balance Sheet
of H Ltd. and
Its Subsidiary S Ltd. as on 31 March 2011

12.4.2.7 Contingent Liabilities

Transactions that may become liabilities in future are contingent liabilities. It may or may not occur. It is not certain.

Example: (i) Bills endorsed to creditors and discounted with Bank (ii) Investment in partly paid shares (iii) Arrears of dividend or cumulative preference shares (iv) Liability under guarantee, etc.

Treatment:

  1. Contingent liability involving a third party is to be shown as a “foot note” to the consolidated balance sheet (External contingent liability).
  2. Contingent liability involving the holding company and its subsidiaries is not to be shown as a footnote to consolidated balance sheet. (It will be shown as liability in the consolidated balance sheet) [Internal contingent liability].

12.4.2.8 Unrealized Profit in Stock

The holding company or the subsidiary, at times, has in its stock goods purchased from the other company that were sold at profit. Hence, the stock includes the unrealized profit charged by the selling company.

Such unrealized profit has to be eliminated from closing stock.

Treatment: First, the unrealized profit value would be deducted from the profit of the subsidiary company. Then it would be deducted from the closing stock. While preparing consolidated balance sheet, the unrealized profit should be reduced from the stock (on the assets side of B/S) and from the P&L A/c (on the liabilities side of B/S)

Unrealized profit may also be deducted from the revenue profit of subsidiary company while determining the share of holding company in the revenue profits of subsidiary company.

Illustration 12.9

Model: Contingent liabilities and unrealized profit in stock

The balance sheet of H Ltd. and S Ltd. on 31 March 2010 was as follows:

H Ltd. acquires shares in S Ltd. on 1 January 2010. S Ltd. issued all bills payable to H Ltd. Bills receivable of H Ltd. include bills of S Ltd. for 48,000. Sundry debtors of S Ltd. include 40,000 owing by H Ltd. Stock of H Ltd. includes goods worth 60,000 purchased from S Ltd. for which the latter company has charged profit at 25% on cost. Contingent liability for bills discounted by H Ltd. is 1,00,000. Prepare a consolidated balance sheet.

Solution

BASIC CALCULATIONS:

II: Calculation of H Ltd.’s Share in Capital Profi ts:

III. Calculation of Cost of Control:

IV: Computation of Minority Interest:

V: Calculation of H Ltd.’s Share in Revenue Profi ts:

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 March 2010
Note: Contingent liability is 68,000.

Illustration 12.10

Model: Unrealized profit in stock (Loss of stock by fire)

The following are the balance sheets as on 31 March 2011:

H Ltd. acquired the shares on 1 August 2010. The P&L A/c of S Ltd. showed a debit balance of 3,00,000 on 1 April 2010. During June 2010, goods costing 12,000 were destroyed by fire against which insurer paid only 4,000. Trade creditors of S Ltd. include 40,000 for goods supplied by H Ltd. on which H Ltd. made a profit of 4,000. Half of the goods were still in stock on 31 March 2011. Prepare a consolidated balance sheet and show the complete working.

[B.Com (Hons) Delhi Modified]

Solution

CALCULATIONS:

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 March 2011

12.4.2.9 Preference Share Capital in Subsidiary Company

Preference shares (part or full) in a subsidiary company may also be acquired by the holding company, in addition to equity shares.

Treatment:

  1. Preference share capital in subsidiary company has to be shown in the consolidated balance sheet along with minority interest.
  2. While ascertaining the cost of control, amount paid by the holding company is added to the amount paid for equity shares. Face value of preference shares is reduced. Any difference between the face value and the amount paid is adjusted with goodwill/capital reserve.
  3. Any dividend due on the preference shares up to the date of acquisition is also reduced while computing cost of controls, after deducting it from capital profits.
  4. Any dividend due on the preference shares for the post-acquisition period is treated as revenue dividend payable.
  5. Minority share of preference shares is to be included in minority interest along with pre-acquisition dividend payable to the minority.
  6. Premium payable on redeemable preference shares has to be provided for by annual instalments over the period between the date of the balance sheet and the date of redemption.
  7. In case the profits of subsidiary company are not sufficient to provide for arrears of dividends, then it is not permitted to provide for such arrears from the consolidated profits of the holding and subsidiary companies.

Illustration 12.11

Model: Preference share capital in subsidiary company

The following are the balance sheets of A Ltd. and B Ltd. as on 31 March 2011:

Prepare the consolidated balance sheet as at 31 March 2011 assuming that:

  1. B Ltd.’s general reserve and P&L A/c (after appropriation for dividends) stood at 75,000 and 30,000, respectively, on 31 March 2010
  2. A Ltd. sells goods at a profit of 25% on cost

[B. Com Delhi Modified]

Solution

CALCULATIONS:

Consolidated Balance Sheet of
A Ltd. and Its Subsidiary B Ltd.
as on 31 March 2011

12.4.2.10 Debentures in Subsidiary Company

  1. Debentures of the holding company are to be treated in the same manner as that of share capital, i.e., they are to be shown in the consolidated balance sheet as a separate item
  2. Debentures of the subsidiary company also will be treated in the same manner, as (i).
  3. In case a part of the debentures of a subsidiary company is held as investments by the holding company, the amount of debentures would be reduced to the extent of investments.
  4. The remaining part of debentures held by outsiders is to be shown on the liability side of the consolidated balance sheet as a separate item.

Illustration 12.12

Model: Debentures in subsidiary company

The following are the balance sheets of C Ltd. and its subsidiary D Ltd. as at 31 March 2011:

Prepare the consolidated balance sheet as at 31 March 2011 assuming that D Ltd. earned uniformly in 2010–11 and its P&L A/c showed a debit balance of 60,000 on 1 April 2010. Also show the working.

 

[B.Com (Hons) Delhi Modified]

Solution

CALCULATIONS:

Note: No need to allocate the minority’s share of profits/reserves into post- and pre-acquisition periods.

 

Consolidated Balance Sheet of
C Ltd. and Subsidiary D Ltd.
as on 31 March 2011

12.4.2.11 Revaluation of Assets

When a holding company acquires shares in a subsidiary company, fixed assets of subsidiary company are revalued in order to assess its correct value of shares. Any profit or loss on revaluation of assets has to be shown in the consolidated balance sheet.

  • Any increase in the value of any fixed assets is to be treated as capital profits, whether it is in pre- or post-acquisition period.
  • Such capital profits will be apportioned between capital reserve and minority interests.
  • The proportion of increase of the holding company is to be taken to investment account. This will reduce the cost of control/goodwill.
  • In case, any decrease in the value of fixed assets is to be treated as capital loss. This will increase the cost of control/goodwill or reduce the capital reserve. But, it is a revenue loss, if the revaluation occurs in the post-acquisition period.
  • Adjustment for depreciation:
    1. If the value of fixed assets increases (revaluation profit), depreciation charge also will be increased accordingly. This is to be deducted from the revenue profits of the subsidiary company.
    2. If the value of fixed assets decreases, depreciation will also be decreased proportionately. This is to be added to the revenue profits of the subsidiary company.

Illustration 12.13

Model: Revaluation of assets–profits

The following are the balance sheets of P Ltd. and its subsidiary Q Ltd. as at 31 March 2011:

On 1 April, 2010 P&L A/c of Q Ltd. showed a credit balance of 32,000 and equipment of Q Ltd. was revalued by P Ltd. 20% above its book value of 4,00,000 (but no such adjustment effected in the books of Q Ltd). Prepare the consolidated balance sheet as at 31 March 2011.

 

[B.Com (Hons) Delhi Modified]

Solution

CALCULATIONS:

 

I: Calculation of Pre-acquisition Profits:

(i) Balance on 1 April 2010

32,000

(ii) Share of P Ltd. i.e. 90% × 32,000

28,800

(iii) Minority Interest [(i) – (ii)]

3,200

II: Revaluation of Equipment:

 

 

(i) Profit on Revaluation (20% × 4,00,000)

80,000

(ii) Share of P Ltd. (i.e. × 80,000)

72,000

(iii) Minority Share [(i) –. (ii)]

8,000

III: Calculation of Additional Depreciation:

(i) Book Value on 1 April 2010

: 4,00,000

(ii) Less: Book Value on 31 March 2011

3,80,000

(iii) Depreciation [(i) – (ii)]

20,000

(iv) Rate of Depreciation = × 100 =5%

 

(iv) ∴ Additional Depreciation on 80,000

 

5% = × 80,000

4,000

IV: Calculation of Post-acquisition of Profit:

 

(i) Balance on 31 March 2011

80,000

(ii) Less: Balance on 31 March 2010

32,000

 

48,000

 

44,000

(iii) Less: Additional Depreciation (Ref: III)

4,000

(iv) Less: Share of P Ltd. × 44,000

39,600

(v) Minority Interest [(iii) – (iv)]

4,400

V: Calculation of Cost of Control:

 

(i) Cost of Investment in Shares of Q Ltd.

5,60,000

(ii) Less: Paid-up Capital Held

3,60,000

 

2,00,000

(iii) Less: Capital Profit—Pre-acquisition

28,800

 

1,71,200

(iv) Less: Revaluation of Equipment (Capital Profit)

72,000

 

99,200

VI: Computation of Minority Interest:

 

(i) Paid-up Value of Shares Held

40,000

(ii) Add: Share of Pre-acquisition Profit: [Ref: I (iii)] i.e. × 32,000

3,200

 

43,200

(iii) Add: Share of Profit on Revaluation [Ref: II (iii)] i.e., × 80,000

8,000

 

51,200

(iv) Add: Share of Post-acquisition Profit [Ref: IV (v)] i.e., × 44,000

4,400

 

55,600

 

Consolidated Balance Sheet of
P Ltd. and Its Subsidiary Q Ltd.
as on 31 March 2011

12.4.2.12 Bonus Shares Issued by Subsidiary Company

A subsidiary company (after the holding company acquired controlling interest) may issue bonus share out of its profits to all the shareholders. This will increase the number of shares with the holding company. Naturally, the face value of shares held in the subsidiary company will also increase, as the holding company receives such bonus shares.

Treatment: “Source of profit” out of which the bonus issued is the basis of accounting treatment. They are:

  1. Bonus shares issued out of capital profits (or) pre-acquisition profits
  2. Bonus shares issued out of revenue profits (or) post-acquisition profits

1. Bonus issue out of capital profits: This does not have any accounting effect. The reason is that while determining the cost of control/goodwill, the share of the holding company in the pre-acquisition profit is reduced and the paid-up value of shares held is increased. At this juncture, the issue of bonus shares will in no way affect the cost of control. Minority share of the bonus is added to the minority interest.

2. Bonus issue out of revenue profits: This has its effect on the consolidated balance sheet. The amount of bonus is reduced from revenue profits before apportioning the revenue profits in the holding minority ratio.

While calculating “cost of control”, the holding company’s share of bonus is deducted. This will result in decrease in goodwill to the extent of the holding company’s share of bonus. Minority share of the bonus is added to the minority interest.

Net result is that the bonus issue is in the nature of capital profits whether they are issued out of capital profits or out of revenue profits.

Illustration 12.14

Model: Bonus issue out of capital profit (Pre-acquisition profits

R Ltd. acquired 3,200 ordinary shares of 100 each in S Ltd. on 31 December 2010. Their summarized balance sheets as on that date were as follows:

You are supplied the following information:

  1. S Ltd. has made a bonus issue on 31 December 2010 of one ordinary share for every two shares held by its shareholders. Effect has yet to be given in the accounts for the issue.
  2. The directors are advised that land & buildings of S Ltd. are undervalued by 40,000 and plant & machinery of S Ltd. are overvalued by 20,000. These assets have to be adjusted accordingly.
  3. Sundry creditors of X Ltd. include 24,000 due to S Ltd.

You are required to prepare the consolidated balance sheet as on 31 December 2010.

[B.Com Bangalore University Modified]

Solution

CALCULATIONS:

 

I: Calculation of Holding Minority Ratio:

Step 1:

Total Shares in S Ltd. 4,000

 

Step 2:

Shares Acquired by R Ltd.

3,200

Step 3:

Minority Shares (Step 1 – 2)

800

Step 4:

Ratio = 3,200:800 (or) 4:1

 

 

II: Calculation of Share of Bonus Issue:

Step 1:

Bonus Issue 1 Share for Every 2 Shares Held

 

(Not Yet Recorded) 4,00,000 × :

2,00,000

Step 2:

Holding Company R Ltd.’s Share:

 

2,00,000 ×

1,60,000

Step 3:

Minority’s Share

       

 

(Step 1 – Step 2) or 1,00,000 ×

40,000

III: Calculation of Capital Profits:

Step 1:

Capital Reserve of S Ltd.

2,40,000

Step 2:

Less: Bonus Issue Made

2,00,000

 

 

40,000

Step 3:

Add: Profit & Loss A/c

72,000

 

 

1,12,000

Step 4:

Add: Undervaluation of Asset (Land & Buildings)

40,000

 

 

1,52,000

Step 5:

Less: Overvaluation of Asset (Plant & Machinery)

20,000

Step 6:

Capital Profits

1,32,000

Step 7:

Share of R Ltd.: 1,32,000 × =

1,05,600

Step 8:

Minority’s Share 1,32,000 ×

26,400

IV: Computation of Minority Interest:

Step 1:

Face Value of Shares Held by Minority Shareholders

80,000

 

(800 shares × 100)

 

Step 2:

Add: Minority’s Share of Bonus Shares (Ref: III Step 3)

40,000

 

 

1,20,000

Step 3:

Add: Minority’s Share of Capital Profit (Ref: III Step 8)

26,400

Step 4:

Minority Interest

1,46,400

V: Calculation of Cost of Control/Goodwill:

Step 1:

Amount Paid by R Ltd. for Shares in S Ltd.

6,80,000

Step 2:

Face Value of Shares Purchased: 3,200 shares × 100

3,20,000

 

 

3,60,000

Step 3:

R Ltd.’s Share of Capital Profits (Ref: III Step 7)

1,05,600

 

 

2,54,400

Step 4:

R Ltd.’s Share of Bonus Issue (Ref: II Step 2)

1,60,000

Step 5:

Cost of Control/Goodwill

94,400

Consolidated Balance Sheets
of R Ltd. and Its Subsidiary S Ltd.
as on 31 December 2010

Illustration 12.15

Model: Bonus shares issued out of revenue profits

The summarized balance sheet of H Ltd. and S Ltd. as on 31 December 2010 are as follows:

S Ltd. had reserves of 90,000 when H Ltd. acquired the shares in S Ltd. but the P&L A/c balance of S Ltd. was fully earned after the purchase of shares.

S Ltd. decided to issue bonus shares out of the post-acquisition profit in the ratio of 2 shares for every 5 shares held.

Calculate the cost of control before the issue of bonus shares and after the issue of bonus shares.

Solution

 

I: Calculation of Cost of Control Before the Issue of Bonus Shares:

Step 1:

Amount Paid by H Ltd. in Purchase of Shares in S Ltd.

4,20,000

Step 2:

Less: Face Value of Shares Acquired 24,000 × 10

2,40,000

 

 

1,80,000

Step 3:

Less: H Ltd.’s Share of Capital Profits 2,40,000 × (or )

72,000

Step 4:

Cost of Control/Goodwill

________
1,08,000
________

II: Calculation of Cost of Control After the Issue of Bonus Shares:

Step 1:

Amount Paid by H Ltd. for Purchase of Shares in S Ltd.

4,20,000

Step 2:

Less: Face Value of Shares Required (24,000 × 10)

2,40,000

 

 

1,80,000

Step 3:

Less: H Ltd.’s Share of Capital Profits

 

 

90,000 ×

72,000

 

 

1,08,000

Step 4:

Less: H Ltd.’s Share of Bonus

96,000

 

(3,00,000 × × )

   

Step 5:

Cost of Control/Goodwill

________
12,000
________

Illustration 12.16

Model: Bonus issue out of revenue profits (Post-acquisition profits)

C Ltd. acquired 10,000 equity shares of 10 each in D Ltd. on 31 March 2010.

The summarized balance sheets of the two companies as on 31 March 2011 were as follows:

Particulars C Ltd.
D Ltd.

Liabilities:

 

 

Equity Share Capital (Shares of 10 Each)

4,00,000

1,25,000

Reserves

1,50,000

25,000

Profit and Loss Account

50,000

50,000

Creditors

1,00,000

25,000

 

7,00,000

2,25,000

Assets:

 

 

Fixed Assets

3,50,000

1,25,000

Current Assets

2,00,000

1,00,000

10,000 Shares in D Ltd. at Cost

1,50,000

 

7,00,000

2,25,000

D Ltd. had a credit balance of 25,000 in the reserves and 10,000 in the P&L A/c when C Ltd. acquired shares in D Ltd. D Ltd. issued bonus shares in the ratio of 1 share for every 5 shares held out of the profits earned during 2010–11. This is not shown in the above balance sheet of D Ltd. Prepare a consolidated balance sheet of C Ltd. and its subsidiary on 31 March 2011 giving all the necessary workings.

 

[B.Com (Hons) Delhi Modified]

Solution

CALCULATIONS:

Consolidated Balance Sheet
of C Ltd. and Its Subsidiary D Ltd.
as on 31 March 2011

12.4.2.13 Dividend

A subsidiary company can declare dividend on its shares. The holding company will receive such dividends on the paid-up value of the shares held by it. The source from which the dividends to be paid may be any one of the following categories:

Category I: Payment of dividends entirely from the pre-acquisition profits:

Treatment: It is treated as capital gains.

  • On receipt of dividend, the following entry has to be passed:

    Bank A/c             Dr.

          To investment in shares of subsidiary company A/c           …

  • This type of dividends will not be utilized for distributing dividends to the shareholders of the holding company.

Important notes:

  1. If the dividend is paid wholly out of pre-acquisition profits, it has to be appropriated from previous years’ profits.
  2. Holding company’s share has to be adjusted towards cost of control or capital reserve.
  3. Holding company’s share has to be deducted from the consolidated P&L A/c.
  4. If by mistake this type of dividend is credited to P&L A/c of the holding company, it has to be rectified by debiting P&L A/c and crediting investment A/c.

Category II: Payment of dividends entirely from post-acquisition profits:

  • It is treated as revenue income.
  • Entry:

       Bank A/c      Dr. …

         To P&L A/c of the holding company.        …

  • This type of dividend can be utilized to distribute dividends to the shareholders of the holding company.

Category III: Payment of dividends partly out of pre-acquisition profits and partly out of Post-acquisition profits.

The main point to be observed is that the dividend up to the date of acquisition (pre-acquisition) is to be treated as capital profit (capital receipt) and after the date of acquisition (post-acquisition) is to be treated as revenue profit (revenue receipt).

Accounting Treatment:

 

This means that the proportion of dividend out of pre-acquisition profit has to be credited to investment account and the proportion of dividend out of post-acquisition profit has to be credited to profit and loss account.

12.4.2.14 Goodwill (Goodwill Appearing in the Balance Sheet of Subsidiary Company)

At times, goodwill is shown in the balance sheet of the subsidiary company. That means goodwill already exists.

Accounting Treatment:

Approach I: Add: Goodwill Already Appearing in the Balance Sheet of Subsidiary Company to the Goodwill and/or Cost of Control in the Consolidated Balance Sheet.

Approach II: Add: Only Holding Company’s Share to the Cost of Control/Goodwill, from the Goodwill of the Subsidiary Company.

Illustration 12.17

 

Model: Dividends paid out of pre-acquisition profits and goodwill of subsidiary company.

From the following balance sheets of a holding company and its subsidiary on 31 March 2011, prepare a consolidated balance sheet.

When control was acquired, S Ltd. had 1,20,000 in general reserve and 90,000 in profit and loss account. Immediately on purchase of shares, H Ltd. received 48,000 as dividend from S Ltd., which was credited to profit and loss account. Debtors of H Ltd. include 60,000 due from S Ltd. whereas creditors of S Ltd. include 45,000 due to H Ltd.; the difference being accounted for by a cheque-in-transfer.

 

[B.Com (Hons) Modified]

Solution

Step 7: Construction of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as on 31 March 2011

12.4.2.15 Proposed Dividend

The amount of proposed dividend, if any, will appear in the balance sheet of subsidiary company. In such a case, the accounting treatment will be:

  1. Such amount should be added to current year’s profits of the subsidiary company.
  2. Then, cost of control and minority interest should be determined.
  3. Its share in the proposed dividend should be deducted from minority interest.
  4. Finally, it should be shown as a separate item on the liability side of the consolidated balance sheet under the head “Provisions”.

Illustration 12.18

Model: Proposed dividend—Already appearing in the balance sheet

R.R. Ltd. acquired 90% of the equity shares in S.S. Ltd. on 30 June 2010 at a cost of 3,00,000. No balance sheet was prepared at the date of acquisition. The balance sheet of S.S. Ltd. as at 31 December 2009 and 2010 were as follows:

R.R. Ltd.’s Balance Sheet on 31 December 2010 was as follows:

R.R. Ltd. has not passed entries for the dividend proposed by S.S. Ltd.

Prepare consolidated balance sheet of R.R. Ltd. and its subsidiary S.S. Ltd. as on 31 December 2010.

[Madras University Modified]

Solution

CALCULATIONS:

Here, it is assumed that the proposed dividend is out of revenue profi t, i.e., post-acquisition profi ts.

Step 6:    Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
R.R. Ltd and Its Subsidiary S.S. Ltd.
as on 31 December 2010

12.4.2.16 Interim Dividend Paid by Subsidiary Company

Sometimes, interim dividend may be paid by the subsidiary company.

Accounting Treatment:

  1. Interim dividend paid should be added to the balance of current year profit of subsidiary company.
  2. Then, share of holding company should be deducted from the consolidated profit.
  3. Minority’s share of interim dividend should be deducted from minority’s interest.

Note: It should be noted that interim dividend should not be shown in the consolidated balance sheet.

Illustration 12.19

Model: Interim dividend by subsidiary company

The following are the summarized balance sheets of H Ltd. and S Ltd. at 30 June 2010:

H Ltd. acquired 36,000 shares of S Ltd on 1 July 2009 at a total cost of 5,40,000. On scrutiny the balance sheet of H Ltd. as at 30 June 2010, the following details are obtained:

  1. Profit & loss A/c includes interim dividend at the rate of 10% p.a. free of tax from S Ltd.
  2. Stock includes 18,000 of stock at cost purchased from S Ltd.
  3. Sundry creditors include 54,000 for purchases from S Ltd. on which the latter company made a profit of 13,500.

It is further stated that on 1 July 2009, the P&L A/c of S Ltd. stood at 2,28,000 and the general reserve at 13,500. No final dividends are yet proposed to be declared by S Ltd.

[Calcutta University Modified]

Solution

Calculations:

Consolidated Balance Sheet
of H Ltd. and Its Subsidiary S Ltd.
as at 30 June 2010

12.4.2.17 Unclaimed Dividends

In case, if unclaimed dividends appear in the balance sheet of the subsidiary company, it should be added to minority interest in the consolidated balance sheet.

12.4.2.18 Miscellaneous Expenditures

Preliminary expenses, discount on issue of shares and debentures, underwriting commission are some of the items that are shown under the head “Miscellaneous Expenditures”. These items should never be shown in the consolidated balance sheet.

Accounting Treatment:

Approach I:

  1. Holding company’s share in these items should be added to the cost of control or deducted from the capital reserve.
  2. Share of minority interest in such items should be deducted from the minority interest itself.

Approach II:

These should be deducted from the pre-acquisition profits (capital profit). Then it is apportioned between holding company and minority interest in the holding minority ratio.

Illustration 12.20

Model: Miscellaneous expenditure and unclaimed dividend

The following are the balance sheets of H Ltd. and its subsidiary S Ltd. as on 31 December 2010:

H Ltd. acquired the shares of S Ltd on 31 March 2010. On 1 January 2010, S Ltd.’s general reserve stood at 30,000 and P&L A/c at 10,000. No part of the preliminary expenses was written off during the year 2010. Prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as at 31 December 2010.

Solution

CALCULATIONS:

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as at 31 December 2010

12.4.2.19 Consolidated Profit & Loss Account

Consolidated profit & loss account is prepared to depict the aggregate profit of the group as a whole and also profit or loss of each individual company in the group.

Preparation of Consolidated Profit and Loss Account:

Step 1:

P&L A/c Is to Be Presented in Columnar Form. So, on Both Sides of the Account (Dr. & Cr.),
  1. One Column Is Opened for Each Company
  2. One Column for Adjustment
  3. The Third Column for Total Amount

Step 2:

All the Items (Revenues & Expenses) are Shown as Is Done in the Preparation of Ordinary P&L A/c

Step 3:

Inter-company Transactions Have to Be Eliminated in the Total Column. Details Have to be Entered in the Column for Adjustments
  1. Purchases & Sales Within the Group Should be Eliminated on Both Sides of the Account
  2. Similarly, Interest on Debentures and Dividends Received Should Be Eliminated on Both Sides of the Account

Step 4:

After Entering All the Required Items, the Accounts are Balanced to Arrive at Profit/Loss of Each Individual Company and Group.

Step 5:

Holding Company’s Share of Pre-acquisition Profits is to be Determined. Then, This Amount Is to Be Debited to the Subsidiary and Also to Be Credited to Cost of Control or Capital Reserve.

Step 6:

In the Same Manner, Minority Interest is to be Determined in the Subsidiary Company’s Profits. Then It Is to Be Debited to the Subsidiary Company and Also to be Shown in the Total Column.

Step 7:

Provision for Unrealized Profit in Stock, if Any, Is to Be Ascertained and to Be Debited to the Holding or Subsidiary Company as the Case May Be. Then it Is to Be Debited to Stock Reserve Account.

Step 8:

All Such Items as Debited Above (Steps 5, 6 and 7) Should Be Shown in the Columns of Respective Companies and in the Total Column. Care Should Be Taken Not to Record Such Items in the Adjustment Column.

Step 9:

Only the Balance in the Total Column is to be Carried to Consolidated Balance Sheet, to Be Shown as P&L A/c.

Illustration 12.21

Model: Consolidated profit & loss A/c

H Ltd. acquired 80% of the shares in S Ltd. on 1 January 2010.

The following is the summarized P&L A/c of the companies after ascertaining net profit:

Profit & Loss Account of
H Ltd. & S Ltd.
for the Year Ended 31 December 2010.

You are required to prepare a consolidated P&L A/c for the two companies.

Solution

Consolidated Profit & Loss Account
of H Ltd. and Its Subsidiary S Ltd.
for the Year Ended 31 December 2010
Advanced Level (C.A.; C.S.; I.C.W.A.; M.Com; etc.)

Illustration 12.22

Model: Revaluation of assets

The summarized balance sheets of H Ltd. and its subsidiary S Ltd. as at 31 December 2010 are as follows:

You are required to prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as at 31 December 2010 together with working notes, after giving effect to the following relevant information:

  1. Plant of S Ltd. was to be revalued on 1 January 2010 at 1,620 lakh, fixtures at 150 lakh and trade investments were deemed to be valued less. There were no transactions of purchase or sales of these assets during the year 2010. The directors wish to give effect to the above revaluation in the consolidated accounts.
  2. Depreciation has been provided for the year 2010 on plant at 10% and on fixtures at 5%.
  3. The stock of S Ltd. included goods purchases of 120 lakh from H Ltd. who have invoiced these goods at cost plus 25%.
  4. A cheque of 15,00,000 from H Ltd. to S Ltd. was in transfer on December 2010.
  5. H Ltd. acquired the equity shares in S Ltd. on 1 January 2010.

[I.C.W.A. (Final). Modified]

Solution

CALCULATIONS:

Step 8: Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as at 31 December 2010

Illustration 12.23

Model: Bonus shares—Overvaluation of assets and contingent liability

X Ltd. acquired 16,000 shares of 10 each in Y Ltd. on 31 March 2011. The summarized balance sheets of the two companies as on that date were as follows:

Particulars X Ltd. Y Ltd.

Share Capital:

 

 

60,000 Shares of 10 Each

6,00,000

-

20,000 Shares of 10 Each

2,00,000

Capital Reserve

1,04,000

General Reserve

50,000

10,000

Profit and Loss Account

76,400

36,000

Loan from Y Ltd.

4,200

Bills Payable (Including 1,000 to X Ltd.)

3,400

Creditors

35,800

10,000

Note on the Balance Sheet of X Ltd:

 

 

There is a Contingent Liability for Bills Discounted of 2,000

7,66,400

3,63,400

Fixed Assets

3,00,000

2,89,400

Investments in Y Ltd. as Cost

3,40,000

Stock in Hand

80,000

40,000

Loan to X Ltd.

4,000

Bills Receivable (Including 400 from Y Ltd.)

2,400

Debtors

40,000

20,000

Bank

4,000

10,000

 

7,66,400,

3,63,400

You are given the following information:

  1. Y Ltd. made a bonus issue on 31 March 2010 of one share for every two shares held, reducing the capital reserve equivalently, but the transaction is not shown in the above balance sheets.
  2. Interest receivable ( 200) in respect of loan due by X Ltd. to Y Ltd. has not been credited in the accounts of Y Ltd.
  3. The directors decided that the fixed assets of Y Ltd. were overvalued and should be written down by 10,000.

Prepare the consolidated balance sheet as at 31 March 2011, showing your workings.

[C.A. (Final). Modified]

Solution

Step 7:

Consolidated Balance Sheet of
X Ltd. and Its Subsidiary
as at 31 March 2011

Illustration 12.24

Model: Investments in different dates.

The balance sheets of a holding company (H Ltd.) and its subsidiary (S Ltd.) at 31 December 2010 are as follows:

Particulars X Ltd. Y Ltd.

Equity Share of 10 Each Fully Paid

12,00,000

6,00,000

Profit & Loss Account at 31 December 2008

6,00,000

3,00,000

Net Profit (Loss) 2009

3,60,000

(1,20,000)

Net Profit 2010

1,20,000

1,80,000

Creditors

3,00,000

1,20,000

 

25,80,000

10,80,000

Investments in S Ltd. as Cost

7,80,000

Other Assets

18,00,000

10,80,000

 

25,80,000

10,80,000

On 31 December 2008, H Ltd. acquired 36,000 shares in S Ltd. for 6,00,000. On 31 December 2009, it acquired a further 12,000 shares for 1,80,000.

No dividends have been paid or proposed by either company in relevant years. Prepare a consolidated balance sheet of the group as at 31 December 2010.

[I.C.W.A. (Final). Modified]

Solution

Step 5: Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as at 31 December 2010

Illustration 12.25

Model: Controlling interest acquired during the course of the year

The following are the balance sheets of H Ltd. and its subsidiary S Ltd. as at 31 March 2011:

H Ltd. acquired the shares of S Ltd. on 30 June 2010. On 1 April 2010, S Ltd.’s general reserve and profit and loss account stood at 1,80,000 and 60,000, respectively.

No part of preliminary expenses was written off during the year ended 31 March 2010.

Prepare the consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as at 31 March 2011.

[C.S. (Inter). Modified]

Solution

CALCULATIONS:

Step 1: Net Profit for the Year is Ascertained by Preparing P&L Appropriation A/c as follows:

 

P&L Appropriation Account
for the Year Ended 31 March 2010

Step 2: Determination of Pre-acquisition Profits:

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as at 31 March 2011

Illustration 12.26

Model: Preference shares

On 1 April 2010, H Ltd. acquired 80% equity shares and 30% preference shares of S Ltd. for 3,90,000 and 61,000, respectively, on which date S Ltd.’s general reserve and profit and loss accounts showed balances of 60,000 and 8,000, respectively. On 31 March 2011, the balance sheets of two companies stood as follows:

You are required to draw the consolidated balance sheet as at 31 March 2011, assuming that on 1 April 2010, there were no arrears of preference dividend.

Solution

Step 1: Determination of Net Profi t for the Year: P&L Appropriation A/c

Step 7: Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as at 31 March 2011

Illustration 12.27

Model: Proposed dividend, received bonus shares, revaluation of assets, unrealized profit in stock and consolidation after some years of investment

One 1 January 2008, A Ltd. acquired 16,000 shares of 10 each of B Ltd. at 1,80,000. The respective balance sheets as on 31 December 2010 are given as follows:

Additional information:

  1. At the time of acquiring shares, B Ltd. had 48,000 in reserve and 30,000 in profit & loss account.
  2. B Ltd. paid 10% dividends in 2008, 12% in 2009, 15% in 2010 for 2007, 2008 & 2009, respectively. All dividends received have been credited to P&L A/c of A Ltd.
  3. Proposed dividends of both the companies for 2010 is 10%.
  4. One bonus share for five fully paid shares held has been declared by B Ltd. Out of pre-acquisition reserves on 31 December 2010, no effect has been given to that in the above accounts.
  5. On 1 January 2008, Building of B Ltd. which stood in the books as 1,00,000 was revalued as 1,20,000. But no adjustment has been made in the books. Depreciation has been charged @ 10% p.a. or reducing balance method.
  6. In 2010, A Ltd. purchased from B Ltd. goods for 20,000 on which B Ltd. made a profit of 20% on sales. 25% of such goods are lying unsold on 31 December 2010.

    You are required to prepare the consolidated balance sheet as 31 December 2010.

[C.A. (Final). Modified]

Solution

Step 7: Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
A Ltd. & and its Subsidiary B Ltd.
as at 31 December 2010.

Illustration 12.28

Model: Sale of investments

The summarized balance sheets of A Ltd. and B Ltd. are as follows:

 

Balance Sheets as at 31 December 2010
Particulars A Ltd. B Ltd.

Sources of Funds:

 

 

Equity Shares of 10 Each

8,00,000

2,00,000

Reserves

80,000

20,000

Profit & Loss A/c as on 1 January 2010

1,20,000

40,000

Profit for the Year

32,000

32,000

Add: Dividends from B Ltd.

16,000

Less: Dividends Paid

(20,000)

Creditors

1,20,000

80,000

 

11,68,000

3,52,000

Application of Funds:

 

 

Fixed Assets

8,00,000

3,20,000

Current Assets

1,28,000

32,000

Shares in B Ltd. at Cost 12,000 Shares

2,40,000

 

11,68,000

3,52,000

A Ltd. had acquired 16,000 shares in B Ltd. at 20 each on 1 January 2010 and sold 4,000 of them at the same price as on 1 October 2010. The sale is cum dividend. An interim dividend of 10% was paid by B Ltd. on 1 July 2010.

Draft the consolidated balance sheet as at 31 December 2010.

 

[C.A. (Final) Modified]

Solution

Step 6: Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
A Ltd. and Its Subsidiary S Ltd.
as at 31 December 2010

Illustration 12.29

Model: More than one subsidiary companies’ cross holdings

The following are the balance sheets of H Ltd., A Ltd. and B Ltd., as on 31 December 2010:

H Ltd. purchased 80% of shares in A Ltd. when the latter’s P&L A/c was 2,40,000 and reserve was 1,20,000. A Ltd. purchased 75% of shares in B Ltd. when the latter’s P&L A/c was 1,20,000 and reserve was 60,000. Prepare consolidated balance sheets of H Ltd. and its subsidiaries A Ltd. and B Ltd. as on 31 December 2010 together units consolidation schedules.

 

[C.A. (Final). Modified]

Solution

A: Analysis of B Ltd.:

B: Analysis of A Ltd.:

Step 12: Preparation of Consolidated Balance Sheet

 

Consolidated Balance Sheet of H Ltd.
and Its Subsidiaries A Ltd.
and B Ltd. as at 31 December 2010

Illustration 12.30

Model: Consolidated P&L A/c

From the following trial balance of H Ltd. and its subsidiary S Ltd., you are required to prepare consolidated P&L A/c and balance sheet as on 31 March 2011.

 

Trial balance of H Ltd. and S Ltd.
as on 31 March 2011

Additional information:

Investments in S Ltd. was acquired on 1 July 2010 and consisted of 80% of the equity capital and 50% of the preference capital the latter being at par.

Depreciation on fixed assets is as 10% p.a.

H Ltd. sold goods worth 1,20,000 at cost plus 25%; 50% of these goods are still in stock on 31 March 2011.

Solution

Consolidated P&L A/c of
H Ltd. and Its Subsidiary S Ltd.
for the Year Ended 31 March 2011

CALCULATIONS:

Step 5: Preparation of Consolidated Balance Sheet:

 

Consolidated Balance Sheet of
H Ltd. and Its Subsidiary S Ltd.
as at 31 March 2011

Summary

Holding company: As per Section 4(4) of the Companies Act, “A company shall be deemed to be the holding company of another, if, but only if, that another is its subsidiary.

Subsidiary company: As per Section (1) of the Companies Act, a company is a subsidiary of another company, if, but only if:

  1. The other company controls the composition of its board of directors
    or
  2. The other company
    1. Holds more than half in nominal value of its equity shares capital
      or
    2. It is a subsidiary of any company which is that of other company’s subsidiary

Consolidated P&L A/c and balance sheet means a single P&L A/c and balance sheet of a holding company and all its subsidiaries (Group).

Steps involved in the preparation of consolidated balance sheet and profit & Loss A/c (Ref: Main text).

Various factors to be considered for the preparation of consolidated balance sheet of a holding company and its subsidiaries:

  1. Holding–minority ratio
  2. Elimination of investment A/c
  3. Minority interest
  4. Cost of control/goodwill
  5. Pre-acquisition profit (Capital profit)
  6. Post-acquisition profit (Revenue profit)
  7. Revaluation of assets and liabilities
  8. Depreciation
  9. Bonus shares issued by subsidiary company
  10. Dividends from subsidiary company
  11. Preference shares in subsidiary company
  12. Debentures in subsidiary company
  13. Mutual obligations
  14. Consignment liabilities
  15. Unrealized profit in stock
  16. Post- and pre-acquisition losses—Abnormal losses
  17. Preliminary expenses

Each factor is explained (individually) in Illustrations 12.1 to 12.30 (Ref: Text)

Preparation of consolidated balance sheet of a holding company having more than one subsidiary company is explained in Illustration 12.29.

Key Terms

Holding Company: A company is said to be the holding company of another if that other company is its subsidiary.

Subsidiary Company: A company is said to be a subsidiary of another if that another company controls the composition of its Board of Directors (holding more than 50% of the nominal value of equity share capital).

Minority Interest: Holding of the general public (other than holding company) in a subsidiary company is termed as “minority interest”.

Cost of Control: The “excess” amount paid (more than face value or book value of shares) by the holding company to acquire “controlling interest” in the subsidiary company.

Consolidated Balance Sheet: The balance sheet prepared by the holding company by incorporating all the assets and liabilities of its subsidiary company along with its own assets and liabilities.

QUESTION BANK

Objective Type Questions

I: State whether the following statements are true or false

  1. A holding company is one which controls the other company by way of holding 50% of its equity shares.
  2. Holding company can become the subsidiary of another company.
  3. It is not mandatory for a holding company to prepare and present “consolidated financial statements”.
  4. Minority interest is to be included in paid-up value of share capital.
  5. The cost of control represents the amount paid by the holding company to acquire controlling interest in subsidiary company.
  6. The minority share of revenue profit is to be added in computation of minority interest.
  7. Pre-acquisition profits are revenue profits.
  8. If shares are purchased by the holding company on the date of balance sheet, there will be no revenue profits.
  9. Additional depreciation should be deducted from revenue profits.
  10. Bonus issued out of capital profits will adversely affect the consolidated balance sheet.
  11. Holding company’s share of bonus (bonus issued out of revenue profits) should be added in computing minority interest.
  12. Proposed dividend is to be added to revenue or capital profits as the case may be.
  13. Minority share of the revenue dividend should be ignored.
  14. Dividend due on the preference shares for the post-acquisition period should be treated as capital dividend.
  15. In case, if a holding company purchases a part or all of the debentures, they should be eliminated from the consolidated balance sheet.
  16. Mutual obligations should be included in the consolidated balance sheet.
  17. “Investment in partly paid shares” should be shown on the assets side of the balance sheet.
  18. The unrealized profit in stock should be deducted from stock.
  19. If the holding company gets less than the amount of investment in shares of subsidiary, the excess is termed as “goodwill”.
  20. All inter-company transactions should be shown in the “Total Column” in consolidated profit and loss A/c.

Answers:

  1. False
  2. True
  3. True
  4. False
  5. False
  6. True
  7. False
  8. True
  9. True
  10. False
  11. False
  12. True
  13. True
  14. True
  15. False
  16. False
  17. False
  18. True
  19. True
  20. False

II: Fill in the blanks with apt word(s)

  1. A holding company is one which controls one or more other companies by means of holding ____________ shares.
  2. A holding company is one which controls one or more other companies by means of controlling the composition of ____________ .
  3. A company is a subsidiary of another company if it is a subsidiary of any company which is that other company’s ____________ .
  4. Accounting Standard AS-21 deals with “ ____________ ”.
  5. “A group” represents a parent Company and all its ____________ .
  6. The balance sheet depicting all items relating to a holding company and its subsidiaries is referred as ____________ .
  7. Holding of the general public (after acquisition of major shares by the holding company) in the subsidiary company is known as “ ____________ ”.
  8. All the accumulated profits of the subsidiary company on the date of purchase of shares by the holding company are called: “ ____________ ” or “ ____________ ”
  9. Profits earned by a subsidiary company after the date of acquisition of shares by the holding company are known as “ ____________ ” or “ ____________ .
  10. ____________ is the excess amount paid for acquisition of shares in a subsidiary.
  11. In case of appreciation on fixed assets on account of revaluation, ____________ from the date of revaluation till the date of balance sheet should be provided.
  12. Minority share of the bonus has to be ____________ to minority interest.
  13. Dividend paid by subsidiary out of pre-acquisition profits is termed as ____________ .
  14. Holding company’s share of capital dividend which was to P&L A/c should be deducted from P&L A/c in the consolidated balance sheet.
  15. Holding company’s share of revenue dividend has to be ____________ to P&L A/c.
  16. Interim dividend relating to pre-acquisition period is adjusted units ____________ .
  17. Cash in transit is to be shown on ____________ side of the balance sheet as a separate item.
  18. Any contingent liability involving a third party has to be shown as a ____________ in the consolidated balance sheet.
  19. The unrealized profit in stock should be ____________ from “stock”.
  20. In case the holding company gets more than what it has invested in shares, the excess is treated as ____________

Answers:

  1. more than 50% or majority
  2. Board of Directors
  3. subsidiary
  4. consolidated financial statements
  5. subsidiaries
  6. consolidated balance sheet
  7. minority interest
  8. capital profit; pre-acquisition profit
  9. revenue profit; post-acquisition profit
  10. Cost of control/goodwill
  11. additional depreciation
  12. added
  13. capital dividend
  14. credited
  15. credited
  16. cost of control
  17. assets
  18. foot note
  19. subtracted/deducted
  20. capital reserve

III: Multiple choice questions—Choose the correct answer

  1. A holding company is one which holds
    1. 50% of share capital of subsidiary company
    2. 75% of share capital of subsidiary company
    3. more than two-thirds share capital of subsidiary company
    4. more than 50% of share capital of subsidiary company
  2. The Accounting Standard that is related to “consolidated financial statements” is
    1. AS-21
    2. AS-14
    3. AS-3
    4. none of the above
  3. “Group accounts” constitute accounts of.
    1. holding company
    2. subsidiary companies
    3. both of the above
    4. none of the above
  4. Profits earned by a subsidiary company till the date of acquisition are termed as
    1. revaluation profits
    2. capital profits
    3. revenue profits
    4. none of these
  5. Profits earned after the date of acquisition by a subsidiary company are called
    1. revenue profits
    2. capital profits
    3. revaluation profits
    4. none of these
  6. “Minority interest” is to be shown in consolidated balance sheet as
    1. asset
    2. liability
    3. foot note
    4. none of these
  7. The “excess” paid by the holding company to acquire “controlling interest” in the subsidiary company is called
    1. surplus
    2. deficiency
    3. cost of control
    4. none of these
  8. The excess of share in share capital of the subsidiary company above the amount spent on investment is called
    1. goodwill
    2. revenue reserve
    3. cost of control
    4. capital reserve
  9. Revenue loss has to be
    1. divided in holding–minority ratio
    2. charged direct to holding company’s P&L A/c
    3. charged direct to subsidiary company’s P&L A/c
    4. none of the above
  10. The holding company’s share of revenue profits is
    1. ignored
    2. shown in consolidated balance sheet
    3. shown in P&L A/c of holding company
    4. added in computing minority interest
  11. As per Section 212 of the Companies Act, the information to be attached to the balance sheet of a holding company with respect to subsidiary companies should
    1. be on the same date as that of holding company
    2. not be more than “year old”
    3. not be more than 6 months old
    4. be of any date
  12. Ifthe fall in the asset occurs in the post-acquisition period, the loss is treated as
    1. capital loss
    2. revenue loss
    3. revaluation loss
    4. none of these
  13. Bonus issue is a capital profit when they are issued from
    1. pre-acquisition profits
    2. post-acquisition profits
    3. both (a) & (b) above
    4. none of the above
  14. Interim dividend will
    1. be shown as liability in consolidated balance sheet
    2. be shown as asset in consolidated balance sheet
    3. be shown in consolidated P&L A/c
    4. not be shown in consolidated balance sheet
  15. Any profit on revaluation of assets is
    1. treated as capital profit
    2. ignored
    3. shown as a separate item in the consolidated B/S
    4. treated as revenue profit

Answers:

 

1. (d)

2. (a)

3. (c)

4. (b)

5. (a)

6. (b)

7. (c)

8. (d)

9. (a)

10. (b)

11. (c)

12. (b)

13. (c)

14. (d)

15. (a)

 

Short Answer Questions

  1. Define a “holding company”.
  2. What are the basic tenets of a “holding company”?
  3. Define a “subsidiary company”.
  4. What do you mean by “deemed subsidiary”?
  5. Mention the four important documents that a holding company has to attach with its balance sheet.
  6. Enlist the main requirements of Schedule VI.
  7. What do you mean by a consolidated balance sheet?
  8. What is a “parent company”?
  9. Explain “pre-acquisition profits”.
  10. Write a short note on “post-acquisition profits”.
  11. What do you understand by “minority interest”.
  12. Explain: Holding–minority ratio.
  13. How will you ascertain “minority interest”?
  14. What is meant by “cost of control”?
  15. How will you determine “cost of control”?
  16. What is “capital reserve”?
  17. Explain: (a) Revenue loss (b) Capital loss.
  18. Explain: “additional depreciation”
  19. How will you deal with profit/loss on revaluation of the assets and the outside liabilities?
  20. Explain the accounting treatment of bonus issue (i) out of capital profits (ii) out of revenue profits.
  21. How will you treat “proposed dividend by the subsidiary company”?
  22. Explain the accounting treatment for “interim dividend”.
  23. Write a note on: preference shares in subsidiary company.
  24. What is meant by “capital dividend”? How it is treated?
  25. What is the accounting treatment for “mutual obligations”.
  26. What is a contingent liability? How will a contingent liability involving a third party be shown in consolidated balance sheet?
  27. Write a note on “unrealized profit in stock”

Essay Type Questions

  1. What is a holding company? Explain the requirements that are to be fulfilled for a company to become a holding company? Explain with the help examples.
  2. What is a consolidated balance sheet? Explain the methods of consolidating balance sheets of a holding company and its subsidiaries.
  3. Explain the accounting treatment of the following while computing consolidated balance sheets of holding company and its subsidiary companies.
    1. Elimination of investment A/c
    2. Minority interest
    3. Cost of control
    4. Pre-acquisition profits
    5. Post-acquisition profits
    6. Pre- and post-acquisition losses
    7. Revaluation of assets and liabilities
    8. Bonus shares issued:
      1. Out of capital profits
      2. Revenue profits
    9. Dividends from a subsidiary company:
      1. Proposed
      2. Capital dividend
      3. Revenue dividend
    10. Preference shares in subsidiary company
    11. Debentures
    12. Mutual obligations
    13. Contingent liabilities
    14. Unrealized profit in stock
  4. Discuss the various steps involved in the preparation of consolidated profit and loss account.

Exercises

 

Part A—For Undergraduate Level

[Model: Capital and revenue profits]

1. H Ltd. acquired 15,000 equity shares in S Ltd. on 1 April 2010. On 31 December 2010, the balance sheet of S Ltd. was as follows:

Ascertain capital profits and revenue profits.

[B.Com Osmania University Modified]

[Ans: Capital profits: 6,00,000; Revenueprofits: 3,00,000]

[Model: Minority interest]

2. Calculate minority interest from the balance sheet of Delhi Ltd.

Balance sheet of Delhi Ltd. as on 31 December 2010:

Mumbai Ltd. acquired 80% of the shares at 19,50,000.

[Ans: Minority interest: 13,20,000]

[Model: Cost of control/capital reserve]

3. On 30 June 2010, two-third of the shares of S Ltd. (with a total capital of 48,00,000) was acquired by H Ltd. The balance sheet of S Ltd. showed a debit balance of 24,00,000 or 1 January 2010 and a credit balance of 14,40,000 on 31 December 2010. The investment by H Ltd. in shares of S Ltd. is 36,00,000. Calculate the cost of control or capital reserve.

[Ans: Cost of control/goodwill: 7,20,000]

[Model: Cost of control after the issue of bonus shares]

4. S Ltd. has a capital of 45,00,000 in shares of 100 each. Out of this, H Ltd. purchased 75% shares of 52,50,000. The profit of S Ltd. at the time of purchase of shares by H Ltd. were 22,50,000. S Ltd. decided to make a bonus issue out of capital profits of one share of 100 each fully paid for every three shares held. Calculate the cost of control after the issue of bonus shares.

[Ans: Cost of control/goodwill: 1,87,500]

[Model: Cost of control before and after the issue of bonus shares]

5. S Ltd. has a capital of 10,00,000 in shares of 100 each, out of which H Ltd. purchased 75% of the shares at 12,00,000. The profits of S Ltd. at the time of purchase of shares by H Ltd. were 5,50,000. S Ltd. decided to make a bonus issue out of pre-acquisition profit of one share for every five shares held.

Calculate the cost of control of acquiring shares of S Ltd.:

  1. Before the issue of bonus shares
  2. After the issue of bonus shares

[Ans: Cost of control/goodwill:

  1. Before the issue of bonus shares—

    37,500

  2. After the issue of bonus shares—

    37,500]

[Model: Consolidated balance sheet—Simple problems

6. Prepare a consolidated balance sheet from the following balance sheets:

On the date of acquisition of shares by H Ltd. in S Ltd., the credit balance on latter’s P&L A/c was 4,400. No dividends have been declared since that date.

[Ans: Capital profit: 4,400; Revenue profit: 2,000; Minority interest: 2,640; Goodwill: 540; B/S total: 48,440]

7. Consolidate the following balance sheets:

When H Ltd. acquired the shares in S Ltd. the P&L A/c of the latter had a credit balance of 1,000.

[Ans: Capital profit 1,000; Revenue profit: 500; Minority interest: 650; Goodwill: 600; Balance sheet total: 10,600]

8. From the following balance sheets, prepare a consolidated balance sheet of X Ltd. and its subsidiary Y Ltd. The interests of the minority shareholders of Y Ltd. are to be shown in the consolidated balance sheet.

 

Balance Sheet of
X Ltd. and Its Subsidiary Y Ltd.
as at 31 December 2010

[Ans: Minority interest: 8,00,000; Capital reserve: 14,40,000; Balance sheet total: 6,36,80,000]

9. Balance sheets on 31 March 2010

The shares of B Ltd. were acquired at 5,85,000 on 31 March 2010. Prepare consolidated balance sheet as on 31 March 2010.

[Ans: Capital profit: 1,10,000; Capital reserve: 25,000; Balance sheet total: 18,75,000]

10. On 31 March, 2010, the balance sheets of H Ltd. and S Ltd. stood as follows:

Prepare the consolidated balance sheet as at 31 March 2010.

[Ans: Capital profit: 22,000; Minority interest: 48,800; Goodwill: 32,000; Balance sheet total: 4,18,800]

[Model: Revaluation of assets, unrealized profit in stock (Date of purchases of shares—Not given)]

11. From the balance sheets and information given below, prepare a consolidated balance sheet.

Additional information:

  1. All profits of S Ltd. have been earned since the shares were acquired by H Ltd. but the reserve of 30,000 was already there at the time.
  2. Bills accepted by S Ltd. are all in favour of H Ltd., which has discounted 10,000 of them.
  3. Sundry assets of S Ltd. were undervalued by 10,000.
  4. The stock in trade of H Ltd. includes 25,000 bought from S Ltd. at a profit of 25% on cost to the latter.

[Ans: Capital profit: 40,000; Revenue profit: 60,000; Minority interest: 50,000; Capital reserve: 30,000; Provision for unrealized profit in stock: 5,000; Total of balance sheet: 10,40,000]

[Model: Mutual obligation (Date of acquisition of shares—Not given)]

12. From the following details, prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as on 31 December 2010.

On the date of acquisition of shares by H Ltd. in S Ltd., the latter had undistributed profits of 18,000 and reserve of 12,000. The values of buildings and plant of S Ltd. were considered as 1,30,000 and 32,000, respectively. No purchase or sale of these assets after the acquisition of shares. Depreciation may be ignored. Debtors of H Ltd. include 10,000 due from S Ltd. and also bills payable of H Ltd. includes a bill of 6,000 accepted in favour of S Ltd.

[Ans: Capital profit: 42,000; Revenue profit: 42,000; Minority interest: 68,000; Goodwill: 12,000; B/S total: 8,48,000]

[Model: Shares acquired at the beginning of accounting]

13. The following are the summarized balance sheets as on 31 December 2010:

H Ltd. acquired shares in S Ltd. on 1 January 2010 when S Ltd. had 40,000 in general reserve. No dividend was declared by S Ltd. in 2010. All bills receivable of H Ltd. are drawn on S Ltd.

You are required to prepare a consolidated obligation]

balance sheet on 31 December 2010.

[Ans: Capital profit: 40,000; Revenue profit: 1,20,000; Minority interest: 1,40,000; Capital reserve: 10,000; Balance sheet total: 24,80,000]

[Model: Unrealized profit in stock and mutual

14. X Ltd. acquired 10,000 shares of 10 each in Y Ltd. on 1 January 2010. The summarized balance sheets of both the companies on 31 December 2010 were as follows:

On 1 January 2010, P&L A/c of Y Ltd. showed a debit balance of 25,000. Y Ltd. made a transfer of 15,000 to reserve on 31 December 2010.

Creditors of X Ltd include 25,000 for goods supplied by Y on credit. Stock of 20,000 in X Ltd represents unsold goods purchased from Y Ltd. who charged profit on sale of 20%.

Bills payable of Y Ltd. included 15,000 accepted in favour of X Ltd. Bills receivable of 15. X Ltd. included 12,500 received from Y Ltd. Ltd. & S Ltd.

Prepare a consolidated balance sheet.

[Ans: Capital profit: 35,000; Revenue profit: 60,000; Minority interest: 44,000; Goodwill: 34,500; Balance sheet total: 7,95,500]

15. From the following balance sheet of H Ltd and S Ltd., prepare a consolidated balance sheet of H Shares were acquired by H Ltd. in S Ltd. on 30 June 2010. S Ltd. transferred 3,000 from profits to reserve on 31 December 2010.

 

Balance Sheets as on 31 December 2010

[Ans: Capital profit: 7,500; Revenue profit: 4,500; Goodwill: 1,500; Balance sheet total: 1,69,500]

[Model: Shares acquired on a later date—Mutual obligations, unrealized profit in stock]

16. The following are the balance sheets of H Ltd. and S Ltd. on 31 December 2010:

  1. H Ltd. acquired the shares of S Ltd. on 1 September 2010
  2. Bills payable of H Ltd. was wholly in favour of S Ltd.
  3. Debtors of S Ltd. include 7,500 owed by H Ltd.
  4. Stock of H Ltd. includes 5,000 worth of goods bought from S Ltd. on which the latter company has made a profit of 25% on cost.

Prepare the consolidated balance sheet.

[Ans: Capital profit: 87,500; Revenue profit: 20,000; Minority interest: 93,000; Capital reserve: 27,500; Net capital reserve in B/ S: 2,500; Provision for unrealized profit: 1,000; B/S total: 6,59,000]

[Model: Interim dividend]

17. A Ltd. acquired the whole of the shares in B Ltd. on 1 July 2010 at a total cost of 2,80,000. The balance sheets of both the companies as at 31 December 2010 were as follows:

  1. The balance of profit & loss A/c of B Ltd. on 1 January 2010 was 70,000. Included in the purchases from B Ltd. were goods for 15,000 on which B Ltd. made a profit of 3,750.
  2. Stock of A Ltd. included 7,500 purchased from B Ltd. (part of 15,000)
  3. Profit & Loss A/c of A Ltd. included interim dividend at the rate of 16% p.a. from B Ltd

Make necessary adjustments and show a consolidated balance sheet as at 31 December 2010.

[Ans: Capital profit: 85,000; Revenue profit: 10,000; Goodwill: 60,000; B/S total: 8,88,375]

[Model: Revaluation of assets and depreciation]

18. A Ltd. acquired 8,000 shares in B Ltd. of 100 each on 1 July 2010, On 31 December 2010, the balance sheets of the two companies were as follows:

  1. P&L A/c of B Ltd. showed a balance of 1,50,000 on 1 January 2010 out of which 10% dividend was paid on 1 August. A Ltd. has credited the dividend to P&L A/c.
  2. The machinery which stood at 7,50,000 on 1 January was revalued as 9,00,000 on 1 July 2010. This figure is to b\e adjusted.
  3. B Ltd. has sold stocks worth 1,75,000 charging 25% on cost to A Ltd. Still half of the goods remain with A Ltd.
  4. Of the debtors of A Ltd., 30,000 are from B Ltd.

Prepare the consolidated balance sheet in the books of A Ltd. as on 31 December 2010.

[Ans: Capital profit: 9,17,500; Revenue profit: 1,72,500; Minority interest: 4,18,000; Goodwill: 86,000; P&L A/c: 3,26,500; B/S total: 51,37,000]

[Model: Bonus issue of shares from general reserve]

19. H Ltd. acquired 15,000 equity shares of 10 each in S Ltd on 31 March 2010, on which date the balance sheets are as follows:

On 31 March 2010, the directors of S Ltd. proposed a dividend of 10% on the shares capital of 2,00,000 and made a bonus issue of one equity share for every four equity shares held using general reserve.

Effect of bonus is to be incorporated in the above given balance sheets.

Prepare a consolidated balance sheet as at 31 March 2010.

[Ans: Capital profit (excluding dividend): 1,95,000;

Bonus: 50,000; Capital reserve: 48,750; Balance sheet total: 12,34,000]

[Model: Consolidated profit and loss A/c]

20. X Ltd. purchased 54,000 equity shares and 1,800 preference shares in Y Ltd. on 1 January 2010. Both the companies make up their accounts on 30 June each year. The following figures are extracted from their records for the year ended 30 June 2010:

Particulars

X Ltd.

Y Ltd.

Sales

32,40,000

30,60,000

Purchases

18,00,000

17,40,000

Selling Expenses

1,60,000

2,40,000

Administration Expenses

4,00,000

1,80,000

Interim Divided: Paid on Reference Sheets

40,000

Stock on 1 July 2010

1,80,000

3,60,000

Paid-up Share Capital: Equity Shares of 10 Each

10,80,000

7,20,000

10% Preference Shares of 100 Each

4,00,000

P&L A/c Balance on 1 July 2010

1,00,000

1,20,000

The following additional information is relevant:

  1. Closing Stock X Ltd.: 3,00,000 and Y Ltd.: 3,40,000
  2. Provision for tax to be made—X Ltd.: 5,40,000; Y Ltd.: 4,00,000
  3. Y Ltd. sold goods worth 1,60,000 at cost plus 25% to X Ltd. which company had 50% of then as unsold stock.

Prepare consolidated P&L A/c.

[Ans: Consolidated profit: 18,58,000; Profit of X Ltd.: 10,18,000; Profit of Y Ltd.: 8,40,000; Minority interest in current year’s profit: 2,10,000; Capital reserve: 3,15,000: Provision for unrealized profits: 16,000]

Exercises

 

Part B—For Advanced Level

[Model: Revaluation of assets, dividend out of pre-acquisition profits, contingent liability]

21. Jupiter Ltd. purchased control of Neptune Ltd. on 1 October 2010. Following are the balance sheets of two companies as at 31 March 2011:

Neptune Ltd. had on 1 April 2010 90,000 in general reserve and 1,08,000 (Cr.) in P&L A/ c. 10% dividend was received by Jupiter Ltd. in November for 2009–10 and this amount was credited to P&L A/c of holding company. Plant & machinery standing in the books of Neptune Ltd. as 3,60,000 on the date of purchase was revalued at 4,32,000. Stock of Neptune Ltd. includes 28,800 received from Jupiter Ltd. on which it made a profit of 25% on cost. Ignore corporate dividend tax. Prepare the consolidated balance sheet.

[B.Com (Hons) Calcutta University Modified]

[Ans: Goodwill: 29,250; Minority interest: 2,24,100; B/S total: 19,14,390; Contingent liability: 9,000]

[Model: Acquisition of shares during the current accounting year—Unrealized profit in stock]

22. The following are the balance sheets of VR Ltd. and its subsidiary RS Ltd. as at 31 March 2011:

The following additional information is provided to you:

  1. The P&L A/c of RS Ltd. stood at 1,20,000 on 1 April 2010 whereas general reserve has remained unchanged since that date
  2. VR Ltd. acquired 80% of shares in RS Ltd. on 1 October 2010 for 13,60,000. As mentioned above.
  3. Included in debtors of RS Ltd. is a sum of 40,000 due from VR Ltd. for goods sold at a profit of 25% on cost price. Till 31 March 2011, only one half of the goods had been sold while the remaining goods were laying tin warehouse of VR Ltd. as on that date.

Prepare the consolidated balance sheet as at 31 March 2011.

[B.Com (Hons) Delhi 1990, 1994 Modified]

[Ans: Minority interest 2,72,000, Cost of contiol 3,20, 000, B/S Total 48,56,000

[Model: Revaluation of assets and goods destroyed by fire]

23. The following are the balance sheets of B Ltd. and V Ltd. as on 31 December 2010:

B Ltd. acquired these 4,500 shares on 1 May 2010. The profit & loss A/c of V Ltd. showed a debit balance of 4,50,000 on 1 January 2010. During March 2010, goods costing 18,000 were destroyed against which the insurance company paid only 6,000 to V Ltd. Creditors of V Ltd. include 60,000 for goods supplied by B Ltd. on which V Ltd. made a profit of 6,000. Half of the goods were sold out of this.

An item of plant (included in fixed assets) V Ltd. had book value of 45,000 was to be revalued at 60,000 on 1 January 2010 (ignore depreciation).

Prepare the consolidated balance sheet.

[B.Com (Hons) Delhi 2002 Modified]

[Ans: Goodwill; 2,04,750; Minority interest: 78,750 Balance sheet total: 26,16,750]

[Model: Bonus shares out of its reserves and dividend pair]

24. Balance sheets of two companies as on 31 March 2011 are given as follows:

Other information:

  1. H Ltd. acquired 60% shares of S Ltd. on 1 July 2010
  2. Reserves and profit and loss A/c of S Ltd. on 1 April 2010 had balances of 10,00,000 and 4,80,000, respectively.
    S Ltd. had issued bonus shares out of its reserves in the ratio of 1:4 on 1 October 2010.
  3. No entry has been made in the books of H Ltd. for this.
  4. S Ltd. also paid dividend @ 25% on its capital of 16,00,000 pre-acquisition profits on 1 October 2010 which were recorded by H Ltd.

Prepare consolidated balance sheet of H Ltd. and S Ltd.

[B.com (Hons) – Delhi – 2005 – Modified]

[Ans: Minority interest: 12,80,000; B/S total: 91,14,000]

[Model: Interim dividend—Paid]

25. H Ltd. acquired 80% shares in S Ltd. on 30 September 2010 as a total cost of 10,80,000. The balance sheets of both the companies as at 31 March 2011 were as follows:

 

Balance Sheet of H Ltd.
as at 31 March 2011

Profit & loss A/c balance includes interim dividend @ 10% per annum received from S Ltd.

Balance Sheet of S Ltd.
as at 31 March 2011

On 1 April 2010, S Ltd.’s P&L A/c showed a credit balance of 1,20,000. S Ltd. declared interim dividend of 10% on 1 January 2010. Assume no taxation.

Prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as at 31 March 2011.

[B.Com (Hons) Delhi 2004 Modified]

[Ans: Goodwill: 42,000; Minority interest: 2,64,000; Balance sheet total: 49,92,000] [Model: Wholly owned subsidiary]

26. From the following balance sheets and additional information, prepare a consolidated balance sheet of X Ltd. and its subsidiary Y Ltd.:

 

Balance Sheets
as on 31 March 2011
Particulars X Ltd. Y Ltd.

Liabilities: Shares of 100 Each

25,00,000

5,00,000

Profit & Loss Account

10,00,000

3,00,000

Reserves

3,00,000

1,50,000

Bills Payable

75,000

Creditors

5,50,000

3,00,000

 

43,50,000

13,25,000

Assets:

 

 

Fixed Assets

20,00,000

3,00,000

Stock

15,00,000

6,00,000

Debtors

3,75,000

4,25,000

Bills Receivable

1,00,000

Shares in Y Ltd. at Cost

3,75,000

 

43,50,000

13,25,000

Additional information:

  1. Bills accepted by Y Ltd. are all in favour of X Ltd.
  2. The stock of X Ltd. includes 1,25,000 purchased from Y Ltd. at a profit to the latter of 20% on sales
  3. All the profits of Y Ltd. have been earned since the shares were acquired by X Ltd. but there was already reserve of 1,50,000 at that date

[B.Com (Hons) Delhi 2006 Modified]

[Ans: Capital reserve: 2,75,000; Unrealized profit in stock: 2,500; Balance sheet total: 52,00,000]

[Model: Revaluation of assets, depreciation, dividend and interim dividend, unrealized profit in stock]

27. The following are the balance sheets of H Ltd. and S Ltd. as on 31 March 2011:

Additional information:

  1. H Ltd. acquired 80% of Shares of S Ltd. on 1 April 2010, when the balances of Reserve and P&L A/c were 36,000 and 5,04,000, respectively.
  2. Land and Buildings of S Ltd. whose book value on 1 April 2010 was 5,76,000 and 5,04,000, respectively.
  3. Machines of S Ltd. whose book value was 5,40,000 on 1 April 2010 was revalued as 7,20,000 but no entry was made in this regard.
  4. S Ltd. declared an interim dividend of 16% during the year ending 31 March 2011 and a final dividend of 6% an account of the year ended 31 March 2010. H Ltd. credited the entire amount of dividends received from S Ltd. to its profits & loss A/c.
  5. Stock of H Ltd. includes goods worth 54,000 supplied by S Ltd.
  6. Sundry creditors of H Ltd. include 1,08,000 for purchases from S Ltd. on which H Ltd. made a profit of 27,000.
  7. On 31 March 2011, H Ltd. remitted cash of 15,600 for loan received from S Ltd. Interest accrued 1,800 for loan to H Ltd. has not been provided by S Ltd.

Prepare consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as on 31 March 2011.

[B.Com (Hons) Delhi 2007 Modified]

[Ans: Cost of Control/Goodwill: 2,01,600;

Minority interest: 3,36,060; Unrealized profit in stock: 13,500; Balance sheet total: 66,97,800]

[Model: Revaluation of assets, dividends paid]

28. H Ltd. acquired 96,000 equity shares of 10 each in S Ltd. on 1 October 2010 for 19,36,800. The balance sheets of two companies as on 31 March 2011 were as follows:

Liabilities: X Ltd. Y Ltd.

Shares Capital of 100

30,00,000

12,00,000

Each

 

 

Reserves (1 April 2010)

14,40,000

6,00,000

Profit & Loss Account

3,43,200

4,92,000

Bank Overdraft

6,00,000

Bills Payable

78,000

Sundry Creditors

4,18,800

1,20,000

 

58,02,000

24,90,000

Assets: H Ltd. S Ltd.

Land & Building

10,80,000

11,40,000

Plant & Machinery

14,40,000

8,10,000

Investments

21,60,000

Stock

6,84,000

2,52,000

Debtors

2,64,000

2,40,000

Bills Receivable

88,800

Cash

85,200

48,000

 

58,02,000

24,90,000

  1. The P&L A/c of S Ltd. showed a balance of 1,80,000 on 1 April 2010 out of which a dividend of 10% was paid on 1 November 2010. The dividend was correctly recorded by H Ltd.
  2. The plant & machinery of S Ltd. which stood at 9,00,000 on 1 April 2011 was considered worth 10,80,000 on the date of acquisition by H Ltd.

Prepare consolidated balance sheet together with work sheet.

[B.Com (Hons) Delhi 2008 Modified]

[Ans: Cost of control: NIL; Minority interest: 5,01,600; Balance sheet total: 66,67,200]

[Model: Contingent liability, dividend paid, unrealized profit in stock, Mutual obligations]

29. H Ltd. acquired 1,28,000 equity shares of 10 each in S Ltd. on 1 October 2010 for 24,00,000. The balance sheets of the two companies as at 31 March 2011 were as follows:

Liabilities: H Ltd. S Ltd.

Equity Shares of 100

40,00,000

16,00,000

Each Fully Paid up

 

 

General Reserve

19,20,000

8,00,000

(1 April 2010)

 

 

Profit & Loss A/c

4,80,000

7,20,000

Unclaimed Dividend

8,000

Bills Payable

1,20,000

Sundry Creditors

16,00,000

3,52,000

 

80,00,000

36,00,000

Assets: H Ltd. S Ltd.

Land and Building

16,00,000

17,60,000

Plant & Machinery

24,00,000

12,00,000

Investments

32,00,000

Stock

2,00,000

1,20,000

Debtors

1,60,000

2,00,000

Bills Receivable

40,00080,000

80,000

Bank Balance

4,00,000

1,60,000

Preliminary Expenses

80,000

 

80,00,000

36,00,000

NOTE: Contingent liability for bills discounted 80,000.

Additional information:

  1. On 1 April 2010, the P&L A/c of S Ltd. showed a credit balance of 2,80,000 out of which a dividend of 10% was paid on 1 November 2010. The dividend was credited by H Ltd. to its P&L A/c. Ignore corporate dividend tax.
  2. (Creditors of S Ltd. include an amount of 1,20,000 for purchases from H Ltd. The goods are still unsold on 31 March 2011. H Ltd. sells goods at cost plus 20%.
  3. Bills payable of S Ltd. are all issued in favour of H Ltd. Of these bills, H Ltd. got discounted bills worth 80,000.

Prepare consolidated balance sheet.

[B.Com (Hons) 2009 Modified]

[Ans: Goodwill: 80,000; Unrealized profit in stock: 20,000; Minority interest: 6,16,000; B/S total: 90,20,000]

[Model: Dividend paid, mutual obligations, unrealized profit in stock, revaluation of assets]

30. Mili Ltd. took over the control of Noorie Ltd. on 1 July 2010 by acquiring 30,000 shares at a price of 4,80,000.

 

Balance Sheet as at 31 March 2011

The P&L A/c and general reserve of Noorie Ltd. showed a balance of 1,00,000 & 1,20,000, respectively, on 1 April 2010. A dividend was paid at the rate of 15% by Noorie Ltd. in the month of September 2010 for the year 2009–10. This dividend was credited to P&L A/c by Mili Ltd. The bills payable of Noorie Ltd. were all issued in favour of Mili Ltd. The receiving company got these bills discounted with the bank. Creditors of Noorie Ltd. included 40,000 due to Mili Ltd. for goods supplied by the latter company. Stock of Noorie Ltd. included 16,000 worth of stock purchased from Mili Ltd. at a profit of % on cost. The plant of Noorie Ltd. with book value of 2,00,000 on 1 April 2010 was revalued at 3,00,000 at the time of taking the control of Noorie Ltd. The new value has not been incorporated in the books.

Prepare consolidated balance sheet as at 31 March 2011. Show clearly all the calculations and workings.

[B.Com (Hons) Delhi 2010 Modified]

[Ans: Goodwill: 50,000; Minority interest: 1,99,376; Balance sheet total: 20,02,500]

[Model: Bonus issue and corporate dividend tax]

31. On 31 March 2011, the balance sheets of H Ltd. and S Ltd. stood as follows:

Following additional information is available:

  1. H Ltd. purchased 270 thousands equity shares in S Ltd. on 1 April 2010 at which date the following balances stood in the books of S Ltd.:
    General reserve: 4,500 thousands; P&L A/ c: 1,989 thousands
  2. On 14 July 2010, S Ltd. declared a dividend of 20% out of pre-acquisition profits and paid corporate dividend tax (including surcharge) as 11%. H Ltd. credited the dividend received to P&L A/c.
  3. On 1 November 2010, S Ltd. issued three fully paid equity shares of 10 each forevery five shares held as bonus shares out of pre-acquisition general reserve.
  4. On 31 March 2011, the stock of S Ltd. included goods purchased for 150 thousands from H Ltd., which had made a profit of 25% on cost.

Prepare a consolidated balance sheet as on 31 March 2011. [C.A. (Final). 2002 Modified]

[Ans: Capital reserve: 19,80,000; Minority interest: 46,80,000; Balance sheet total: 3,06,69,000]

[Model: Bonus issued]

32. On 31 March 2010, P Ltd acquired 4,20,000 shares of Q Ltd for 48,00,000. The balance sheet of Q Ltd on that date was as follows:

On 31 March 2011, the balance sheets of two companies were as follows:

Directors of Q Ltd made bonus issue on 31 March 2011 in the ratio of one equity share of 10 each fully paid for every two equity shares held on that date.

Calculate as on 31 March 2011:

  1. Cost of control/capital reserve
  2. Minority interest

Prepare a consolidated balance sheet after the bonus issue.       [C.A. (Final). 2003 Modified]

[Ans: Consolidated profits before bonus issue: 1,26,42,000; Consolidated profit after bonus issue: 1,05,40,000; Minority interest: 46, 26,000; Capital reserve: 17,52,000 Balance sheet total: 6,55,80,000]

[Model: Investment in different dates, dividend mutual obligation, unrealized profit in stock] at 31 March 2011:

33. Following are the balance sheets of H Ltd and S Ltd as

Additional information:

  1. All the bills receivable of H Ltd including those discounted were accepted by S Ltd
  2. When 18,000 shares were acquired by H Ltd in S Ltd, it had 60,000 general reserve and 15,000 credit balance in P&L A/c
  3. At the time of acquisition of further 3,000 shares by H Ltd, S Ltd had 75,000 general reserve and 84,000 credit balance in P&L A/c from which 20% dividend was paid by S Ltd and dividend received by H Ltd on these shares were credited to P&L A/c
  4. Stock of S Ltd includes 60,000 purchased from H Ltd which has made 25% profit on cost
  5. Both companies have proposed dividend—H Ltd 10%; S Ltd 15% but no effect has been given in the above balance sheets

Prepare consolidated balance sheet as at 31 March 2011.

[C.A. (Final). Modified]

[Ans: Goodwill: 28,100; Minority interest: 1,53,000; P&L A/c of H Ltd: 42,000; Balance sheet total: 28,82,100]

[Model: Preference shares, proposed dividend, unrealized profit in stock, stock in transit, cash in transit]

34. H Ltd acquired 80% of the equity shares and 50% of the preference shares of S Ltd on 1 April 2010 at cost of 14,40,000 and 60,000, respectively. The balance sheets of the companies as at 31 March 2011 were as follows:

 

Balance Sheets
Particulars H Ltd. S Ltd.

Land & Building at Cost

6,00,000

8,00,000

Equipment at Cost

9,15,000

3,10,000

Investment in S Ltd

15,00,000

Stock

4,00,000

3,50,000

Debtors

8,00,000

4,50,000

Bank

50,000

60,000

Current Account

95,000

Equity Shares ( 10 Each)

20,00,000

7,50,000

10% Cumulative Preference Shares

1,00,000

Reserves (1 April 2010)

11,00,000

4,50,000

Retained Profit for 2010–11

1,00,000

90,000

Sundry Creditors

8,00,000

3,50,000

Proposed Dividend

1,00,000

70,000

Provision for Depreciation:

 

 

Land & Building

60,000

30,000

Equipment

2,00,000

60,000

Current Account

70,000

 

43,60,000

19,70,000

Other information:

  1. A remittance of 10,000 from H Ltd to S Ltd in March 2011 was not received by S Ltd until April 2011.
  2. Goods with an invoice value of 15,000 were dispatched by H Ltd. in March 2011 but were not received by S Ltd until April 2011. The profit element included in this transaction is 2,500.
  3. Included in the stock of S Ltd at 31 March 2011 were goods purchased from H Ltd for 50,000. The profit element included in this amount was 4,000.
  4. Proposed dividend of S Ltd included a full year’s preference dividend. No interim dividends were paid in the year by either company.

You are required to prepare a consolidated balance sheet of H Ltd and its subsidiary S Ltd as at 31 March 2011.

[I.C.W.A. (Final). Modified]

[Ans: Cost of control/Goodwill: 4,90,000; Minority interest: 3,08,000; Balance sheet total: 48,94,800]

[Model: Revaluation of assets, depreciation, unrealized profit in stock]

35. A Ltd. purchased control of B Ltd. on 1 July 2010. Following are the balance sheets of the two companies on 31 December 2010:

Note: Contingent liability of A Ltd. for 27,000 for bills discounted.

B Ltd. had on 1 January 2011 90,000 in general reserve and 1,08,000 (Cr.) in P&L A/c. 10% dividend was received by A Ltd. in July 2010 from B Ltd. and this amount was credited to P&L A/c of holding company. Plant & machinery standing in the books of B Ltd. at 3,60,000 on the date of purchase was revalued at 4,32,000. Stock of B Ltd. includes 28,800 received from A Ltd. on which it made a profit of 25% on cost.

Prepare the consolidated balance sheet.

[I.C.W.A. (Final). Modified]

[Ans: Capital reserve: 67,500; Minority interest: 2,19,600; Unrealized profit in stock: 5,760; Consolidated P&L A/c: 1,58,040; B/S total: 18,89,640; Contingent liability: 9,000]

[Model: More than one subsidiary companies— gross holdings, dividends, unrealized profit in stocks]

36. The following is the balance Sheets of Red Ltd. and its two subsidiaries Yellow Ltd. and White Ltd. as at 31 March 2011:

Addition information:

  1. Red Ltd. acquired its shares in Yellow Ltd. and White Ltd. on 1 April 2010, on which date the P&L A/c balances of the latter companies showed the following position:
    Yellow Ltd (Dr.): 25,000
    White Ltd (Cr.): 45,000
  2. In June 2010, Red Ltd. received equity dividends of 20,000 from White Ltd. for the year 2009–10 (out of the profits earned prior to 1 April 2010). The dividends were credited to its P&L A/c by Red Ltd.
  3. The bills payable of Yellow Ltd. are all in
  4. Stocks of Red Ltd. include goods of 15,000 and 20,000 representing purchases made from Yellow Ltd., and White Ltd. earns a margin of 33.33% on cost.

You are required to prepare a consolidated balance sheet as at 31 March 2011.

[I.C.W.A. (Final). 2000 Modified]

[Ans: Cost of control: Yellow Ltd.— 75,000; White Ltd.— 14,000; Minority interest Yellow— 3,12,000; White— 97,000; Consolidated profits: 6,29,200; B/S total: 38,38,200]

[Model: Purchase and sale of asset—Mutual obligations]

37. Following are the draft balance sheets of two companies A Ltd. and B Ltd. as at 31 March 2011:

The following adjustments were not yet made:

  1. Stock worth 25,000 in B Ltd. was found to be obsolete with no value
  2. A Ltd. acquired an asset costing 2,50,000 on 31 March 2011. No effect has been given for both the purchase and payment.
  3. During the year, A Ltd. sold an asset for 3,00,000 (original cost 2,00,000). The profit was included in revenue profits.
  4. Debtors of A Ltd. included a sum of 2,50,000 owed by B Ltd.
    You are required to prepare a consolidated balance Sheet of both the companies as on 31 March 2011 after giving effect to the above transactions.

[C.A. (Final). Modified]

[Ans: Minority interest in revenue profits: 1,00,000; Minority interest in capital profits 1,25,000; Minority interest: 5,25,000; Goodwill: 2,00,000; Balance sheet total: 56,60,000]

[Model: More than one subsidiary companies— Consolidated P&L A/c]

38. The final sections of the profit & loss accounts of A Ltd, B Ltd and C Ltd for the year ended 31 December 2010 are as follows:

 

A Ltd
B Ltd
C Ltd

A Ltd acquired the whole share capital of C Ltd on 31 December 2009 and three-quarters of the share capital of B Ltd on 31 December 2008.

The balance of 10,000 on P&L A/c of B Ltd as on 31 December 2009 represents a credit balance of 6,000 brought forward from 2008 and a net profit of 4,000 in 2009.

No dividend has been paid by either B Ltd or C Ltd since the holding company acquired the shares.

You are required to prepare the final section of the consolidated profit & Loss account of A Ltd for the year ended 31 December 2010.

[C.S. Modified]

[Ans: Revenue profits: A Ltd— 96,000; B Ltd— 44,000; C Ltd— 7,000; Capital Profits: B Ltd— 6,000; C Ltd— 8,500]

[Model: Consolidated P&L A/c]

39. Consolidated to prepare a consolidated profit & loss A/c for the year ended 31 December 2010, suitable for incorporation in the published accounts of A Ltd which will not include a separate P&L A/c for the holding company.

Particulars A Ltd. B Ltd.

P&L A/c Balance as 1

7,20,000

3,00,000

January 2010

 

 

Trading Profit

14,20,000

8,00,000

Dividends (Gross) from B Ltd (Preference)

1,08,000

Dividends (Gross) from B Ltd (Ordinary)

1,50,000

 

23,98,000

11,00,000

Depreciation

2,40,000

80,000

Debentures Interest

2,00,000

Taxation

4,40,000

3,00,000

Director’s Emoluments

1,40,000

60,000

Dividends Paid:

60,000

6% Preference:

60,000

On 30

 

 

JuneOn 31 December

 

 

Ordinary Shares:

 

 

Interim on 30 June

2,40,000

1,00,000

Final on 31December

2,40,000

1,00,000

P&L A/c Balance as on 31 December 2010

8,98,000

3,40,000

 

23,98,000

11,00,000

Information Relating toShare Capital:

 

 

Ordinary Shares of 1 Each Fully Paid

80,00,000

40,00,000

6% Preference Shares of 1 Fully Paid

20,00,000

Shares in B Ltd Held by A Ltd:

 

 

Ordinary Shares

30,00,000

Acquired on 1 July 2010

 

 

Preference Shares

18,00,000

Acquired on 1 January2010

 

 

Income and expenditure are deemed to accrue evenly throughout the year. All dividends are payable out of the current year’s profits. The directors of B Ltd. resigned on 1 July 2010 and were replaced on that day by directors of A Ltd who are to receive the same remuneration as the former directors.

[Ans: Balance carried forward: A Ltd— 8,23,000; B Ltd— 15,000; Total: 8,38,000]

[Model: Interim dividend, corporate dividend tax, mutual obligation, unrealized profit on stock]

40. The balance sheets of Ashish Ltd. and Anand Ltd. as on 31 March 2011 are as follows:

Liabilities AshishLtd. Anand Ltd.

Equity Share Capital:

 

 

Fully Paid Shares of 10 Each

1,20,000

30,000

General Reserve as on 1 April 2010

84,000

1,200

Profit and Loss Account

51,000

21,600

Sundry Creditors

21,000

10,5002,76,00063,300

 

2,76,000

63,300

Assets

Buildings

84,000

17,400

Plant & Machinery

60,0000

15,600

Furniture & Fittings

4,500

2,100

Investments

60,000

Stock

60,000

Sundry Debtors

22,500

12,600

Cash at Bank

24,000

9,600

 

21,000

6,000

 

2,76,000

63,300

Prepare a consolidated balance sheet after considering the following:

  1. Ashish Ltd. acquired 24 lakh equity shares of Anand Ltd. on 1 July 2010 at 6 crore.
  2. Stock of Ashish Ltd. includes 18 lakh relating to stock purchased from Anand Ltd. which sells goods at cost plus 25%.
  3. Sundry creditors of Ashish Ltd. includes 30 lakh due to Anand Ltd.
  4. P&L A/c of Ashish Ltd. includes interim dividend received from Anand Ltd. on 1 August 2010.
  5. On 1 April 2010, balance of P&L A/c in Anand Ltd.’s ledger stood at 1,71,30,000. Out of this balance, an interim dividend @ 10% was paid on 1 August 2010. Corporate dividend tax @ 11% was also paid on the amount of interim dividend.

Profits during the year 2010–11 have been earned by Anand Ltd. on a uniform basis throughout the year.

[C.S. (Inter). Modified]

[Ans: Goodwill: 20,040 thousand; Minority interest: 10,560 thousand; Balance sheet total 2,95,980 thousand]