3 HOLDING COMPANIES –IMPORTANT ISSUES TO SOLVE PROBLEMS 1.ANALYS OF CAPTAL PROFIT-2.ANALYSYS OF REVENUE PROFIT3.CALCULATION OF CAPITAL RESERVE/COST OF CONTROL(GOODWILL)4.CALCULATION OF MINORITY INTEREST5.Consolidated Balance sheet
4 1.ANALYSYS OF CAPTAL PROFIT MEANING:PROFIT/RESERVE OF ANY TYPE IN THE SUBSIDIARY COMPANY BEFORE THE DATE OF ACQUISITION
5 CAPTAL PROFIT EXAMPLE -I BALANCE SHEET OF SUBSIDIARY LIMITED AS ONLIABILITIESGENERAL RESERVE( ) ,00,000PROFIT AND LOSS ,00,000THE BUSINESS WAS ACQUIRED ONO1-O1-2007
6 ANSWER EX.1 RESERVE BEFORE ACQUISITION- 5,00,000 PROFIT UP TO O1-O1-2007(2,OO,OOO*9/12) 1,50,000TOTAL CAPITAL PROFIT 6,50,000HOW MUCH IS THE REVENUE PROFIT?
7 REVENUE PROFIT? Exercise-2: 2,OO,OOO-1,5O,OOO= 50,000 SUPPOSING THE BUSINESS WAS ACQUIRED ON HOW MUCH IS CAPITAL PROFIT? /REVENUE PROFIT?
8 ANSWER-2 CAPITAL PROFIT: RESERVE(PRE-ACQISITION) 5,OO,OOO SHARE OF P/L A/C(2,OO,OOO*6/12) ,OO,OOOTOTAL ,OO,OOOREVENUE PROFIT:(2,OO,OOO *6/12) ,OO,OOOENTIRE RESERVE PROFIT EARNED BY THE SUBSIDIARY WAS PRE-ACQUISITION PROFIT
9 CALCULATION OF CAPITAL RESERVE AMOUNT INVESTED BY THE HOLDING COMPANY IN SUBSIDIARY COMPANY(REFLECTED AS INVESTMENT IN THE ASSET SIDE)LESS:1.AMOUNT RECEIVED OUT OF CAPITAL PROFIT IN THE FORM OF DIVIDEND2.PAID UP VALUE OF THE SHARE(NOMINAL VALUE)3. SHARE OF REMAINING CAPITAL PROFIT OF HOLDING COMPANY
10 Cost of control/goodwill The holding company purchased shares of subsidiarymore than the real worth of the subsidiaryWhat is the meaning of real worth?If all assets are sold and third party liabilities are paidwhat remain to share holders is known as real worthReal worth= Assets(realisable value) –third party liabilitiesOrEquity shares + reserves and surplus(both capital profitand revenue reserve)
11 Example-3 How do you calculate goodwill on the shares acquired by Holding company?The excess amount paid over real worth to acquiresubsidiary company’s share is known as goodwill.Example-34000 shares are purchased for Rs. 50,000.The nominal value is Rs.10. The excess amount of Rs.10,000is goodwill. Goodwill is shown in the consolidated balance sheet.Assumed no profits in the balance sheet
12 If goodwill appears already in the holding and subsidiary company? Balance sheet as on 31st March 2008H LtdS ltdS LtdEquity shares(Rs.100 each)12% preference shares(Rs.100 each)General reserveProfit and loss a/c( )Profits during the year5,00,000Nil1,30,00060,00080,0002,00,0001,00,00060,000(CP)20,000(CP)70,000(CP)GoodwillShares in S Ltd(2000 equity shares and 500 preference shares)Preliminary expenses20,0003,50,00010,00010,000(CL)Date of acquisition was
13 Profit to equity share holders 1,28,000 1.Total Capital profitsGeneral reserve 60,000Profit on ,000Profit during the year ,000Total ,000Less:-Preliminary expenses (10,000)Less: Preference share holders (12,000)(cumulative preference shares)Profit to equity share holders ,28,000
14 Have You observed that all profits are capital profits. Why? It is not due to real capital profits. But because profits are earned by subsidiary before the date of acquisition.Note:1. General reserve before the date of acquisition, Revenue profit before the date of acquisition and all capital profits after the date of acquisition less all wasteful preliminary expenses(Capital loss) are capital profit.Note:2: Any benefits(money,dividend, bonus shares) derived by holding company out of capital profits reduce their cost of control(Investments)
15 If the subsidiary company shares are purchased less than Capital reserveIf the subsidiary company shares are purchased less thanthe subsidiary’s worth,(Purchased at cheaper rate)the benefits earned at the timeof acquisition is known as capital reserve. The capital reserveis a capital profitExample 4:If nominal value of shares of subsidiary is Rs.10 and4000 shares are acquired for Rs. 35,000, then there isa gain of 5000 to holding company is known as capital reserve
16 What is capital profit? What is the reason of differentiating between Capital profits and revenue profits?Capital profits:1. Profits of subsidiary company earned by operation ornon-operation prior to holding company’s acquisition.2. Capital profits earned after acquisitionCapital profits are not available for declaration of dividend.After the acquisition date, profits earned by subsidiary companyby a normal business operations is a revenue profit.Such profits are available for declaration of dividend.
17 Balance sheet of subsidiary as on 31st March 2008 Exercise-5Balance sheet of subsidiary as on 31st March 20083,000 shares were acquired by holding company in subsidiary company on 1st January 2008 for Rs.4,50,000.Equity shares ,00,000(Rs.100 per share)General reserve ,000Profit and loss a/c 30,000(on )Profit and loss a/c 80,000(For the year )
18 Date of acquisition is 1st January 2008 Reserves and ProfitsCapital ProfitBefore orAfter acquisitionRevenue ProfitGeneral reserve(Before )Nil50,000P/L on(Before)30,000NilP/L for(9 months beforeAnd 3 months after)9 months profit9/12 x 80,000=60,0003 months profit3/12 x 80,000=20,000Rs.1,40,000TotalRs.20,000
19 In the consolidated B/S Minority/MajorityMinorityMajority1000x 1001,00,000Shares Capital4,00,0003,000x 1003,00,000Date of acquisitionValue on the¼ x 1,40,000=Rs.35,000Capital profitsRs.1,40,000¾ x1,40,000=Rs.1,05,000Rs.4,05,000¼ x 20,000=Rs.5000¾ x 20,000=Rs.15000(P/L)Revenue profitsRs.20,000Rs.4,05,000-goodwill purposeRs.15,000-profit and loss a/cIn the consolidated B/SRs.1,40,000TotalRs.5,60,000
20 Good will/Capital reserve It is calculated from the point of view of Holding companyWhat is the value of total investment made by Holding company?It is Rs.4,50,000What was it worth on the date of acquisition?It is Rs.4,05,000.Have they invested more than the real worth?Yes. It means they had paid extra for the goodwill of the subsidiary company.
21 Does it affect goodwill/capital reserve of the company? Suppose subsidiary company declares dividend after the acquisition out of revenue profits which were earned before the date acquisition?Holding company had invested in subsidiary.If dividend is declared out of pre-acquisition profits of subsidiary, the holding company gets parts of its investments back.Therefore such dividend received to be reduced from investment of the holding company in subsidiary.Does it affect goodwill/capital reserve of the company?
22 Yes.It affects goodwill.It decrease the goodwill. Exercise-6Suppose subsidiary declares dividend out of general reserve(Capital profit because it was earned before acquisition)Rs.40,000 to all share holders, the holdingcompany’s share of general reserve is ¾ of 40,000=30,000.Since 30,000 is received by holding out of their investmentsThe investment value decreased to Rs.4,20,000(4,50,000-30,000).Therefore goodwill is Rs.15,000.
23 If dividend declared by subsidiary out of post acquisition profit? Post acquisition profit is a revenue profit.Such dividend received by holding from subsidiary does not reduce the value of investment of the holding company. It is included with the profits of holding company.The journal entry in the books of holding company is:Cash a/c debitProfit and loss a/c credit
24 Elimination of common transactions 1.Bills drawn by holding company on subsidiary company or vice-versa:Holding companySubsidiary companyBills receivable a/c debitTo subsidiary company a/cHolding company a/c debitTo Bills payable a/cBalance sheet Asset sideBills receivableBalance sheet Liability sideBills payable
25 When we prepare a consolidated Balance sheet? Treat the holding and the subsidiary company as one unit.Therefore eliminate both bills receivables and payable to the extent of holding company’s share of Bills receivable from consolidated balance sheet.The same treatment is applicable for debtors and creditors on goods sold by holding to subsidiary or vice versa.Suppose a girl friend given loan to her Boy friend before marriage and they get married; who has to pay to whom?No one has to pay to no one( after their marriage) provided???????????!!!!!!!!!!!
26 Provided??????!!!!!They get married each other.
27 How do you deal in the consolidated Balance sheet? Loan given by holding company to subsidiary?2. Debentures issued by holding to subsidiary?3. Loan given by subsidiary to holding?Exercise-8Only one answer: In one company balance sheetthey are shown as assetand an another company they are shown as liability.If combined(Consolidated) both asset and liabilityare eliminated.Only outsiders’ liabilities are shown inthe consolidated balance sheetSee the exercise in the next page
28 Bills receivable of S ltd. include bills for Rs.8000 accepted Exercise-9Balance SheetH ltdRs.’00,000S LtdH LtdRsShare Capital Rs.10 each9% debenturesCreditorsBills payable20.00Nil4.00.210.002.00.1Shares in S ltd(80,000 shares)9% debentures in S ltdDebtorsBills receivables188.8.131.52.70.15Bills receivable of S ltd. include bills for Rs.8000 acceptedby H Ltd and creditors of S Ltd include Rs.20,000 due to H Ltd.How do they appear in the combined(consolidated) balance Sheet?
29 Balance Sheet(observe other than share capital) H ltdRs.’00,000S LtdH LtdRs9% debenturesCreditorsBills payableNil4.00.22.00.19% debentures in S ltdDebtorsBills receivables0.81.82.70.15Bills receivable of S ltd. include bills for Rs.8000 acceptedby H Ltd and creditors of S Ltd include Rs.20,000 due to H Ltd.How do they appear in the combined(consolidated) balance Sheet?
30 Bills accepted by H Ltd is B/P in H ltd Balance sheet. Remove Rs from B/P and B/R2. Creditors of S Ltd. of Rs. 20,000 is equal to Rs.Debtors ofH Ltd. Both to be eliminated to the extent of Rs. 20,0003. Debentures of Rs.80,000 of S ltd is an investment for H Ltd.Both to be eliminated in the consolidated Balance sheet.TheRemaining debentures belong to outsiders to be shown in theConsolidated Balance sheet.See the consolidated Balance sheet in the next slide
31 ’00,000 Debentures Creditors Bills Payable 1.2 5.8 0.22 9% Debentures Consolidated Balance sheet’00,000DebenturesCreditorsBills Payable184.108.40.206% DebenturesDebtorsBills receivablesNil4.30.17How do you show share capital of both the companies inThe consolidated Balance sheet?See in the next slide
32 Consolidated Balance sheet Holding companyRs.20,00,000Subsidiary companyRs.10,00,00080,000 sharesMajority(Holding company)ConsolidatedBalance sheet20,000 sharesMinorityNominal value2,00,000(Appear in theconsolidatedBalance sheet)Paid up value-8,80,000Real value- 8,00,000Good will ,000(consolidated B/S)
33 Share capital of holding company appears in the ExplanationsShare capital of holding company appears in theconsolidated Balance sheet2. Minority interest appears as liability in the consolidated B/S3. Investments of Holding company in subsidiary disappearsin the consolidated Balance Sheet4.Goodwill estimated appears along with other existing goodwill
34 How do you deal interest outstanding and accrued interest from holding to subsidiary or vice-versa?Both should be eliminated on either sideof the consolidated Balance sheet as theyBelong to the same homeHome is the place for loving and living.No creditor and debtor relationship
35 How do you deal contingent liability? Accepted and discountedwith in the Group(H to S or vice-versa)Accepted by outsidersWill become actual liabilityTherefore eliminated eitherSide of consolidated B/SAppear as contingent liabilityIn the consolidated B/S
36 If goods are sold to subsidiary to holding or vice-versa? Concept:- Profits can be realised only when goods are soldoutside the boundary of subsidiary and holding company.1. If goods supplied are completely sold out, profit wouldHave been realisedtherefore, no problem arises at the time of consolidationexcept if such goods sold are on credit. If the goods were soldon credit, (If, not yet paid on the B/S date)might have been included with creditors and debtorsin subsidiary and holding company respectively.If so,eliminate both such debtors and creditors in the consolidatedBalance sheet.
37 On February 2008 H. Ltd sold goods to S Ltd. goods costing Exercise-10On February 2008 H. Ltd sold goods to S Ltd. goods costingRs.8000 for Rs.10,000.25% of such goods not yet soldby subsidiary (S.Ltd.).Creditors of S.ltd include Rs.4,000Due to H Ltd on account of these goods.Solution: 75% of the goods are sold out side the boundary.So, profits arerealised on those goods.But on 25% of the goods not yet soldare not yet realised. The unrealised profit isRs.500(2000 x25%).1.We remove from stock Rs. 5002.We remove profit Rs.5003. Eliminate from debtors and creditors Rs.4000.
38 If goods supplied by subsidiary to holding or vice versa Are not fully sold on the date of balance sheet?1.Unrealised profit on supplied goods with in the group to beeliminated from closing stock.2.Eliminate the profit on such unsold stock from the suppliercompany(either H or S) to the extent ofholding company’s share.
39 Dividend already paid out of Subsidiary Ltd. to Holding Treatment of dividendDividend already paid outof Subsidiary Ltd. to HoldingDividend Proposed(not paid)By subsidiary Ltd.Capital ProfitDividend out ofRevenue ProfitsHoldingcompanySubsidiarycompanyREDUCE FROMINVESTMENTINSUBSIDIARYCredited toP/L A/c And appearsIn the consolidatedBalance sheetAdded toMinorityInterestDo not disclose separately the proposedDividend in the consolidated B/S??
40 Do not disclose separately the proposed Dividend in the consolidated B/S Why? It is because, the proposed dividend of subsidiary is shown with the minority interest(Minority’s share )and also in the P/L A/c of Holding (Holding company’s share).
41 Balance Sheet as on 31st March 2008 Exercise-11Balance Sheet as on 31st March 2008A LtdRs.’00,000B LtdRsShare Capital Rs.10 eachGeneral reservesProfit and loss a/cTrade creditors25.003.62.43.534.56.001.21.81.010.00Land and buildingMachineryFurniture40,000 shares in B Ltd.Stock on handDebtorsBank Balance6.412.61.45.04.13.82.03.40.6----2.50.5A Ltd. acquired 40,000 shares of B Ltd . On the date of acquisition,the B Ltd. had profits and reserves undistributed Rs. 1,00,000. Out of pre-Acquisition profits Rs.60,000 was distributed as dividend.Prepare :-1.Minority Interest 2.Cost of control/goodwill3.Consolidated Balance sheet as on 31st March 2008
42 Note:- Do not bother about Holding Company’s Balance sheet While preparing Minority Interest or cost of ControlStep-1 A Ltd in B Ltd: Minority shares in B Ltd.40:20=2:1Step-2: Capital Profit of B Ltd= 1,00,000(Pre- acquisition profit)Holding company A’s shareRs.66,667Minority share holdersRs.33,000Less:Dividend received out of Capital profitsRs60,000 x 1/3= Rs.20,000: 60,000 x 2/3=40,000Remaining capital profitsRs.66,667-Rs.40,000=Rs.26,667Rs.33,000-20,000=13,333
43 Step-2:Revenue profit(Post acquisition profit) =[Rs.1,20,000-(1,00,000-60,000)](Remaining Reserve)+1,80,000(P/L A/c)=Rs.2,60,000The reserve of Rs.1,20,000 remains in the Balance sheet isafter paying dividend of Rs.60,000(ie.,out of the capital Profits of Rs.1,00,000.) to the share holders.Rs.2,60,000Majority(A Ltd)Rs.2,60,000 x2/3=Rs.1,73,333MinorityRs.2,60,000 x1/3=Rs.86,667
44 Note:- Amount of dividend received by minority shareholders has not been added as they have already received the dividendin cash.Step-3:- Minority Interest1.Share capital20,000 x 10 = Rs.2,00,000Share of remainingCapital ProfitRs.13,333Share of revenueprofitRs.86,667TotalRs.3,00,000
45 Calculation of goodwill or cost of control (for Holding company point of view)Step-4Amount paid to acquire sharesOf B Ltd.Rs.5,00,000Less: Capital profits receivedIn the form of dividendRs.40,000Less: Face value of share40,000 x 10=Rs.4,00,000Less:-Holding company’s share ofRemaining capital profitsRs.26,667Rs.33,333Good will
46 Consolidated Balance sheet(Exercise-11) LiabilitiesRs.00,000AssetsShare capital 2,50,000 shares of 10 eachGeneral reserveProfit and loss a/c(Note-3)(2,40,000 – 40, ,73,333)Trade creditors(3,50, ,00,000)Minority InterestTotal25.003.603.734.503.0039.83GoodwillLand and Building(6,40, ,00,000)Machinery(12,60, ,40,0000)Furniture(1,40, ,000)Stock in trade(4,10, ,50,000)Debtors(3,80, ,00,000)Bank(1,20, ,000)0.33338.4016.002.006.64.81.7
47 Important observations in consolidated Balance sheet 1.All assets of Holding and subsidiary are added and disclose in the consolidated Balance sheet.2. All third party liabilities of both the companies are added and disclosed(displayed)3.From the profits of holding company and holding company’s share of subsidiary’s revenue profits subtract capital profits received in the form form of dividend as such dividend taken to calculate capital reserve(reduced from investments).
48 reduces the investment made by holding in subsidiary. How do you deal Bonus Shares issued by subsidiary?Issued out ofPost-acquisition profitsIssued out ofPre-acquisition profitsNo effect onConsolidatedBalance sheetShares of investmentsheld by Holding company in subsidiaryIncreases due to which cost ofControl reduced(See exercise)Note:- Anything is received from subsidiary either in the form of dividend or BonusShares out of Pre-acquisition profits or amounts of pre-acquisition profitsreduces the investment made by holding in subsidiary.
49 Balance Sheet as on 31st March 2008 Exercise-12Balance Sheet as on 31st March 2008A LtdRs.’00,000B LtdRsShare Capital Rs.100 eachGeneral reservesProfit and loss a/cTrade creditors90.0020.0015.00145.0025.005.0010.0045.00Fixed assetsCurrent Assets20,000 shares in S Ltd.65.0050.0030.00------A Ltd. acquired 20,000 shares of B Ltd on 31st March On the date of acquisition,the B Ltd. had reserves undistributed Rs. 5,00,000 and Rs.2,00,000 in the Profit and Loss Accountwhen A Ltd. acquired B Ltd. B Ltd.issued bonus for every 5 sharesHeld out of post-acquisition profits.Calculate: 1. Cost of control before and after issue of bonus shares2. prepare consolidated Balance sheet
50 Cost of control before issue of Bonus shares Step-1Cost of 20,000 shares ,00,000Less: Face value ,00,000share of capital profits1. Reserves 5,00,000 x 4/5=4,00,0002. Profit ,00,000 x 4/5=1,60, ,60, ,60,000Cost of control ,40,000Cost of acquiring 20,000 shares ,00,000Less:-Paid up value including bonus shares (24,000 x 10 ) 24,00,000Less:Share of Capital profits ( 7,00,000 x 4/5) ,60,000Cost of control ,000Step-2Cost of control after issue of Bonus sharesNumber of shares after bonus issue are (20, /5 x 20,000) =24,000
51 Why there is a difference in the cost of control before and after issue of Bonus shares? The Bonus shares are issued out of revenue profits. How does company issue bonus shares?The bonus shares are considered as capitalisation of profits.What do you mean by capitalisation of profits?It means Revenue profits are converted into capital profits before the issue of bonus shares.Once profit is capitalised it amounts to return of investment made by holding company in subsidiary if bonus shares issued. Therefore, it reduces cost of control.
52 Step-3Revenue ProfitsOut of Rs.10,00,000 profits Rs2,00,000 were earned pre-acquisition period.The revenue profit is (10,00,000-2,00,000) Rs.8,00,000.Bonus shares are issued out of revenue profit. It reduces revenue profit. Remaining profit is[Rs.8,00,000-(25,00,000 x1/5)] Rs.3,00,000.
53 Share of remaining revenue profit Step-4Holding companyRs.3,00,000 x 4/5=Rs.2,40,000Minority InterestRs.3,00,000 x 1/5=Rs.60,000
54 Minority InterestStep-5What ever belong to them whether capital profit or revenue profit or bonus shares.No of shares after bonus shares[ (5000 x 1/5)] sharesFace value (6000 x 10 ) Rs.6,00,000Share in capital profits Rs.1,40,000(Rs.7,00,000 x 1/5)Share of remaining revenue profit Rs.60,000Minority interest Rs.8,00,000
55 Consolidated Balance sheet as on 31st March 2008 Step-6Rs.Share capital(90,000 shares Rs.100 each)ReservesProfit and loss a/c(H Ltd. 20,00,000share in subsidiary Rs.2,40,000)Creditors(H Ltd. Rs.15,00,000S Ltd. Rs. 5,00,000)Minority InterestTotal90,00,000(H)20,00,000(H)22,40,000(H+S)20,00,000(H+S)8,00,000(S)1,60,40,000Fixed assetsCurrent assetsCost of control(goodwill)85,00,000(H+S)75,00,000(H+S)40,000(Balance)
56 How do you deal the following? Exercise-131.Unclaimed dividend given in the Liability side of subsidiary company.2.Preliminary expenses given in the asset side of subsidiary companyAnswer:1.Unclaimed dividend is assumed to belong to minorityShare holders.Add to minority Interest.2.Preliminary expenses is a wasteful expenses. It can not beRealised in cash. The net worth should be brought down.Capital profitOf pre-acquisition period should be brought downto the extent of preliminary expenses.
57 How do you deal the following? Exercise-14How do you deal the following?Preference shares given in the subsidiary company balance sheetAnswer: a)Share of Minority share holders to be added to minority interest.b)Share of Holding company to be added with equity shares held by majoritybefore calculating goodwill/capital reserve.
58 Debentures Rs.40,000 Investments in debenture 10,000 S Ltd H Ltd. Exercise-15How do you deal if debentures of Subsidiary company acquired by Holding company?We know that debentures are third party liabilities.If same debentures are acquired by holding company from subsidiary company it is known as intra company debts. Remove from either side of the Balance sheet.1.Balance sheet beforeDebentures Rs.40, Investments in debenture 10,000S LtdH Ltd.2.Consolidated Balance sheetDebentures Rs.30, Investment in subsidiary Nil
59 Debenture interest accrued from subsidiary to holding-How do you deal? Exercise-16Debenture interest accrued from subsidiary to holding-How do you deal?It is also inter company debts. Remove from both sides of Balance sheet to the extent belong to holding company.How ever outsider’s interest due will appear in the liability side of consolidated Balance sheet
60 2. Dividend received A/c debit Exercise-17What is the Journal entry in the books of Holding company if dividend is received from subsidiary?Answer:-A. If dividend declared by subsidiary out of pre-acquisition profits, the Journal entries are1.Bank a/c debitTo Dividend received2. Dividend received A/c debitTo Investment in shares of subsidiary A/cNote: Any dividend received from pre-acquisition profits are to be reduced from investments in subsidiary account in order to calculate goodwill/capital reserve.
61 B.If Dividend received on investments made by holding in subsidiary out of post acquisition profits, Journal entry isDividend received A/c debitTo Profit and Loss A/cNote:- Such dividend is considered as income from investment. It is added to holding company’s profit and loss a/c.
62 Acquisition of shares on different date If acquired on different dates, AS-21 consolidated Balance sheet only from the date on which holding and subsidiary relationship comes into existence.
63 How do you deal dividend tax? Dividend paid by Indian company has to pay 15% dividend tax +3% educational cess.It is equal to 15.45%.The dividend paid and tax reduce profit and loss account.Even preference dividend reduces profit.
64 Thank U Knowledge is meant to share, and not to store Life is to give, and not to receive