1

Unit – III
Lesson 7
HOLDING COMPANIES – I
Introduction

The present trend of large scale corporate growth owes to a steady pattern of
acquisitions and combinations. This in turn is due to several advantages like product
diversification, economics of cost due to large scale production and distribution, sharing
of material and man power, thereby the expertise and ultimately meeting the ends with
efficient economic management. One such device is the formation of holding
companies. A holding company can be defined as a company which controls one or
more other companies by virtue of majority share holding. This vests a right of
managerial control as most of the directors are appointed by them. A company which is
controlled by a holding company is defined as Subsidiary Company.

Definition and Types

A Definitions

According to Section 4(4) of the Companies Act, a Company is a subsidiary company

if, but only if (a) the other companies controls the composition of hoard of directors or
(b) the other company (i) holds more than half in nominal value of equity share capital
or (ii) if it is a company formed before 1 st April 1956 with both equity and preference
share holders having the same voting rights, the other company exercises or controls
more than half if equity share voting power or (iii) it is a subsidiary or any company
which is that other companies subsidiary. For example if company A is the subsidiary
of B, and B is the subsidiary of C, A automatically becomes subsidiary of C.

Accounting Standard 21, ‘Consolidated Financial Statements’ issued by the Institute

of Chartered Accountants of India, defines subsidiary company as ‘an enterprise that
is controlled by another enterprise’ (known as parent). A parent has been defined as
‘an enterprise that has one or more subsidiary’.
 2

B Types: Wholly owned or partly owned subsidiaries

Where all the shares of the subsidiary and owned by the holding company, it is the
wholly owned subsidiary company, in such a case, in order to fulfill the legal
requirement of minimum number of members, i.e. 2 case of private and 7 in case of
public, the holding company appoint the requisite number of nominees holding one
share each on behalf of the holding company.

A partly owned subsidiary is one in which the holding company does not hold all the
shares but holds majority rest of the shares are held by a small group called ‘Minority
share holders’.

A subsidiary company cannot hold shares in holding company after it becomes

subsidiary but if it has certain shares before the acquisition on the part of holding
company, it can retain the same but without voting.

Rationale for Holding Companies

Holding companies assure better organizational functioning due to the following facts.
(a) It allows better quality decisions at all levels with the macro policy of the
holding company.
(b) By pooling the financial and human resources, R & D and marketing better
utilization of financial and other resources is made possible.
(c) The management of holding company promotes commercial and managerial
culture.
(d) From the point of span of control and co-ordination holding companies result
in sizable units assuring financial viability.
(e) This enables promotion of corporate culture on sound business principals.
 3

Final Accounts

It is essential that the financial year of the holding company and subsidiary company
should be uniform. In view of this section 213(1) of Companies Act stipulates that in
view of such uniformity the financial year of holding company or subsidiary company
can extend to more than one year and such period should not be more than six months
and if it is more than six months the Central government gives necessary instructions to
reduce the time gap to not more than 6 months on the application of the directors of
either holding or subsidiary company.

Though in India it is not compulsory for holding company to make a Consolidated

Balance Sheet and Income Statement section 213 of the Companies Act gives a list of
documents which are to be attached of a subsidiary company by the holding company.
They are -
(i) A copy of the balance sheet of the subsidiary company
(ii) A copy of the profit and loss account
(iii) A copy of the report of its Board of Directors
(iv) A copy of the report of its auditors
(v) A Statement showing (a) the extent of holding companies interest in the
subsidiary company (b) the profits (after setting off the losses of the
subsidiary) so far as they concern the holding company for current year and
previous year separately and for profits already dealt within the books of the
holding company and not so dealt with. Here the word ‘profits’ refer to
revenue profits earned after the date of acquisition of shares by the holding
company.
(vi) Where the financial year of holding and subsidiary company do not coincide a
statement showing (a) whether and to what extent holding company’s interest
in the subsidiary company since the close of the financial year of the
subsidiary company (b) details of the material changes which have occurred
between the end of the financial year of both the companies in items like fixed
assets, investments, borrowings, etc.
 4

In view of the feasibility and better understanding to stake holders it is now a

practice for a holding company to present with its own Profit and Loss
Account and Balance Sheet, a consolidated income statement and position
statement covering all the items of its own and that of subsidiary companies.
While presenting so all the intercompany transactions are eliminated.

Accounting Statement 21 ( A S 21 ) (Consolidated Financial Statements)

Consolidated Financial Statements are issued by the Council of Institute of Chartered
Accountants of India and is applicable for accounting period commencing from
1.4.2001. Given below the features of A S 21.
a. Objectives

The purpose of this standard is to lay down the principles and procedures for
preparation and presentation of the statements to be prepared by the parent
company which incorporates the accounts of its subsidiaries. This reflects the
economic status and the resource utilization of the entire group as a whole.

b. Scope

(i) The statement should be applied in the preparation and presentation of

consolidated financial statements for a group of units under the control of the
parent company.
(ii) The statement should also be applied in accounting for investments in
subsidiaries in the separate financial statement of the parent.
(iii) Definitions
Following are the meanings of various terms used in preparing financial statements.
(a) Control
(1) Ownership directly or indirectly through subsidiary (ICS) of more than one half
of the voting power of an enterprise, or
(2)
 5

(a) Control of the composition of the board of directors in case of a company or of

the composition of the corresponding governing body In case of any other
enterprise so as to obtain economic benefits from its activities.
(b) Subsidiary

(a) A subsidiary is an enterprise that is controlled by another enterprise (known

as the parent)

(b) Parent: - A parent is an enterprise that has one or more subsidiaries.

(c) Group: - A group is a parent and all its subsidiaries

(d) Consolidated Financial Statements are the financial statements of a group

presented as those of a single enterprise.

(e) Equity is the residual interest in the assets of an enterprise after deducting
all its liabilities.

(f) Minority Interest is that part of the net results of operations and of the net
assets of a subsidiary attributable to interest which are not owned directly or
indirectly through subsidiaries, by the parent.

The consolidated financial statements are prepared in addition to the regular financial
statements. A parent has to consolidate all statements, domestic or foreign. However, a
subsidiary should be excluded from consolidation when the control is intended to be
temporary or it operation under severe long term restrictions which impairs Company’s
ability to transfer funds to its parents.

Consolidation Procedure
In preparing the consolidated financial statements, all assets, liabilities, incomes and
expenditure should be combined on a line by line basis by adding individually. While
doing so, proper attention should be paid to the following items.
 6

(a) Cost of control or Good will / Capital Reserve

If the holding company purchases the shares of the subsidiary company at a
price higher than the paid up value of the shares, the excess amount paid
represents payment for good will or cost of acquiring control over subsidiary
company subject to the adjustment for reserves or profit or loss. On the
contrary / if the amount paid towards shares is less than paid up value of share, it
speaks about the capital reserve or profit. This can be arrived at by comparing
the value of shares held by holding company on the liabilities side of subsidiary
company’s balance sheet in the items share capital and Reserves and
Investments on the Assets side of Holding company’s Balance Sheet (in
subsidiary company). For example if 9000 shares whose paid up value is Rs. 10
of 10,000 shares of a subsidiary company are bought for Rs.1,00,000
as is shown as ‘Investment’ on the Assets of holding company, excess Rs.
10,000 is assumed as cost of acquiring control over subsidiary company or Good
will. On the contrary, if the value of investment is only Rs. 80,000 differential Rs.
10,000 can be attributed to Capital Reserve. In case the subsidiary company
has accumulated profits in the form of reserves or profit and loss Account
balance, the proportionate share of such balance also has to be considered for
computation of Good will / Capital Reserve. If in the above example the balance
of Reserve and Profit and Loss Account balance is Rs 5000, the
proportionate share i.e. 9000 /10,000 of 5000 = 4500 should be added to value of
shares. Thus 90,000 + 4500 = 94,500 as against Rs. 1,00,000 in the first case
i.e. Rs 5500 is Good will or cost of control. In the second situation where the
shares are bought for Rs 80,000 Capital Reserve is 94,500 – 80,000 = Rs
14,500.
(b) Post Acquisition Profits
Profits of the subsidiary company after the date of purchase of shares by the
holding company are treated as revenue profits. Holding company’s share of
such profit is added to Profit and Loss Account of Holding Company and the
balance depicting Minority share holder’s interest is added to Minority interest in
the consolidated balance sheet. For example if the profits earned during the
 7

current year are Rs 12,000, the holding company acquiring 9/10 of share holding
after six months of commencement of business, profits that are to be added to
Profit and Loss Account of holding company are 12,000 X 9/10 X ½ = Rs,5400
and balance of Rs 6600 are to be added to Minority Interest.

(c) Minority Interest

When some of the shares are held by a outsiders i.e. other than holding
company, such class are called ‘Minority share holders’ while consolidating the
assets and liabilities in the books of holding company, such interest of Minority
share holders also has to be shown as a liability. These are called ‘Minority
share holders’ as they possess less than 50% of the shares of the subsidiary
company. Their interest is calculated as follows:

Paid up value of the shares held by outsiders

Add: Proportionate share of subsidiary company’s profits and reserve

Proportionate increase in the value of assets

Less: Proportionate share in losses of subsidiary company

Proportionate share in decrease in the value of assets of subsidiary

Company =

Value of Minority Interest

If the preference shares are held by outsiders, the paid up value of such shares
together with dividend also should be added to Minority share holders’ interest.

(d)Treatment of Fictitious Assets

If fictitious assets like preliminary expenses discount on shares, underwriting

commission are given on the assets side of Balance Sheet of the subsidiary
 8

company should be deducted from the capital profits before distributing the same
among holding company and Minority share holders.

(e)Elimination of Common Transactions.

It is quite possible for holding company and subsidiary to have mutual

transactions before taking over. Thus, with these transactions ‘debtors’ and
creditors comprise of what is due from the parent or subsidiary while preparing
the consolidated Balance Sheet. Such transactions have to be eliminated from
Debtors and Creditors. On the other hand if account of such transactions, some
of the stock is left out, which includes profit which is not yet realized, even this
has to be eliminated from Profit and Loss Account of Vendor Company and stock
of the purchasing company. Inter company transactions, apart from the above
comprise the following.

(i) Bills of exchange mutually drawn

(ii) Loans mutually taken
(iii) Debentures issued by one company held by another
(f) Good will of the Subsidiary Company.
If subsidiary company has Good will, such amount should be added if the
Holding Company. On the other hand, if it is capital reserve, capital reserve is
adjusted to this extent.
SUMMARY
The advantages of large scale production resulted in several types of combinations.
One such combination which encourages managerial ability and enables uniform
funding of the units by extending support financially and managerially is that of Holding
and Subsidiary Companies. A holding company is a parent body which contributes to
either whole of the shares or majority of the shares. A Subsidiary company whose
shares are owned by a holding company is controlled by parent company. The efficacy
in such type of combination is to derive the expertise and experience of the parent
company from among the subsidiary company. This assures better utilization of
resources, efficient management and implementation of several scientific schemes in
functioning.
 9

While preparing the final accounts, AS 21 which refer to Consolidated Financial

Statements have to be adhered to. This though not mandatory is to be adopted from
the view point of convenience consolidation means summing up the assets and
liabilities of holding company along with the subsidiary company.

While preparing consolidated Balance Sheet of the holding company and its subsidiary
care must be taken as to the following items.

(a) Cost of control Good will or capital reserve which is the difference between
the prices paid and the value of the shares acquired.
(b) Minority interest which reflects the share of those share holders other than the
parent body in the business of the subsidiary company.
(c) Capital profits and Revenue Profits of the subsidiary company which
comprise the share of these items by the holding company and Minority share
holders.
(d) Intercompany transactions referring to the transactions prior to the acquisition
of shares by holding company in subsidiary company. These are to be
cancelled in the consolidated balance sheet by the adjusting the Debtors and
Creditors or Bills receivable and Bills payable.
(e) Elimination of profit included in stock which is not yet realized by creating a
stock reserve.

Above all in the consolidated Balance Sheet investment of holding company on the
assets side, share capital of subsidiary company will not be shown as it is adjusted for
computation of Good will / capital reserve to the extent of holding company’s share and
Minority interest for balance of it.

Self Check Questions

A Objective Questions
(a) A holding company is the one which holds all the shares of a
subsidiary company - True / False
 10

(b) Presentation of consolidated Balance Sheet is mandatory – True /

False.
(c) Cost of control is excess paid over the value of shares – True /
False
(d) Pre acquisition profits are capital profits – True / False
(e) Intercompany transactions are to be included in the consolidated
Balance Sheet – True / False.
B Short Questions
(a) What is a holding company?
(b) What is Capital Reserve?
(c ) what are pre- acquisition and post-acquisition profits ?
(d) What is the rationale behind formation of holding company?
C Essay Questions
(a) Define a holding company and subsidiary company. What are the
advantages of such combination?
(b) How do you arrive at the ‘Minority Interest’?
(c) What are intercompany transactions? Explain three of them?
(d) What is consolidated Balance Sheet. How is it prepared.
 11

LESSON 8

HOLDING COMPANIES – II
Introduction

Accounting Standard (AS) 21 speaks about the consolidated Financial Statements of

Holding Company with that of its subsidiary. The process of consolidation is done
through combining the assets and liabilities of holding company with that of subsidiary
company. The primary point to remember here is that while preparing the consolidated
Balance Sheet, the share capital of subsidiary company and Investments in shares’ of
subsidiary company on Assets side of holding company need not be taken. However
the net effect of this is reflected on other items i.e. for computation of cost of control and
Minority Share holders interest. It is now proposed to take up each item with practical
example.

Illustration on Cost of Control

The price paid by Holding Company for acquiring all / majority of shares in
subsidiary company, when compared to the value of the shares speaks about the
standing of the parent company in the administration and management of the subsidiary
company. If the price paid as depicted by the word ‘Investment’ on the Assets side of
Holding Company is more than the value of the shares as arrived at from the liabilities
side of subsidiary company’s Balance Sheet. The extra amount so paid is towards
goodwill of the company or for acquiring cost of control. If on the other hand price paid
is less than the value it speaks of Capital Revenue.
 12

Illustration – I

(A) H Ltd acquires all the share capital of S Ltd on 31 st December 2008, when the Balance
Sheets of them are as under

Balance Sheet

Liabilities Assets

H Ltd S Ltd Ltd

S Ltd

Share Capital (Rs.10 each) 40000 20000 Fixed Assets 40000 20000

General Reserve 10000 6000 Current Assets 20000 24000

Profit and Loss Account 6000 4000 Share in S Ltd 26000 ---

10% Debentures 20000 10000

Sundry Creditors 10000 4000

-------- -------- --------- --------

86000 44000 86000 44000
-------- -------- --------
---------

Prepare a consolidated Balance Sheet.

Solution

Working notes :-

Cost of Control

Amount paid for shares – 26000

Less :-
Paid up value of Shares 20000
General Reserve 6000
Profit and Loss Account 4000
---------
30000
= (4000)

Since the amount paid is less than the value of shares and accumulated profits, there is a
Capital Reserve of Rs. 4000.
 13

Consolidated Balance Sheet

Liabilities Assets

Share Capital 40,000 Fixed Assets 60,000

General Reserve 10,000 Current Assets 44,000

Profit and Loss Account 6,000

Capital Reserve 4,000

10% Debentures 30,000

Sundry Creditors 14,000

------------ --------------
1,04,000
1,04,000 --------------
--------------

B What will be position if there is no General Reserve and Profit and Loss Account for
Subsidiary Company instead it is Bank Loan.

Amount paid for Shares Rs. 26,000

Less:-

Paid up value of Shares Rs. 20,000

--------------

Cost of Control / Good will Rs. 6,000

Consolidated Balance Sheet

Liabilities Assets

Share Capital Rs. 40,000 Fixed Assets Rs. 60,000

General Reserve Rs. 10,000 Current Assets Rs. 44,000

Profit and Loss Account Rs. 6,000 Good will Rs. 6,000

10% Debentures Rs. 30,000

Bank Loan Rs. 10,000

 14

Sundry Creditors Rs. 14,000

----------------- -------------------

Rs.1.10,000 Rs.1,10,000

---------------- -------------------

3.2.3 Minority Interest

A Holding Company acquires either all or majority of the share holding of a Subsidiary
Company, where only majority shares are acquired a section of the share holders whose
interest exists in the Company are called Minority Share Holders. Their contribution in Share
Capital of the Company, their share in accumulated profits and current profits together would be
shown as ‘Minority Interest’ in the Consolidated Balance Sheet as a ‘Liability’.

Illustration

From the following information pertaining to Major Ltd and its Subsidiary Minor Ltd
prepare a Consolidated Balance Sheet. Major acquires 750 Shares in Minor Ltd.

Balance Sheet of Major and Minor Ltd

Liabilities Assets

Major Minor Major Minor

Share Capital 20,000 10,000 Fixed Assets 30,000 20,000

(shares of Rs.10/-each)

General Reserve 5,000 5,000 Current Assets 10,000 4,000

Profit and Loss Account 10,000 4,000 Shares in Minor Ltd 15,000

Other Liabilities 20,000 5,000

---------- --------- ---------- ----------

55,000 24,000 55,000 24,000

---------- ---------- ----------
----------

Solution:

Working Notes:-

(a) Cost of Control Rs. 15,000

 15

Amount paid for Shares

Less:-

Par value of Shares acquired 750 X Rs. 10 = Rs. 7,500

Shares in General Reserve 5000 X 750/1000 = Rs. 3,750

Share in Profit and Loss Account 4000 X 750 / 1000 = Rs. 3,000

Rs. 14,250 Rs. 14,250

------------- --------------

Good will Rs. 750

(b) Minority Interest

Share Capital Rs. 2,500

Share in General and Reserve 250 / 1000 X 5000 = Rs. 1,250

Profit and Loss Account 250 / 1000 X 4000 = Rs. 1,000

-------------
Rs. 4,750
---------
-----

Consolidated Balance Sheet

Liabilities Assets

Share Capital 20,000 Fixed Assets 50,000

General Reserve 5,000 Current Assets 14,000

Profit and Loss Account 10,000 Good will 750

Minority Interest 4,750

Other Liabilities 25,000

--------- ---------

64,750 64,750

--------- ---------
 16

3.2.4 Illustration on Pre Acquisition and Post Acquisition profit :-

Pre acquisition profits are those profits which the Subsidiary Company earns before
taking over by the Holding Company whereas, all the profits earned after such acquisition are
called Post Acquisition Profits or Revenue Profits.

Pre acquisition Profit to the extent of Holding Company Share is adjusted while
ascertaining cost of control / Good will or Capital Profit. Balance of it will be added to the
Minority Share holders Interest, Revenue Profits to the extent of Holding Company’s share is
added to the Profit of the Holding Company and that of the Minority Share holders is added to
Minority Share holders Interest. To determine whether profits in the year one Capital Profits or
Revenue Profits, the date on which such acquisition by Holding Company take place has to be
considered.

Illustration:-

Following are the Balance Sheet of H Ltd and its Subsidiary S Ltd on 31st March 2010

Balance Sheet

Liabilities Assets

H Ltd S Ltd H Ltd S Ltd

Share Capital 4,00,000 1,00,000 Fixed Assets 2,75,000 50,000

General Reserve 75,000 35,000 75% Shares in S.Ltd 1,40,000 -----

Profit & Loss Account 45,000 27,500 Stock 52,500 88,500

Creditors 60,000 40,000 Other Assets 1,12,500 64,000

----------- ------------ ------------ ------------
5,80,000 2,02,500 5,80,000 2,02,500
----------- ------------ ------------ ------------

Draw a Consolidated Balance Sheet where H Ltd has acquired Shares on 31st July and
the Profits earned during the year are 22,500.

Solution

Working Note:- Rupees

i) Analysis of Capital Profit

Balance of General Reserve 35,000
Profit and Loss Account as on 31st March
(Rs.27,500 – 22,500 ) = 5,000
Current year’s profit till 31st July
(2,25,000 X 4 / 12) = 7,500
---------
 17

47,500
---------
Holding Company’s Share (47,500 X 25/100) = 35,625
Minority Interest (4,75,000 X 25/100) = 11,875
ii) Analysis of Revenue Profit

Profit from 1st August to 31st March =

(22,500 X 8 / 12 ) = 15,000

Holding Company’s Share (15,000 X 25/100) = 11,250

Minority Interest (15000 X 25 / 100 ) = 3,750

Rupees

iii) Calculation of Cost of Control

Cost of Investments 1,40,000
Less :-
Paid up value of 75% Shares 75,000
Share in Capital Profit 35,625
--------- 1,10,625
Cost of Control 29,375
iv) Minority Interest
Share in Capital of Subsidiary Company
(1/4 X 1,00,000 ) = 25,000
Share in Capital Profit 11,875
Share in Revenue Profit 3,750
-----------
40,625
-----------
v) Balance of Profit and Loss Account of Holding Company

Balance of H Ltd 45,000

Share in profits of Subsidiary Company 11,250
----------
56,250
----------

Consolidated Balance of H Ltd and its Subsidiary S Ltd

Liabilities Assets

Share Capital 4,00,000 Fixed Assets

 18

H Ltd 2,75,000

S Ltd 50,000 3,25,000

General Reserve 75,000 Good will (Cost of Control) 29,375

Minority Interest 40,625 Stock

H Ltd 52,500

S Ltd 88,500 1,41,000

Current Liabilities Other Assets

H Ltd 60,000 H Ltd 1,12,500

S Ltd 40,000 1,00,000 S Ltd 64,000 1,76,500

------------ ---------
--- 6,71,875
6,71,875 ------------
------------

3.2.5 Illustration on Fictitious Assets

If the Subsidiary Companies’ Balance Sheet comprise of fictitious assets like preliminary
expenses, discount on issue of shares or debentures, underwriting commission, etc., these are
to be adjusted from Capital Profits before ascertaining cost of control or Minority share holders’
interest.

Illustration

Given below is the Balance Sheet of Big Ltd and Small Ltd on the date of acquisition by
Big Ltd. Big Ltd contribution for 60% of the shares.

Balance Sheet

Liabilities Big Ltd Small Ltd Assets Big Ltd Small Ltd
 19

Share Capital 50,000 20,000 Sundry Assets 51,760 30,400

(Rs.10 each)

Reserves 10,000 5,000 Investments in

Shares of Small Ltd. 16,240 -----

Creditors 8,000 6,000 Preliminary Expenses ------ 600

---------- ---------- ---------- ---------

68,000 31,000 68,000
31,000 ---------- ---------- ----------
---------

Solution
Working Notes :- Rs.
(a) Analysis of Profit
Balance of Reserve 5000
Less:-
Preliminary expenses 600
-------
4400
-------
Share of Holding Company (4400 X 60 / 100 ) = 2640
Share of Minority Share holders (4400X40/100) = 1760
(b) Computation of Cost of Control
Cost of Investments 16,240
Less :-
(20,000 X 60 / 100 ) = 12,000
Share in Capital Profit 2,600 14,640
Good will 1,600
(C ) Minority Interest
Paid up value of 40% of Shares 8,000
Share in Capital Profit 1,600
---------
9,760

---------

Consolidated Balance Sheet

Liabilities Rs. Assets Rs.
Share Capital 50,000 Good will 1,600
Minority Interest 9,760 Other Assets
Reserves 10,000 Big Ltd 51,760
Creditors Small Ltd 30,400 82,160
 20

Big Ltd 8000

Small Ltd 6000 14,000
--------- ----------
83,760
83,760 ---------
----------

3.2.6 Elimination of Common Transactions

Holding Company before it acquires shares in Subsidiary Company is totally a different

entity, so mutually they could have number of transactions. Once major holding is taken by the
holding company and a consolidated Balance Sheet is prepared by it. Certain mutual
transactions are to be adjusted in consolidated Balance Sheet.

(1) When goods are sold on credit by one company to other, the selling company becomes
a creditor to buying company. Thus the Debtors and Creditors include this sum which is
payable / recoverable. In the consolidated Balance Sheet, this needs an
adjustment by elimination.
(2) Bills drawn by one Company on the other when Bills of exchange are drawn between
holding company and subsidiary company in the consolidated Balance Sheet, Bills
payable and Bills recoverable need to be adjusted.
(3) Loan advanced by one company to another, Assets and Liabilities in the consolidated
Balance Sheet for loan given under investments in Assets and Loan taken under
Liabilities need to be adjusted.
(4) Debentures issued by one company and held by the other company. This demands
investments in assets and Debentures on liabilities have to be adjusted.
(5) Good will of Subsidiary Company should either be added to the cost of control or set off
against the Capital Revenue of Holding Company.

Illustration
The Balance Sheets of Major Ltd and Minor Ltd are given below on 31st March 2009
when Major acquired 8000 shares in Minor Ltd on 31st October 2008.

Balance Sheet
 21

Liabilities Major Minor Assets Major Minor

Share Capital 2,00,000 1,00,000 Good will 10,000 ------

(Rs.10 each)

Reserves 10,000 15,000 Fixed Assets 52,000 49,000

Profit &Loss Account 5,000 4,500 Share in Minor Ltd 88,000 ------

6% Debentures ------ 20,000 6% Debentures in

Minor 8,000 -----

Creditors & Bills payable 42,000 21,000 Current Assets:

Stock 52,000 5,000

Debtors 18,000 27,000

Bills Recoverable 1,000 1,500

Cash 28,000 18,000

------------ ------------ ------------
----------- 2,57,000 1,60,500
2,57,000 1,60,500 ------------ ------------
------------ -----------

Bills Recoverable of Minor Ltd and Creditors of Minor Ltd include Rs. 2000 due to Major
Ltd. An amount of Rs. 3000 is transferred by Minor Ltd from current year profits to reserves.

Prepare a consolidated Balance Sheet as on 31st March 2009.

Solution
Working Notes :-

(1) Calculation of Capital Profit Rs

Profit of Minor Ltd as per Balance Sheet 4,500
Add:-
Transfer to General Reserve 3,000
--------
7,500
Profit up to 31st October i.e., Six months period
7500 X ½ = 3,750
Reserves as on the date = Reserves – Transfer to
Profit and Loss Account 15000 – 3000 = 12000 12,000
----------
15,750
Holding Company’s Share 15750 X 8000/10000 = 12,600
 22

Minority Share holders’ Interest

15750 – 12,600 = 3,150 3,150
(2) Calculation of Revenue Profit
Profits from 1st November to 31st March 3,750
Holding Company’s Share 3750X4/5 = 3,000
Share of Minorities 750
(3) Minority Share holders’ Interest
Paid up value of Shares 2000 X 10 20,000
Share in Capital Profit 3,150
Share in Revenue Profit 750
----------
23,900

----------
(4) Calculation of cost of control
Cost of investments 88,000
Less:
Paid up value of Investments
8000 @ Rs.10 each 80,000
Share in Capital Profit 12,600 92,600
Capital Reserve 4,600
Less
Good will as per Balance Sheet 10,000
---------
Net Good will 5,400
---------

Consolidated Balance Sheet of Major Ltd and its Subsidiary Minor Ltd

Liabilities Rs. Assets Rs.

Share Capital (Rs.10 each) 2,00,000 Fixed Assets

Reserves 10,000 Good will 5,400

Profit and Loss Account Others

Major Ltd 5000 Major 52,000

 23

Minor Ltd 3000 8,000 Minor 49,000 1,01,000

6% Debentures 20,000 +Current Assets

Less: Major 52,000

Debentures held by Minor 65,000

1,17,000

Major Ltd. 8,000 12,000 Debtors

Creditors and Bills Payable Major 18,000

Major 42,000 Minor 27,000

Minor 21,000 45,000

63000
Less: Less:

Bills payable 800 mutually owing 2,000 43,000

Sundry Creditors 2000 2,800 60,200 Bills Receivable

(Mutually owing) Major 1000

Minority Interest 23,900 Minor 1500

2500
Less:

Mutually owing 800 1,700

Cash

Major 28,000

Minor 18,000 46,000

-------------
-------------- 3,14,100
3,14,100 -------------
-------------

Treatment of Unrealized Profit

When the holding company and subsidiary company have mutual transactions
include goods that are sold on credit by one company to another at profit and on the
date of acquisition if some of the stock is unsold then while preparing consolidated
Balance Sheet, the unrealized profit on stock that is not sold cannot be shown as profit.
This necessitates adjustment both in the Profit and Loss Account of selling company
and stock of buying company as stock also cannot be shown at a higher value than the
cost. Such adjustment can be made by eliminating the profit element of Holding
 24

Company from profit and loss account by creating stock reserve and the value of stock.
However, the share of Minority share holders’ remains unchanged. If for example
goods worth Rs. 10,000 are sold at a profit of 20% of which one quarter is unsold and
the Holding Company requires 80% of the share holding, stock reserve is calculated as
follows;

Value of stock sold = 10,000 X 20/100 = 12,000

Value of stock unsold = 12000 X ¼ = 3,000

Profit included in unsold stock ‘ 3000 X 20/120 = 500

Share of Holding Company = 500 X 80/200 = 400

A stock reserve of Rs. 400 needs to be created by adjusting Profit and Loss Account
and Closing Stock.

Treatment of Contingent Liabilities

Contingent Liabilities such as liability is respect of Bills discounted, uncalled capital,

unpaid dividend, claims against company not acknowledged, etc., to the extent of
minority share holders’ interest is shown as a foot note but that of holding company’s
share is not shown any where as it is taken as a mutual transaction.

Revaluation of Assets and Liabilities

Revaluation of assets and reassessment of value of liabilities at the time of acquisition

should be taken as Capital Profit or Loss and is to be adjusted to the Profits/Losses as
on that date. This is divided between Holding Company and Minority share holders.
Revaluation of assets and liabilities during post acquisition period is replaced with the
revenue profits of the Company.

Bonus Shares

Bonus shares issued by the Subsidiary Company may be from the pre-acquisition
profits or post acquisition profits. If it is out of pre-acquisition profit, this will not have
any effect on the consolidated Balance Sheet. This is so as while computing cost of
control, though Balance in Capital Profits reduces, to that extent these will be an
increase in Capital. If bonus shares are declared from post acquisition profits, post
acquisition profits will reduce but the share capital reserve reducing the cost of control
or increasing the capital reserve.

Treatment of Dividend
 25

Dividends may be declared out of capital or revenue profits. Dividend received by

Holding Company from capital profits of Subsidiary Company is credited to Investments
Accounts which determines the cost of control or capital reserve. On the other hand,
dividends received out of the revenue profits i.e. post acquisition profits is credit to Profit
and Loss Account of the Holding Company. However, if dividends are declared at the
end of the year and acquisition takes during the mid year, the first half is considered to
Profit and Loss Account. The amount of interest dividend paid by the Subsidiary
Company during the accounting year is to be added to revenue profits and then to be
allocated among holding company and minority share holders. Afterwards the share of
holding company is deducted from profits and that of minority share holders from the
amount due to them. If unclaimed dividend is given in Balance Sheet of Subsidiary
Company, it must be added totally to minority share holders.

Summary

When a Holding Company holds all/majority of the shares of a Subsidiary Company, it

having control over the other company financially and administratively consolidates the
total business by presenting a consolidated Balance Sheet. This is done by computing
the cost of control/capital reserve by company the money paid as investment in shares
of Subsidiary Company. Vis a vis the paid up value of shares, share in the Capital
Profit. If all the shares are not taken up interest of other share holders’ who are in
minority is to be shown as a liability by summing up their contribution in Share Capital,
Capital Profits and Revenue Profits. Revenue Profits of the Holding Company is added
to its Profit and Loss Account. If both the companies have certain transactions like sale
of goods, acceptance of Bills, etc., such items should be eliminated in the Consolidated
Balance Sheet. If goods that are sold by Subsidiary Company to Holding Company
includes some profit, a part of the goods are unsold, this demands a creation of Stock
Reserve for unrealized profit. Fictitious assets of Subsidiary Company have to be
adjusted with its Profit and Loss Account. Bonus Shares issued and dividends declared
by Subsidiary Company also need to be adjusted depending on the fact whether it is
given before acquisition or after acquisition.

The consolidated Balance Sheet so prepared represents a true position of the Holding
Company.

Self Assessment Questions

1 A. Answer the following.

(a) Minority Share holders are a liability in consolidated Balance Sheet Yes / No

(b) Capital Reserve is the excess paid over the par value of shares together with the
share in Capital Profits Yes / No
 26

(c) Bonus shares issued out of pre acquisition profits will not have any impact on
consolidated Balance Sheet Yes / No.

(d) Post acquisition profits are capital profits Yes / No

(e) Goods sold by each other on cash basis before acquisition need an adjustment in
consolidated Balance Sheet Yes / No

B. Long Answers.

(1) Explain with suitable examples the treatment of the following items on the accounts
of Holding Company.

(a) Issue of bonus shares by the Subsidiary Company

(b) Common transactions between Holding Company and Subsidiary

Company.

(C) Debentures of the Subsidiary Company held by the Holding Company.

(2) A Consolidated Balance Sheet is Summing up of assets and liabilities of Holding and
Subsidiary Companies’ Comment.

(3) Prepare a Consolidated Balance Sheet of Strong Ltd and its Subsidiary Weak Ltd
from the following Balance Sheets and adjoining information.

Balance Sheets Strong Ltd and it Subsidiary Weak Ltd

Liabilities Strong Weak Assets Strong Weak

Share Capital (Equity shares Sundry Assets 16000 2400

 27

of Rs. 10 each ) 20000 4000

Stock 12200 4800
Profit and Loss Account 8000 2400 Debtors 2600 3400

Reserve Fund 2000 1200 Bills Receivable 200 ----

Creditors 4000 2400 Shares in Weak Ltd 3000 ---

Bills Payable ---- 600

--------- --------- ----------
-------- 34000 10600 34000
10600 -------- --------- ---------
---------

Additional information:

(i) Company Weak Ltd has earned all the profits only after the acquisition.
(ii) Reserve Fund on the date of acquisition was Rs. 1200
(iii) Bills payable of Weak Ltd are in favour of Strong Ltd which had discounted
Rs. 200 of them
(iv) Sundry assets of Weak Ltd are undervalued by Rs. 200
(v) Stock of Strong Ltd includes goods of Rs. 500 purchased from Weak Ltd at a
profit of 25% on cost.

Lesson 9

HOLDING COMPANIES – 3

Introduction
 28

-The previous two lessons have given a base as to what a Holding Company is, what a
Subsidiary is. The process of Consolidation of final accounts to project, out of the actual
position of the Company as a whole, while doing so, number of adjustments are needed
and points to be considered as to the cost of control, minority interest, treatment of
fictitious assets, elimination of common transactions, treatment of Capital Profits and
revenue profits, etc. In this lesson it is proposed to take numerical examples covering
all such aspects beginning with simple situation to complicated, comprehensive
situations.

Illustrations – Simple

Following are the Balance Sheets of H Ltd and its Subsidiary S Ltd as on 31 st March 2009.
Prepare a Consolidated Balance Sheet.

LIABILITIES ASSETS

H.Ltd S Ltd H Ltd S Ltd

Share 5,00,000 2,00.000 Sundry Assets 5,50,000 2,60,000

Capital(Shares of
Rs.10 each)

Reserves 1,00,000 - 60% of Shares in S 1,30,000 -

Ltd

Creditors 80,000 60,000

6,80,000 2,60,000 6,80,000 2,60,000

Prepare a Consolidated Balance Sheet.

Solution

Working Notes

(1) Calculation of Cost of Control

Amount paid for Shares 1,30,000

Less:-

Paid up value of 60% of 2,00,000 1,20,000

Cost of Control / Good Will 10,000

 29

(2) Minority Share Holders’ Interest

Share of Minority Share Holders 40%

Share in Share Capital 2,00,000X 40/100 = 80,000

Minority Share holders’ Interest 80,000

Consolidated Balance Sheet

LIABILITIES Rs ASSETS Rs

Share Capital 5,00,000 Sundry Assets

Minority Interest 80,000 H.Ltd 5,50,000

Creditors 1,40,000 S Ltd 2,60,000 8,10,000

Reserves 1,00,000 Good will 10,000

8,20,000 8,20,000

Illustration – 2 – Where all the shares are taken by holding company

Following is the position of Big Co and its Subsidiary Small Co

LIABILITIES ASSETS

Big Co Small Co Big Co Small Co

Share Capital 5,00,000 2,00,000 Sundry Assets 4,46,000 3,00,000

Shares of Rs.10
each

Reserves 1,00,000 50,000 100% Shares in 2,34,000 -

Small Co

Other Liabilities 80,000 60,000 Preliminary - 10,000

 30

Expenses

6,80,000 3,10,000 6,80,000 3,10,000

Prepare a Consolidated Balance Sheet

Solution

Cost of Control / Good will

Amount paid for Shares 2,34,000

Less:-

Par value of Shares acquired 2,00,000

Less:-

Preliminary Expenses 10,000

Add:-

Reserves 50,000

----------

(2,00,000 + 50,000 – 10,000 ) = 2,40,000

Capital Reserve (2,40,000 – 2,34,000 ) = 6,000

Note:- As all 100% Shares are taken up by Holding Company, there will not be any
Minority Interest.

Consolidated Balance Sheet of Major Ltd & its subsidiary Minor Ltd

LIABILITIES Rs ASSETS Rs

Share Capital 5,00,000 Sundry Assets

 31

Reserves 1,00,000 Big Co 4,46,000

Other Liabilities 1,40,000 Small Co 3,00,000 7,46,000

Capital Reserve 6,000

7,46,000 7,46,000

Illustration – 3

Where the Profit and Loss Account need to be adjusted

From the following Balance Sheets of Major and Minor Ltd prepare a Consolidated Balance
Sheet.

Balance Sheet as on 31st March, 2009

LIABILITIES Major Minor ASSETS Major Minor

Rs Rs Rs Rs

Share Capital 5,00,000 1,00,000 Fixed Assets 5,81,000 90,000

(Shares of Rs.10
each

General Reserves 1,55,000 - 70% Shares in Minor 71,000 -

Ltd

Profit & Loss A/c 75,000 20,000 Current Assets 1,93,000 62,000

Creditors 1,15,000 34,500 Preliminary - 2,500

Expenses

8,45,000 1,54,500 8,45,000 1,54,500

Major acquired Shares on 31st December, 2008. On 1st April, 2008, the Profit and Loss Account
of Minor showed a debit balance of Rs. 4,000 on 31st March, 2009, Minor Ltd decided to revalue
fixed assets at Rs. 1,00,000.

Solution

Working Notes :-
 32

(i) Minor Ltd’s Profit and Loss Appropriate A/c.

To Balance b/fd 4,000 By Net Profit 24,000

To Balance c/d 20,000
-------- --------
24,000 24,000
-------- --------

Profit up to 31st December, 2008 = 24,000 X 9/12 = 18,000

Profit for next three months = 24,000 X 3/12 = 6,000

Revenue Profits are 6,000

Therefore, Revenue Profits are Rs.6000

Major’s Share = 6000 X 70 / 100 = 4,200

Minority Share holders’ Interest = 6000 X 30 / 100 = 1,800

(ii) Capital Profits:-

Appreciation in the value of fixed assets 10,000

Current year’s Profit till December 18,000

--------

28,000

Less:-

Preliminary Expenses 2500

Debit balance of P & L A/c 4000 6,500

 33

--------

22,500

--------

Share of Major Co = 22,500 X 70/100 = 15,750

Minority Share holders’ Interest = 22,500 X 30/100 = 6,750

(iii) Calculation of Capital Reserve / Cost of Control

Paid up value of 70% of Shares 70,000

Add:-

Share in Capital Profits 15,750

85,750

Less:-

Amount paid for shares 71,000

Capital Reserve 14,750

--------

(iv) Minority Interest

Paid up value of 30% of Shares 30,000

Share in Capital Profits 6,750

Share in Revenue Profits 1,800

--------

38,550

--------
 34

Consolidated Balance Sheet of Major Ltd and its Subsidiary Minor Ltd

LIABILITIES Rs ASSETS Rs

Share Capital (Share of Rs.10 5,00,000 Fixed Assets 6,81,000

each)
Major Ltd 5,81,000

Minor Ltd 1,00,000

Minority Interest 38,550 Current Assets

Capital Reserve 14,750 Major 1,93,000

General Reserve 1,55,000 Minor 62,000 2,55,000

Profit & Loss Account 79,200

Major 75,000

Share in Minor 4,200

Creditors 1,49,500

Major’s 1,15,000

Minor 34,500

9,36,000 9,36,000

Illustration – 4 Treatment of unrealized profit

On 31st March, 2009 the Balance Sheet of H Ltd and its Subsidiary S Ltd stood as follows:

LIABILITIES Rs ASSETS Rs

H Ltd S Ltd H Ltd S Ltd

Share Capital 4,00,000 1,00,00 Fixed Assets 2,75,000 50,000

 35

General Reserve 75,000 35,000 Share in S Ltd(75%) 1,90,000 -

Profit & Loss A/c 45,000 27,500 Stock 52,500 88,500

Creditors 60,000 40,000 Other Assets 1,12,500 64,000

5,80,000 2,02,500 5,80,000 2,02,500

Draw a Consolidated Balance Sheet as on 31 st March after taking into consideration following
information.

1. H Ltd acquired shares on 31st July

2. S Ltd carried a profit of 22,500 for the year ended 31st March, 2009.
3. In January, 2009 S Ltd sold to H Ltd goods costing Rs. 7,500 for Rs. 10,000
on 31st March , half of these goods are unsold.

Solution

Working Notes :

(1) Capital Profits

General Reserve 35,000

Current year’s profit up to 31st July (the date of acquisition)

(22,500 X 4 / 12 ) = 7,500

Profit and Loss Account as on 31st March,2009 27,500 – 22,500 = 5,000

--------

47,500

--------

H Ltd’s Share = 47,500 X 75 / 100 = 35,625

Minority Interest = 47,500 X 25/100 = 11,875

(2) Revenue Profits:

Profits from 1st August to 31st March 2009 i.e 8 months 22500X8/12 = 15000
 36

H Ltd’s Share = 15000X75/100 = 11250

Minority Interest = 15000X25/100 = 3750

(3) Cost of control:

Amount paid for shares = 140000

Less:

Paid up value of shares 75000

Share in Capital Profits 35625

----------- 110625

110625 ----------

----------- 29375

------------

(4) Value of Unrealized Profit:

Total profit charged on goods = 10000-7500 = 2500

Half the stock unsold = 2500X1/2 = 1250

(5) Minority Interest:

Share in Capital 25000

Share in capital profits 11875

Share in revenue profits 3750

--------

40625
 37

---------

Consolidated Balance Sheet of H Ltd and its Subsidiary S Ltd as on 31st March 2009

LIABILITIES Rs ASSETS Rs

Equity Share Capital 4,00,000 Good will 29,375

Minority Interest 40,625 Other Fixed Assets

H. Ltd 2,75,000

S Ltd 50,000 3,25,000

General Reserve 75,000 Stocks

Profit & Loss Account H.Ltd 52,500

H Ltd 45,000 S Ltd 88,500

S Ltd 11,250 1,41,000

56,250 Less:-

Less:- Unrealized profit 1,250 1,39,750

Unrealized profit 1,250 55,000

Creditors Other Current Assets

H Ltd 60,000 H Ltd 1,12,500

S Ltd 40,000 1,00,000 S Ltd 64,000 1,76,500

6,70,625 6,70,625
 38

Illustration – 5

Treatment of Mutual transactions

H Ltd acquired 1500 Shares of S Ltd for Rs.15,500 on July 1st 2008. The Balance Sheet of the
two companies as on 31st March 2009.

Balance Sheet

Liabilities Rs Rs Assets Rs Rs

H Ltd S Ltd H Ltd S Ltd

Equity Shares of Rs.10 90,000 25,000 Machinery 70,000 15,000

each

General Reserve 16,000 4,000 Furniture 10,000 7,000

Profit & Loss Account 8,000 2,500 Investments 15,500 -

Bills Payable 4,000 2,000 Current Assets 25,000 12,500

Creditors 5,000 3,000 Bills Recoverable 2,500 2,000

1,23,000 36,500 1,23,000 36,500

Additional information:

(a) General Reserve appearing in the Balance Sheet as the balance from 31 st March
2008
(b) Profit earned for the current year amounted to Rs. 2,000
(c) Goods costing Rs. 800 were sold for Rs. 1,000. 25% of these goods remain unsold.
Creditors of S Ltd include Rs. 400 due to H Ltd.
(d) Out of S Ltd’s acceptance Rs 800 worth of bills are in favor of H Ltd. Out of these H
Ltd endorsed Rs. 800 worth of bills to its creditors. Draw up the Consolidated
Balance Sheet.
 39

Solution

Working Note

(i) Capital Profits Rs.

General Reserve 4,000

Profit and Loss A/c Balance as on 31st March 2008

(2500 – 2000) = 500

Profits earned during the Current year up to the date of

Acquisition of Shares 2000 X 3/12 = 500

-------

5,000

-------

H Ltd Share = 5000 X 1500 / 25000 = 3,000

Minority Share holders’ share 5000 X 1000 / 2500 = 2,000

(ii) Revenue Profits

Profits earned during the Current year subsequent to acquisition

Of Shares = 2000 X 9/12 = 1,500

H Ltd’s Share = 1500 X 1500 /2000 = 900

Minority Interest = 1500 X 1000 / 2500 = 600

(iii) Computation of Cost of Control / Capital Reserve

Cost of Shares 15,500

 40

Less:

Paid up value of Shares 15,000

H Ltd Share in Capital Profits 3,000

--------

18,000 18,000

--------

Capital Reserve 2,500

(iv) Minority Interest

Paid up value of 1000 shares 10,000

Share in Capital Profit 2,000

Share in Revenue Profits 600

--------

12,600

--------

(v) Unrealized Profit included in Stock (1000 – 800 ) 25/100 = 50

 41

Consolidated Balance Sheet of H Ltd and its Subsidiary S Ltd as on 31st March, 2009

LIABILITIES Rs ASSETS Rs

Equity Share Capital 90,000 Machinery

H Ltd 70,000

S Ltd 15,000 85,000

Minority Interest 12,600 Furniture

H Ltd 10,000

S Ltd 7,000 17,000

Capital Reserve 2,500 Current Assets included to

stock

H Ltd 25,000

S Ltd 12,500

37,500

Less:-

Mutual owing 400

37,100

Less:-

Unrealized Profits 50
37,050

General Reserve 16,000 Bills Recoverable

H Ltd 2,500

S Ltd 2,000

4,500
 42

Less:-

Mutual owing 800 3,700

Profit & Loss Account

H Ltd 8,000

Add:-

Shares in S Ltd 900

8,900

Less:-

Unrealized Profits 50 8,850

Bills Payable

H Ltd 4,000

S Ltd 2,000

6,000

Less:

Mutual owing 800 5,200

Creditors

S Ltd 5,000

S Ltd 3,000

8,000

Less:

Mutual owing 800 7,600

1,42,750 1,42,750

Illustration – 6 – Issue of Bonus Shares

 43

On 1st April, 2008, S Ltd had subscribed Share Capital of Rs.2,50,000 divided into 25000
shares of Rs. 10/- each. It had accumulated profits of 1,95,000 by that date when H Ltd
acquired 80% of its shares for Rs. 4,50,000. The profits of S Ltd for that year amounted to Rs.
1,30,000. On 31st March 2009 on which date S Ltd issued by way of bonus shares one fully
paid equity share of Rs. 10/- for every five shares held from out of its pre-acquisition profits.

Compute the Cost of Control and Minority Interest

(i) Just before issue of bonus Shares

(ii) After the issue of bonus Shares

Solution:

Before issue of Bonus Shares

(A) (i) Calculation of Cost of Control just before issue of

bonus shares i.e. 20,000 shares 4,50,000

Less:

Paid up value of Shares 2,00,000

Add:

H Ltd Share of pre acquisition 1,56,000

Profit 1,95,000 X 80/100 = 3.56.000 3,56,000

-----------

Cost of Control 94,000

(ii) Minority Interest before issue of bonus shares

Paid up value of 20% of shares 50,000

Add:

Share in pre acquisition Profits 1,95,000 X 20/100 = 39,000

Share in post acquisition Profits 1,30,000 X 20/100 = 26,000

 44

----------

1,15,000

----------

(B) After issue of Bonus Shares

Total Share Capital after the bonus issue

1 share - 5 shares = 25,000 shares

5,000 shares @ Rs.10/- per share

Total Share Capital Rs. 50,000

Holding Company’s Share – 50,000 X 80/100 = 40,000

And the Minority Share Holders’ Share

50,000 X 20/100 = 10,000

Pre acquisition Profits remaining after the bonus issue

1,95,000 – 50,000 = 1,45,000

Cost of Control

Amount paid for 20,000 shares 4,50,000

Amount paid for 4,000 bonus shares --

-----------

4,50,000

Less:

(Paid up value of Shares 24,000 @ Rs.10 2,40,000

Add:

H Ltd Share in Pre acquisition Profits

After issue of bonus shares )

 45

1,45,000 X 80 / 100 = 1,16,000

----------

3,56,000 3,56,000

-----------

----------

Cost of Control 94,000

-----------

Minority Interest

Paid up value of 6,000 Shares 30,000 X 20/100 = 60,000

Share in Pre acquisition Profits after issue of bonus shares

1,45,000 X 20/100 = 29,000

Share in Post acquisition Profits

1,30,000 X 20/100 = 26,000

----------

1,15,000

----------

If bonus shares are issued out of post acquisition profits, it will reduce cost of control or
increase capital reserves as number of shares initially paid for are less and the shares
held after bonus issue are more. Minority interest however, will not change as though
the shares in post acquisition profits decrease, to the same extent their share capital
increase.

Comprehensive illustrations
 46

Illustration - 7

The Balance Sheet of H Co Ltd and its Subsidiary S Ltd as on 31st March, 2009 are as follows;

LIABILITIES Rs Rs ASSETS Rs Rs

HCo Ltd S Ltd HCo Ltd S Ltd

Preference Share 50,000 - Fixed Assets 4,36,000 1,00,650

Capital

Equity Share Capital 2,50,000 75,000 Investment in 1200 90,000 -

shares of S Co on
1.4.08

General Reserve 1,70,000 3,000 Stock 68,000 25,300

Profit & Loss Account 1,80,000 54,000 Debtors 1,06,000 40,200

Creditors 50,000 22,075

Bills Payable - 12,075

7,00,000 1,66,150 7,00,000 1,66,150

Additional Information:

(1) Profit and Loss Account of H Co includes interim dividend of 10% received from S
Co.
(2) On 1-4-2008 Profit and Loss Account of S Co Ltd stood at Rs. 38,750 and General
Reserve at Rs. 1500. Also H Co revalued fixed assets Rs. 10,000 more than its
book value.
(3) Stock of H Co includes Rs. 4000 of Stock at cost purchased from S Co. Further
Debtors of S Co includes Rs. 12,000 for sales to H Co on which S Co made a Profit
of Rs. 3,000.
(4) S Co made a bonus issue during year out of pre acquisition profits for Rs. 30,000 not
recorded in books.
Prepare Consolidated Balance Sheet.
 47

Solution:

(i) Analysis of Profits of S Ltd

Capital Profits Revenue Revenue

Rs Reserve Profits

Rs Rs

Profit and Loss A/c Balance as on 1-4-2008 38,750 - -

General Reserve as on 1-4-2008 1,500 - -

Increase in General Reserve during the year - - 15,250

(54,000 – 38,750)

Profits during the year

Revaluation of Plant 10,000

Less: 50,250

Bonus issue 30,000

Less: 20,250

Minority Interest 1/5 4,050 300 3,050

Holding Company’s Share 4/5 16,200 1,200 12,200

Note: Interim dividend need no adjustment since it is presumed that it is out of revenue
profits which have already been adjusted.

(ii) Cost of Control

Amount paid for Shares as reflected in Investment of H Ltd 90,000
Less:
Paid up value of Shares including bonus shares =
60,000 + 24,000 = 84,000
Share in Capital Profits 16,200
--------
1,00200 1,00,200
Capital Reserve (10200)
(iii) Minority Interest
 48

Paid up value of Shares including bonus shares

(15,000 + 6,000) = 21,000

Share in Capital Profits 4,050

Share in Revenue Profits 3,050

Share in Revenue Reserve 300

--------

28,400

--------

(iv) Profit an Loss Account balance:-

Profit and Loss Account of H Ltd 1,80,000

Profit and Loss Account of S Ltd 12,200

-----------

1,92,200

Less:

Unrealized Profit on Stock 4000 X ¼ 1,000

-----------

1,91,200

-----------

Consolidated Balance Sheet of H Ltd and its Subsidiary S Ltd

 49

LIABILITIES Rs ASSETS Rs

Share Capital:- Fixed Assets:

Preference 50,000 H Ltd 4,36,000

Equity 2,50,000 S Ltd 1,00,650 5,46,650

Minority Interest 28,400 (including Rs.10000 appreciation)

Reserves & Surplus:- Current Assets:

General Reserve Stock H Ltd 68,000

H.Ltd 1,70,000 S Ltd 25,300

S Ltd 1,200 1,71,200 93,300

Less:

Stock Reserve 1,000

92,300 92,300

Profit and Loss Account 1,91,200 Debtors:

H Ltd 1,06,000

S Ltd 40,200

1,46,200

Less:

Inter Co owing 12,000

1,34,200 1,34,200

Capital Reserve 10,200

Current Liabilities & Provisions

Creditors:

H Ltd 50,000
 50

S Ltd 22,075

72,075

Less:

Inter Co owing 12,000 60,075

Bills Payable 12,075

7,73,150 7,73,150

Self Assessment Questions

1 (a) Answer the following:

Explain with suitable examples the treatment of the following items

(a) Issue of bonus shares of Holding Company

(b) Common transactions between Holding and Subsidiary Company.
(c) Minority Share-holders are those who have no shares in Subsidiary Company.
Yes / No
(d) Cost of Control is represented as Capital Reserve in the Company Yes / No
(e) Where all the shares are taken by Holding Company, Minority Interest will not be
there. Yes / No
2. The Balance Sheet of H Co and its Subsidiary as on 31st March, 2009 is given below.
Balance Sheet as on 31-3-2009

Liabilities H Co S Co Assets H Co S Co
Rs Rs Rs Rs
Preference Share 1,00,000 - Land 3,56,000 70,000
Capital
Equity Share Capital 5,00,000 1,50,000 Properties 37,600 40,000
General Reserve 3,40,000 6,000 Plant 1,40,000 91,300
Profit & Loss A/c 3,60,000 1,08,000 Investment in 1200 1,80,000 -
shares as on 1.4.2008
Creditors 1,00,000 44,150 Stock 1,36,000 50,600
Bills Payable - 24,150 Debtors & Cash 2,12,000 80,400
14,00,000 3,32,300 14,00,000 3,32,300

The other information given:

 51

(i) Profit and Loss Account include an interim dividend of 10% received from S
Company.
(ii) On 1.4.2008 Profit and Loss Account of S Co stood at Rs. 77,500 and General
Reserve at Rs. 3,000. Also H Co revalued Plant and Machinery of S Co at the time
of purchase of shares by Rs. 20,000 more than its book value.
(iii) Stock of H Co includes Rs. 8,000 of Stock at cost purchased from S Co. Further
Debtors of S Co includes Rs. 24,000 for sales to H Co on which S Co made a profit
of Rs. 6,000.
(iv) S Co made a bonus issue during the year, out of pre-acquisition profits for Rs.
60,000 not recorded in the books.

Prepare Consolidated Balance Sheet.

Ans: Capital Profit Rs. 40,500, Revenue Profit Rs. 33,500, Capital Reserve Rs. 20,400

Minority Interest Rs. 56,800, Balance of Profit & Loss A/c. Rs. 3,85,200, Balance Sheet
Rs. 15,46,700.