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1 Holding company Accounts and Preparation of consolidated balance sheet.

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1 1 Holding company Accounts and Preparation of consolidated balance sheet

2 2 Dedicated to ALL CA STUDENTS………….

3 3 HOLDING COMPANIES –IMPORTANT ISSUES TO SOLVE PROBLEMS 1.ANALYS OF CAPTAL PROFIT- 2.ANALYSYS OF REVENUE PROFIT 3.CALCULATION OF CAPITAL RESERVE/COST OF CONTROL(GOODWILL) 4.CALCULATION OF MINORITY INTEREST 5.Consolidated Balance sheet

4 4 1.ANALYSYS OF CAPTAL PROFIT MEANING: PROFIT/RESERVE OF ANY TYPE IN THE SUBSIDIARY COMPANY BEFORE THE DATE OF ACQUISITION

5 5 CAPTAL PROFIT EXAMPLE -I BALANCE SHEET OF SUBSIDIARY LIMITED AS ON LIABILITIES GENERAL RESERVE ( ) 5,00,000 PROFIT AND LOSS 2,00,000 THE BUSINESS WAS ACQUIRED ON O1-O1-2007

6 6 ANSWER EX.1 RESERVE BEFORE ACQUISITION- 5,00,000 PROFIT UP TO O1-O (2,OO,OOO*9/12)1,50,000 TOTAL CAPITAL PROFIT6,50,000 HOW MUCH IS THE REVENUE PROFIT?

7 7 REVENUE PROFIT? 2,OO,OOO-1,5O,OOO= 50,000 Exercise-2: SUPPOSING THE BUSINESS WAS ACQUIRED ON HOW MUCH IS CAPITAL PROFIT? /REVENUE PROFIT?

8 8 ANSWER-2 CAPITAL PROFIT: RESERVE(PRE-ACQISITION) 5,OO,OOO SHARE OF P/L A/C (2,OO,OOO*6/12) 1,OO,OOO TOTAL 6,OO,OOO REVENUE PROFIT: (2,OO,OOO *6/12) 1,OO,OOO ENTIRE RESERVE PROFIT EARNED BY THE SUBSIDIARY WAS PRE-ACQUISITION PROFIT

9 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 DIVIDEND 2.PAID UP VALUE OF THE SHARE(NOMINAL VALUE) 3. SHARE OF REMAINING CAPITAL PROFIT OF HOLDING COMPANY

10 10 Cost of control/goodwill The holding company purchased shares of subsidiary more than the real worth of the subsidiary If all assets are sold and third party liabilities are paid what remain to share holders is known as real worth What is the meaning of real worth? Real worth= Assets(realisable value) –third party liabilities Or Equity shares + reserves and surplus(both capital profit and revenue reserve)

11 11 The excess amount paid over real worth to acquire subsidiary company’s share is known as goodwill. Example shares are purchased for Rs. 50,000. The nominal value is Rs.10. The excess amount of Rs.10,000 is goodwill. Goodwill is shown in the consolidated balance sheet. How do you calculate goodwill on the shares acquired by Holding company? Assumed no profits in the balance sheet

12 12 If goodwill appears already in the holding and subsidiary company? H LtdS ltdH LtdS Ltd Equity shares(Rs.100 each) 12% preference shares(Rs.100 each) General reserve Profit and loss a/c ( ) Profits during the year 5,00,000 Nil 1,30,000 60,000 80,000 2,00,000 1,00,000 60,000(CP) 20,000(CP) 70,000(CP) Goodwill Shares in S Ltd (2000 equity shares and 500 preference shares) Preliminary expenses 20,000 3,50, ,000 10,000(CL) Date of acquisition was Balance sheet as on 31 st March 2008

13 13 1.Total Capital profits General reserve 60,000 Profit on ,000 Profit during the year ,000 Total150,000 Less:-Preliminary expenses (10,000) Less: Preference share holders (12,000) (cumulative preference shares) Profit to equity share holders 1,28,000

14 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 15 Capital reserve If the subsidiary company shares are purchased less than the subsidiary’s worth,(Purchased at cheaper rate) the benefits earned at the time of acquisition is known as capital reserve. The capital reserve is a capital profit Example 4: If nominal value of shares of subsidiary is Rs.10 and 4000 shares are acquired for Rs. 35,000, then there is a gain of 5000 to holding company is known as capital reserve

16 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 or non-operation prior to holding company’s acquisition. 2. Capital profits earned after acquisition Capital profits are not available for declaration of dividend. After the acquisition date, profits earned by subsidiary company by a normal business operations is a revenue profit. Such profits are available for declaration of dividend.

17 17 Balance sheet of subsidiary as on 31 st March 2008 Equity shares 4,00,000 (Rs.100 per share) General reserve 50,000 Profit and loss a/c 30,000 (on ) Profit and loss a/c 80,000 (For the year ) 3,000 shares were acquired by holding company in subsidiary company on 1 st January 2008 for Rs.4,50,000. Exercise-5

18 18 Reserves and Profits Capital Profit Revenue Profit General reserve (Before ) 50,000 Nil P/L on (Before) 30,000 Nil P/L for (9 months before And 3 months after) 9 months profit 9/12 x 80,000 =60,000 3 months profit 3/12 x 80,000 =20,000 Total Rs.1,40,000 Rs.20,000 Before or After acquisition Date of acquisition is 1 st January 2008

19 19 Minority/Majority Minority Capital profits Rs.1,40,000 Majority ¼ x 1,40,000 =Rs.35,000 ¾ x1,40,000 =Rs.1,05,000 Revenue profits Rs.20,000 ¼ x 20,000 =Rs.5000 ¾ x 20,000 =Rs.15000(P/L) Rs.1,40,000 Total Rs.5,60,000 Rs.4,05,000-goodwill purpose Rs.15,000-profit and loss a/c In the consolidated B/S Shares Capital 4,00, x 100 1,00,000 3,000x 100 3,00,000 Value on the Date of acquisition Rs.4,05,000

20 20 Good will/Capital reserve It is calculated from the point of view of Holding company What is the value of total investment made by Holding company? It is Rs.4,50,000 What 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 21 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 22 Yes.It affects goodwill.It decrease the goodwill. Suppose subsidiary declares dividend out of general reserve (Capital profit because it was earned before acquisition) Rs.40,000 to all share holders, the holding company’s share of general reserve is ¾ of 40,000=30,000. Since 30,000 is received by holding out of their investments The investment value decreased to Rs.4,20,000(4,50,000-30,000). Therefore goodwill is Rs.15,000. Exercise-6

23 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 debit Profit and loss a/c credit

24 24 Elimination of common transactions 1.Bills drawn by holding company on subsidiary company or vice-versa: Holding company Subsidiary company Bills receivable a/c debit To subsidiary company a/c Holding company a/c debit To Bills payable a/c Balance sheet Asset side Bills receivable Balance sheet Liability side Bills payable

25 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 26 Provided??????!!!!! They get married each other.

27 27 How do you deal in the consolidated Balance sheet? 1.Loan given by holding company to subsidiary? 2. Debentures issued by holding to subsidiary? 3. Loan given by subsidiary to holding? Only one answer: In one company balance sheet they are shown as asset and an another company they are shown as liability. If combined(Consolidated) both asset and liability are eliminated.Only outsiders’ liabilities are shown in the consolidated balance sheet See the exercise in the next page Exercise-8

28 28 H ltd Rs. ’00,000 S Ltd Rs. ’00,000 H Ltd Rs ’00,000 S Ltd Rs. ’00,00 0 Share Capital Rs.10 each 9% debentures Creditors Bills payable Nil Shares in S ltd(80,000 shares) 9% debentures in S ltd Debtors Bills receivables Nil Balance Sheet Bills receivable of S ltd. include bills for Rs.8000 accepted by 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? Exercise-9

29 29 H ltd Rs. ’00,000 S Ltd Rs. ’00,000 H Ltd Rs ’00,000 S Ltd Rs. ’00,00 0 9% debentures Creditors Bills payable Nil % debentures in S ltd Debtors Bills receivables Nil Balance Sheet(observe other than share capital) Bills receivable of S ltd. include bills for Rs.8000 accepted by 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 30 1.Bills accepted by H Ltd is B/P in H ltd Balance sheet. Remove Rs.8000 from B/P and B/R 2. Creditors of S Ltd. of Rs. 20,000 is equal to Rs.Debtors of H Ltd. Both to be eliminated to the extent of Rs. 20, Debentures of Rs.80,000 of S ltd is an investment for H Ltd. Both to be eliminated in the consolidated Balance sheet.The Remaining debentures belong to outsiders to be shown in the Consolidated Balance sheet. See the consolidated Balance sheet in the next slide

31 31 ’00,000 Debentures Creditors Bills Payable % Debentures Debtors Bills receivables Nil Consolidated Balance sheet How do you show share capital of both the companies in The consolidated Balance sheet? See in the next slide

32 32 Consolidated Balance sheet Holding company Rs.20,00,000 Subsidiary company Rs.10,00,000 20,000 shares Minority 80,000 shares Majority (Holding company) Paid up value-8,80,000 Real value- 8,00,000 Good will- 80,000 (consolidated B/S) Nominal value 2,00,000(Appear in the consolidated Balance sheet) Consolidated Balance sheet

33 33 Explanations 1.Share capital of holding company appears in the consolidated Balance sheet 2. Minority interest appears as liability in the consolidated B/S 3. Investments of Holding company in subsidiary disappears in the consolidated Balance Sheet 4.Goodwill estimated appears along with other existing goodwill

34 34 How do you deal interest outstanding and accrued interest from holding to subsidiary or vice-versa? Both should be eliminated on either side of the consolidated Balance sheet as they Belong to the same home Home is the place for loving and living. No creditor and debtor relationship

35 35 How do you deal contingent liability? Accepted and discounted with in the Group (H to S or vice-versa) Accepted by outsiders Will become actual liability Therefore eliminated either Side of consolidated B/S Appear as contingent liability In the consolidated B/S

36 36 If goods are sold to subsidiary to holding or vice-versa? 1. If goods supplied are completely sold out, profit would Have been realised therefore, no problem arises at the time of consolidation except if such goods sold are on credit. If the goods were sold on credit, (If, not yet paid on the B/S date) might have been included with creditors and debtors in subsidiary and holding company respectively.If so, eliminate both such debtors and creditors in the consolidated Balance sheet. Concept:- Profits can be realised only when goods are sold outside the boundary of subsidiary and holding company.

37 37 Exercise-10 On February 2008 H. Ltd sold goods to S Ltd. goods costing Rs.8000 for Rs.10,000.25% of such goods not yet sold by subsidiary (S.Ltd.).Creditors of S.ltd include Rs.4,000 Due to H Ltd on account of these goods. Solution: 75% of the goods are sold out side the boundary. So, profits are realised on those goods.But on 25% of the goods not yet sold are not yet realised. The unrealised profit is Rs.500(2000 x25%). 1.We remove from stock Rs We remove profit Rs Eliminate from debtors and creditors Rs.4000.

38 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 be eliminated from closing stock. 2.Eliminate the profit on such unsold stock from the supplier company(either H or S) to the extent of holding company’s share.

39 39 Treatment of dividend Dividend already paid out of Subsidiary Ltd. to Holding Dividend out of Revenue Profits Credited to P/L A/c And appears In the consolidated Balance sheet REDUCE FROM INVESTMENT IN SUBSIDIARY Capital Profit Dividend Proposed(not paid) By subsidiary Ltd. Holding company Subsidiary company Added to Minority Interest Do not disclose separately the proposed Dividend in the consolidated B/S??

40 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 41 A Ltd Rs. ’00,000 B Ltd Rs. ’00,000 A Ltd Rs ’00,000 B Ltd Rs. ’00,000 Share Capital Rs.10 each General reserves Profit and loss a/c Trade creditors Land and building Machinery Furniture 40,000 shares in B Ltd. Stock on hand Debtors Bank Balance Balance Sheet as on 31 st March 2008 A 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/goodwill 3.Consolidated Balance sheet as on 31 st March 2008 Exercise-11

42 42 Step-2: Capital Profit of B Ltd= 1,00,000(Pre- acquisition profit) Note:- Do not bother about Holding Company’s Balance sheet While preparing Minority Interest or cost of Control Holding company A’s share Rs.66,667 Step-1 A Ltd in B Ltd: Minority shares in B Ltd. 40:20=2:1 Minority share holders Rs.33,000 : 60,000 x 2/3=40,000 Rs.66,667-Rs.40,000=Rs.26,667 Rs60,000 x 1/3= Rs.20,000 Rs.33,000-20,000=13,333 Less:Dividend received out of Capital profits Remaining capital profits

43 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.2,60,000 The reserve of Rs.1,20,000 remains in the Balance sheet is after paying dividend of Rs.60,000 (ie.,out of the capital Profits of Rs.1,00,000.) to the share holders. Rs.2,60,000 Majority(A Ltd) Rs.2,60,000 x2/3=Rs.1,73,333 Minority Rs.2,60,000 x1/3=Rs.86,667

44 44 Step-3:- Minority Interest 1.Share capital 20,000 x 10 = Rs.2,00,000 Share of remaining Capital Profit Rs.13,333 Share of revenue profit Rs.86,667 Total Rs.3,00,000 Note:- Amount of dividend received by minority shareholders has not been added as they have already received the dividend in cash.

45 45 Calculation of goodwill or cost of control (for Holding company point of view) Step-4 Amount paid to acquire shares Of B Ltd. Rs.5,00,000 Less: Face value of share40,000 x 10=Rs.4,00,000 Less: Capital profits received In the form of dividend Rs.40,000 Less:-Holding company’s share of Remaining capital profits Rs.26,667 Good will Rs.33,333

46 46 LiabilitiesRs.00,000AssetsRs.00,000 Share capital 2,50,000 shares of 10 each General reserve Profit and loss a/c(Note-3) (2,40,000 – 40, ,73,333) Trade creditors (3,50, ,00,000) Minority Interest Total Goodwill Land 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) Total Consolidated Balance sheet(Exercise-11)

47 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 48 How do you deal Bonus Shares issued by subsidiary? Issued out of Pre-acquisition profits Issued out of Post-acquisition profits No effect on Consolidated Balance sheet Note:- Anything is received from subsidiary either in the form of dividend or Bonus Shares out of Pre-acquisition profits or amounts of pre-acquisition profits reduces the investment made by holding in subsidiary. Shares of investments held by Holding company in subsidiary Increases due to which cost of Control reduced(See exercise)

49 49 A Ltd Rs. ’00,000 B Ltd Rs. ’00,000 A Ltd Rs ’00,000 B Ltd Rs. ’00,000 Share Capital Rs.100 each General reserves Profit and loss a/c Trade creditors Fixed assets Current Assets 20,000 shares in S Ltd Balance Sheet as on 31 st March 2008 A Ltd. acquired 20,000 shares of B Ltd on 31 st 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 Account when A Ltd. acquired B Ltd. B Ltd.issued bonus for every 5 shares Held out of post-acquisition profits. Calculate: 1. Cost of control before and after issue of bonus shares 2. prepare consolidated Balance sheet Exercise-12

50 50 Cost of control before issue of Bonus shares Cost of 20,000 shares 30,00,000 Less: Face value 20,00,000 share of capital profits 1. Reserves 5,00,000 x 4/5=4,00, Profit 2,00,000 x 4/5=1,60,000 5,60,000 25,60,000 Cost of control4,40,000 Step-1 Cost of acquiring 20,000 shares 30,00,000 Less:-Paid up value including bonus shares (24,000 x 10 ) 24,00,000 Less:Share of Capital profits ( 7,00,000 x 4/5) 5,60,000 Cost of control 40,000 Step-2 Cost of control after issue of Bonus shares Number of shares after bonus issue are (20, /5 x 20,000) =24,000

51 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 52 Revenue Profits Out 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. Step-3

53 53 Share of remaining revenue profit Step-4 Holding company Rs.3,00,000 x 4/5 =Rs.2,40,000 Minority Interest Rs.3,00,000 x 1/5 =Rs.60,000

54 54 Minority Interest What ever belong to them whether capital profit or revenue profit or bonus shares. No of shares after bonus shares [ (5000 x 1/5)] 6000 shares Face value (6000 x 10 ) Rs.6,00,000 Share in capital profits Rs.1,40,000 (Rs.7,00,000 x 1/5) Share of remaining revenue profit Rs.60,000 Minority interest Rs.8,00,000 Step-5

55 55 Rs. Share capital (90,000 shares Rs.100 each) Reserves Profit and loss a/c (H Ltd. 20,00,000 share in subsidiary Rs.2,40,000) Creditors (H Ltd. Rs.15,00,000 S Ltd. Rs. 5,00,000) Minority Interest Total 90,00,000(H) 20,00,000(H) 22,40,000(H+S) 20,00,000(H+S) 8,00,000(S) 1,60,40,000 Fixed assets Current assets Cost of control(goodwill) 85,00,000(H+S) 75,00,000(H+S) 40,000(Balance) 1,60,40,000 Consolidated Balance sheet as on 31 st March 2008Step-6

56 56 How do you deal the following? 1.Unclaimed dividend given in the Liability side of subsidiary company. 2.Preliminary expenses given in the asset side of subsidiary company Answer : Exercise-13 1.Unclaimed dividend is assumed to belong to minority Share holders.Add to minority Interest. 2.Preliminary expenses is a wasteful expenses. It can not be Realised in cash. The net worth should be brought down.Capital profit Of pre-acquisition period should be brought down to the extent of preliminary expenses.

57 57 How do you deal the following? Preference shares given in the subsidiary company balance sheet Answer: 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 majority before calculating goodwill/capital reserve. Exercise-14

58 58 How 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. Debentures Rs.40,000 Investments in debenture 10,000 1.Balance sheet before S Ltd H Ltd. 2.Consolidated Balance sheet Debentures Rs.30,000 Investment in subsidiary Nil Exercise-15

59 59 Debenture 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 Exercise-16

60 60 What 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 are 1.Bank a/c debit To Dividend received 2. Dividend received A/c debit To Investment in shares of subsidiary A/c Note: Any dividend received from pre- acquisition profits are to be reduced from investments in subsidiary account in order to calculate goodwill/capital reserve. Exercise-17

61 61 B.If Dividend received on investments made by holding in subsidiary out of post acquisition profits, Journal entry is Dividend received A/c debit To Profit and Loss A/c Note:- Such dividend is considered as income from investment. It is added to holding company’s profit and loss a/c.

62 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 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 64 Thank U Knowledge is meant to share, and not to store Life is to give, and not to receive


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