Contents ... 1. Holding Company Accounts 1.1- 1.50 2. Absomtion of Companies 2.4 -2.60 3. Accounting for Liquidation of Companies 3.4 = 3.64 4. Forensic Accounting 41-419 + Bibliography BAB eto LIST OF FIGURES, GRAPHS AND CHARTS 1.1 Different Ways to Gain Control over Other Companies 12 2.1 Comparaave Features of Amalgamation 22 22 Methods of Calculation of Purchase Consideration 25 2.3. Methods of Acvounting for Amalgamation 2 3.1 Features of Liquidation 32 3.2. Modes of Winding up 33 4.1 Mayor Aspects within Forensic Accounting Practices 45 4.2 Types of Forensic Accounting Servic ar 4.3. Principles of Forensic Sciences 4 4.4 Fundamental Principles of Ethical Hehaviour AMS ekUnit 1 Holding Company Accounts Synopsis ... 1.1 Copital Profit, Revenue Profit and Cost of Control 1.1.1 Copital Profit 1.1.2 Revenve Profit 1.1.3 Cost of Control 1.2. Preporation of Consolidated Balance-Sheet of Holding Company with One Subsidiary 1.2.1 Adjustment of Inter-Compony Transoctions 1.2.2. Unreolised Profit of Stock * Illustrations * Questions for Self-Study ‘Con pt A company may acquire either the whole or the majority of shares of another company, so as to have a controlling interest in such a company or companies. The controlling company is known as the ‘Holding Company’ and the company so controlled is known as a subsidiary and both together are known as the Group. The purpose of getting control over another company may be to gain advantages such as climination of competition, enjoying economies of large-scale Production, ensuring a smooth supply of raw materials, getting an assured market for the products of the company ete. It also means that a company which has a controlling interest by virtue of acquisition of shares or otherwise is known as a Holding Company and the company whose shares have been acquired is known as a Subsidiary Company Therefore, one of the common ways of acquiring, a controlling interest is to acquire more than half in nominal value of the equity shares of another company. There are two ways by which one company can gain control over other companies. One way is to acquire all the assets and liabilities of the companies concerned, thereby securing control by ownership of such assets and liabilities. This arrangement is termed as ‘Absorption’. Another way is to acquire all or the majority (50% and above) of the voting shares of these companies. The company acquiring the shares is known as Holding Company; the company whose shares have been acquired is known as the Subsidiary Company of the holding company. ay Understanding|Corporate Accounting «I 12 Holding Company Accounts Different Ways to Gain Control over Other Companies is shown in Figure 1.1. HH Company Ltd. Invests in HH Company Ltd, Invests in ss Company, ‘Requires Net Assets of SS Co. Ltd. 1 ' 4. ‘ Record as Recorded as Stock Absorption ‘Acquisition and (SS Co. Ltd. will Operation as bo Liquidated) ‘Subsidiary Fig. 1.1: Different Ways to Gain Control over Other Companies Definition] Legal Definition of a Holding Company and Subsidiary Company : 1) Holding company has been indirectly defined by Section 4 of the Companies Act, 1956 in the context of the definition of the subsidiary Co. According to this section, a company shall be deemed to be a subsidiary of another company only if: a) that other company controls the composition of its Board of directors, of by. that other~ i) when the first mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voling rights in all respects, as the holders of Equity Shares exercises or controls more than half of the total voting power of such company, ii) where the first mentioned company is any other company, holds more than half in nominal value of its equity share capital, or ©) the first mentioned company is a subsidiary of any company which is that other's subsidiary. Examples: a) BCo, Ltd,, has a Share Capital of € 100,000 divided into Shares of € 10 each. Therefore, the number of Shares are 10,000. If A Co. Ltd., acquires 6,000 Shares in B Co. Ltd., then A Co. Ltd, will be called the Holding Co. and B Co. Ltd, will be the Subsidiary of A Co. Ltd,Corporate Accounting - 13 Holding Company Accounts b) X Co. Ltd., purchased 4,000 shares in Y Co. Lid., The Share Capital of the ¥ Co. Ltd., consists of 10,000 Shares of & 10 each. In this case, since the share holdings of X Co. Ltd. is only 40%, the relationship of Holding Co. and Subsidiary Co. is not established. © FCo. Ltd., is holding 5,000 Shares out of 10,000 Shares of & 10 each of Q Co. Ltd., since the holding in nominal value is not more than 50%, again the relationship of Holding, Co. and Subsidiary Co. is not established. 2). For the purpase of sub-section (1), the composition of a company's Board of Directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint a directorship with respect to which any of the following condition is satisfied, viz. a) that a person cannot be appointed thereto without the evercise in the favour by that other company of such a power as aforesaid; b) that a person's appointment thereto follows necessarily from his appointment as director, managing agent, secretaries and treasurers, or manager, or to any other office or employment in, that other company: or ©) that the directorship is held by an individual nominated by that other company or a subsidiary thereof 3)_In determining whether one company is a subsidiary of another — a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it; b) subject to the provisions of clauses ¢) and d), any shares held or power exercisable : i) by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity); oF ii) by, or by a nomince for, a subsidiary of that other company, not being a subsidiary which is concemed only in a fiduciary capacity: shail be treated as held or exercisable by that other company; ©) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company, or of a trust deed for securing any issue of such debentures shall be disregarded. d)_ any shares held or power exercisable by, of by a nominee for, that other company or its subsidiary (not being held or exercisable as mentioned in clause (¢) shall be treated as not held or exercisable by that other, if the ordinary business of that other or its subsidiary. as the case may Be, inchudes the lending of money and the shares are held or the power is exercisable as aforesaid by way of security only for the Purposes of a transaction entered into in the ordinary course of that business. 4) For the purposes of this Act, a company shall be deemed to be the Holding Company of another, if, but only if, that other is its Subsidiary. 5) In this section, the expression “company” inchides anybody corporate and the expression “Equity Share Capital” has the same meaning as sub-section (2) of Section 85, 6) In the case of a body corporate which is incorporated in a country outside India, a Subsidiary or Holding, Co. of the body corporate under the law of such country shall be deemed to be the Subsidiary or Holding Co. of the body corporate within the meaning and for the purpose of this Act, also whether the requirements of this section are fulfilled or not.Corporate Accounting =I 14 Holding Company Accounts 7) A private company, being a subsidiary of a body corporate incorporated outside India, which if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies incorporated outside India. [Legal Conditions for Preparation of Balance Sheet of a Holding Company] Section 212, of the Companies Act stipulates the conditions regarding the manner in which the Balance Sheet of the Holding Co. should be prepared. The provisions of the Section are given below : y 2 There shall be attached to the Balance Sheet of a Holding Company having 4 subsidiary or subsidiaries at the end of the financial year as at which the holding company’s Balance Sheet is made out, the following documents in respect of such subsidiary or of each such subsidiary, as the case may be: a) acopy of the Balance Sheet of the subsidiary; b) a copy of its Profit and Loss Account; ©) acopy of the Report of its Board of Directors: ) a copy of the Report of its Auditors; ¢) astatement of the holding company’s interest in the subsidiary as specified in sub- section fy the statement referred to in sub-section (5) if any; and 8) the report referred to in sub-section (6) if any a) The Balance Sheet referred to in clause (a) of sub-section (1) shall be made out in accordance with the financial year of the holding company. i) as at the end of the financial year of the subsidiary, where such financial year coincides with the financial year of the holding company; {i)_as at the end of the financial year of the subsidiary Last before that of the holding company where the financial year of the subsidiary does not coincide with that of the Holding Co. b) The Profit and Loss Account and the Reports of the Board of Directors and the Auditors, referred to in clauses b), ¢) and d) of sub-section (1), shall be made out, in accordance with the requirements of this Act for the financial year of the subsidiary referred to in clause (a). ©) Where the financial year of the subsidiary does not coincide with that of the holding company, the financial year aforesaid of the subsidiary shall not end on a day which precedes the day on which the holding company’s financial year ends by more than six months, d) Where the financial year of a subsidiary is shorter in duration than that of its holding company, references to the financial year of the subsidiary in clauses ¢). b) and a) shall be construed as references to two or more financial years of the subsidiary the duration of which, in the aggregate. is not less than the duration of the holding company’s financial year.Corporate Accounting - 15 Holding Company Accounts 3) The statement referred tc 4 5) clause (e) of sub-section (1) shall specify a) the extent of the holding company’s interest in the subsidiary at the end of financial year or of the Last of financial years of the subsidiary referred to in sub-section (2); b) the net aggregate amount, so far as it concerns members of the Holding Co. and is, not dealt with the company’s accounts, of the subsidiary profits after deducting its losses oF ersa. i) for the financial y and sar or years of the subsidiary aforesa ii) for the previous financial years of the subsidiary, si Co.'s subsidiary; ©) the net aggregate amount of the profits of the subsidiary after deducting its losses ce it became the Holding or vice versa j) for the financial year or years of the subsidiary aforesaid; and ii) for the previous financial years of the subsidiary, since it became the Holding Co's subsidiary; 30 far as those profits are dealt with, ar provision is made for those losses, in the iMpany’s accounts. Clauses (0) and (€) of sub-section (3) shall apply only to profits and losses of the subsidiary which may properly be treated in the holding company's accounts as revenue profits or losses, and the profits or losses attributable to any shares in a subsidiary for the time being held by the Holding Co, or any other of ity subsidiaries shall not (for that or any other purpose) be treated as aforesaid, so far as they are Profits of losses for the period before the date on or as from which the shares were acquited by the company of any of its subsidiaries, except thal they may be in a proper case be so treated where a) the company is itself the subsidiary of another body corporate; and bythe shares were acquired from that body corporate or a subsidiary of it; and for the Purpose of determining whether any profits or losses are to be treated ay profits or losses for the said period, the profit or loss for any financial year of the subsidiary may, if it is not practicable to apportion it with reasonable accuracy by reference to the facts, be treated as accruing from day-to-day during that year and be apportioned accordingly. Whether the financial year or years or a subsidiary referred to in sub-section (2) do not coincide with the financial year of the holding, company, a statement containing information on the following matters. shall also be altached to the Balance Sheet of the Holding Co. a) whether there has been any, and, if so, what change in the holding company’s interest in the subsidiary between the end of the financial year or of the last of the financial years of the subsidiary and the end of the Holding Co’s financial year; by details on any material changes which have occurred between the end of the financial year of of the last of the financial years of the subsidiary and the end of the Holding Co.'s financial year in respect of ~Corporate Accounting «I 16 Molding Company Accounts 6) 8) ” i) the subsidiary’s fined assets; ii) its investment iii) the moneys lent by it; iv) the moneys borrowed by it for any purpone other than that of meeting current liabilities. Uf, for any reason, the Board of Directors of the Holding Co's are unable to obtain information on any of the matters required ta be specified by sub-section (4), a report in Writing to that effect shall be attached to the Balance Sheet of the Holding Co. The documents referred to in clauses (c}, (f) and (g) of sub-section (1) shall be signed by the persons by whom the Balance Sheet of the Holding Co. is required to be signed. The Central Government may, on the application or with the consent of the Board of Directors of the company, direct that in relation to any subsidiary, the provisions of this section shall not apply, or shall apply only to such extent ax may be specified in the direction. If any such person as is referred to in sub-section (6) of Section 209 fails to take all reasonable steps to comply with the provisions of this Section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extent to six months, or with a fine which may extend to one thousand rupees, or with both : Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. Pi pl 3 of Consolidation ‘The basic principles to be remembered in the Preparation of a Consolidated Balance Sheet are as follows : v x 4 ‘The shares in the Subsidiary Co. held by the Holding Co. as investments represent the share of ownership of Holding Cu. in the equity or net assets of the subsidia company. Therefore, while preparing the consolidated Balance Sheet, the investments of the Holding Co. in the subsidiary are replaced by proportionate net assets of the Subsidiary Co. Assets and liabilities of the Holding Co. and its subsidiary will be aggregated with the exception of the following : a) The share capital of the Holding Co. alone will be considered in consolidation and not aggregated with that of Subsidiary Co. b) Investment in the Subsidiary Co. as appearing on the asset side of the Holding Co. balance will not be aggregated as the same has been considered in the wording of the cost af control ©) The Profit and Loss Account and reserves of the Subsidiary Co. will not be aggregated as they have been considered in working of cost of control, minori interest and consoliclated Profit and Loss Account. AML the inter-compan consolidated Balance The interest of minority shareholders will appear on the liabilities side of the consolidated Balance Sheet. ‘owings should be eliminated from both the sides of the heet.Corporate Accounting = 1 47 Holding Company Accounts 5) 6) n je of the The cost of control or goodwill calculated will be shown on the assets Balance Sheet. If it is a capital reserve, it will be shown on the liability side. Consolidated Profit and Loss Account will consist of the Profit and Loss Account of Holding Co. along with its share in the revenue profits of the Subsidiary Co. Unrealised profit to the extent of Holding Co.'s share will be deducted from the figure ‘of consolidated Profit and Loss Account and the figure of total stock. Financial Year of the Holding Co. and its Subs! Section 213 of the Companies Act provides: y 2) Rights of Holding Co.'s Representatives and Members| Where it appears to the Central Government desirable for a Holding Co. or a Holding Cos subsidiary, to extend its financial year so that the subsidiary’s financial year may ‘end with that of the Holding Co., and for that purpose to postpone the submission of the relevant accounts to a general meeting, the Central Government may, on the application or with the consent of the Board of Directors of the company whose financial year is to be extended, direct that in the case of that company, the submission. of accounts to a general meeting, the holding of an annual general meeting or the making of an annual retum, shall not be required to be submitted, held or made, earlier than the dates specified in the direction, notwithstanding anything to the contrary in this Act or in any other Act for the time being in force, The Central Government shall, on the application of the Board of Directors of a Holding Co. or a Holding Co.'s subsidiary exercise the powers conferred on that Government by sub-section (I) if itis necessary to do so, in order to secure that the end of the financial year of the subsidiary does not precede the end of the holding company’s financial year by more than six months, where that is not the case at the commencement of this Act, or at the date on which the relationship of the holding company and subsidiary comes into existence where that date is later than the commencement of this Act”. Section 214 of the Companies Act states : “1 1.1 CAPITAL PROFIT, REVENUE PROFIT AND COST OF CONTROL| A Holding Co. may, by resolution, authorise representatives named in the resolution to inspect the books of account kept by any of its subsidiaries; and the books of accounts of any such subsidiary shall be open to inspection by those representatives at any time during business hours. The rights conferred by Section 235 upon members or a company may be exercised, in respect of any subsidiary, by members of the Holding Co. as if they alone were members of the subsidiary” While preparing the Consolidated Balance-Sheet of a Holding Company and its subsidiaries, certain basic concepts relating to Holding Company Accounts are necessary to understand viz. Capital Profit, Revenue Profit and Cost of Control, which are summarised as follows :Corporate Accounting 13 Holding Company Accounts CAPITAL PROF Actually, the amount of profit earned by the corporate business from the sale of its assets, shares and debentures is termed as ‘Capital Profit’ If the fixed assets are sold at a market price more than their book value, then the excess of book value is called as ‘Capital Profit’. Similarly, if shares and debentures are issued by the company at a premium - more than their face value, the excess of face value or premium is known as ‘Capital Profit’. Thus, profits earned from purchase of a business, the profits from sale of fixed assets and profits prior to incorporation are said to be the ‘Capital Profit’ which are not revenue profit and are not available for distribution of dividend. Similarly, in Holding Company Accounts while preparing consolidated financial statements as per AS-21 the analysis of the profits of the Subsidiary Company as to pre-acquisition profit and post-acquisition is made on the basis of the date of acquisition of shares of subsidiary company by the Holding Company. Hence, profits earned by the subsidiary company upto the date of acquisition of shares by the Holding Company are termed as Pre-acquisition profit or Capital Profit - as the shares were acquired when the balance of profit existed in the Balance-Sheet of the subsidiary company. The Holding Company's share in Capital Profit is credited to Capital Reserve Account or adjusted against the cost of control. As well the share of minority shareholders in Capital Profit is to be adjusted while calculating Minority Interest Similarly the losses of the subsidiary company incurred upto the date of acquisition of shares is treated as "Capital Loss’ and Holding Company's share therein is adjusted against Goodwill or Cost of Control. As well the share of minority shareholders in Capital Loss is to be adjusted while calculating Minority Interest. Actually the differences between revenue incomes and revenue expenses is termed as "Revenue Profit’. Normally, it is earned in the ordinary course of running the business. Il results from the ordinary sale of trading goods and services at a price more than their cost price. Itis the outcome of regular business transactions of the corporate business. It is show'n as a gross profit and net profit in Trading Account and Profit and Loss Account respectively. Thus, in Holding Company Accounts the calculation of Revenue Profit is to be done keeping the date of acquisition of shares as the basic crieterian. The profits eamed by the subsidiary company after the date of acquisition of shares by the Holding Company are called as post acquisition profits or ‘Revenue Profit’ and Holding Company's share therein is to be added to revenue profits of the Holding Company. As well the share of minority shareholders in Revenue Profit is to be adjusted while calculating Minority Interest. Similarly the losses of subsidiary company incurred in the post-acquisition period is treated as ‘Revenue Loss’ and Holding Company's share therein is adjusted to revenue profit of the Holding Company. As well the share of minority shareholders in Revenue Loss is to be adjusted while calculating Minority Interest.Corporate Accounting = 19 Holding Company Accounts 4.1.3 COST OF CONTROL| [At the time of acquisition of shares in subsidiary company by the Holding Company, the existing balances of accumulated profits and losses, reserve and surplus of subsidiary company plays an important role while calculating the actual price to be paid for the shares of Subsidiary Company. As a result of such balances of profits/losses the actual price of the shares of Subsidiary Company either increases/decreases to that extent, as the case may be. It is an abnormal case where the shares of Subsidiary Company are purchased exactly at a par value. If there is sizable balance of profits, shares are purchased at a premium and if there is notable balance of accumulated loss, the shares are purchased at a discount. Thus, Holding Company takes into consideration the effect of these balances of profits/losses while deciding upon the exact price to be paid for acquisition of shares of Subsidiary Company. Therefore, Holding Company's share in such accumulated profit /loss of Subsidiary Company get's adjusted against the actual price to be paid for shares acquired. Hence, when the actual price paid for acquisition of shares is more than the paid-up value of minus Holding Company's share in Capital Loss, itis termed as, ‘Goodwill on Consolidation’ and when the actual price paid for acquisition of shares is less than the paid-up value of shares plus Holding Company's share in capital profit minus Holding Company's share in capital loss, it is termed as, ‘Capital Reserve on Consolidation’. Finally, the resultant Goodwill on Consolidation’ will be shown in the Consolidated Balance- Sheet om the asset side whereas the ‘Capital Reserve on Consolidation’ will be shown on the liability side separately 4.2 PREPARATION OF CONSOLIDATED BALANCE SHEET OF HOLDING COMPANY WITH ONE SUBSIDIARY ‘As per AS-21 : Consolidated Financial Statements usually include: i) Consolidated Balance- Sheet, ii) Consolidated Statement of Profit and Loss and iit) Notes to Accounts. However, for S.Y.B.Com./Semester- TV /CBCS-2019 Pattern /SPPU - New Syllabus, Preparation of Consolidated Balance Sheet of Holding Company with one Subsidiary is required and hence summarised as follows shares plus Holding Company's share in capital profi Purpos The purpose of a consolidated Balance Sheet and Profit and Loss Account is to show the financial position and operating results of a group consisting of a Holding Co. and one or more subsidiaries. The consolidated statements are reports of a notional accounting entity which subsist on the view that the holding and subsidiary companies are to be treated as one economic ‘unit, The financial position and operating results, reported through the consolidated statements are portrayed from the standpoint of the interest of the members of holding company. Shareholders of a holding company hand over share capital to the directors of the company for carrying out an agreed business in the most efficient way. Directors. with a view to discharging their responsibilities fully, present detailed accounts and reports. If the directors have Invested a part of this capital in purchasing, controlling shares in some other company, thus making that company a subsidiary company, it becomes obligatory to explain the position of theCorporate Accounting - I 4.10 Holding Company Accounts subsidiary also. Since the shareholders of the holding company are interested in the subsidiary company only to the eatent of the shares held in it, a full Balance Sheet of the subsidiary may not be of much interest to them. They are interested only to the extent they are entitled to the assets of subsidiary company. But many shareholders being laymen may not be able to make out anything from Separate Balance Sheets of the Holding Co. and the Subsidiary Companies. Therefore, in order to enable them to understand their interest better, it is advisable to give the consolidated Balance Sheet of the group. The advantages of Consolidation of Financial Statements are as follows. i) The Holding Company with its subsidiary constitute one business unit, although they function as separate legal entities. Hence, one Balance Sheet is desirable through consolidation. ii) The shareholders of Holding Company get a complete and full disclosure of the interest of the Holding Company in its Subsidiary Company. iii) The shareholders get a better idea and picture of their investment in the subsidiary which is represented by the net assets position of Subsidiary Company, the investment item appearing on the asset side is represented by the net assets of the subsidiary to the extent of their interest in subsidiary iv) Ithelps in judging the efficiency and performance of the group as a whole. ¥) Ithelps to understand the financial strength of the group as a one business unit. Disadvantages| The following are the main disadvantages of Consolidation of Financial Statements : i) Aggregating the results of Holding Company and its subsidiary may conceal important information from the shareholders when the companies differ in respect to profital business risk and growth potential ii) Consolidation may mislead the sharcholders, if the activities of the subsidiary are very dissimilar from those of other companies within the group. [Frocedure] It becomes imperative for consolidation to arrive at the following figures to present a consolidated Balance Sheet disclosing the interest in the subsidiary. Hence, the following workings are necessary : i) Determination of the share of the Holding company in subsidiary and the share of minority in subsidiary. ii) Analysis of profits of Subsidiary Company into pre and post acquisition period. iii) Calculation of minority interest Calculation of cost of control. Calculation of consolidated Profit and Loss Account. Working of unrealised profit in unsold closing stock. Elimination of inter-company indebtedness. Finally, the consolidated Balance Sheet is prepared as per the rules of consolidation explained below.Corporate Accounting - 4.44 Basic Rules for Preparing a Consolidated Balance Sheet Rute 1: Cancellation of Investment and Share Capilal A Consolidated Balance Sheet can be prepared by simply combining all the assets and liabilities of the holding company and its subsidiary. It will certainly balance, but it iz not a consolidated Balance Sheet. This is because the inter-company balances have first to be climinated. The “Investment in Subsidiary Company” by the holding company should cancel out the Share Capital of the Subsidiary Company. Consider the following example: The simplest example is a case where the holding company is holding all the shares of the subsidiary. Suppose, H. Ltd., acquires all the shares of S. Ltd,, on April 1*, 2019 on which date the Balance Sheets of both the companies are as follows : Balance Sheet as on April 142019 Holding Company Accounts Liabilities HLtd. |S. Ltd. Assets Heutd. | s.ttd, z x z x Share Capital 10,00,000 | 2,00,000 | Sundry Assets 10,00,000 | 2,50,000 A) Issued, Subscribed Investments 2,00,000, - and Paid-up: (20,000 Shares of 210 Shares of 8 10 each each at cost) Creditors 2,00.000] 50.000 Total 12,00,000| _2,50,000 | Total 12,00,000| 2,50,000 Since, in the above example, all the shares of S. Ltd, are held by H. Lid., all the assets and liabilities of S. Ltd., belong only to the holding company and the consolidated Balance Sheet will be as follows Consolidated Balance Sheet of H. Ltd. and S. Ltd. as on April 1”, 2019 Liabilities zt t Assets t z ‘Share Capital: 10,00,000 | Sundry Assets: A) Issued, Subscribed * Hiktd. 10,00,000 and Paid-up: © S.Ltd. (+) -2.50,000 | 12,50,000 Shares of 8 10 each Creditors : + Wktd. 2,00,000 + S.Ltd. (+) 80.000 |_2.50.000 Total 12,50,000] Total 12,50,000 Thus, in the above example, the investments in the holding company is replaced by the assets and liabilities of the subsidiary: the share capital of S. Ltd, being cancelled against. the investments in H. Ltd. Rule 2: Calculation of Minority Interest When the holding company acquires all the shares of the subsidiary company, the latter company becomes a wholly owned subsidiary. In our previous example, $ Lid. is a wholly owned subsidiary of H Ltd. But when the holding company acquires more than half but less than all the shares of the subsidiary company, those shareholders who have a minority share are referred to as Minority Shareholders. The interest of the minority sharcholders, known as Minority Interest must be accounted separately in the Consolidated Balance Sheet.Corporate Accounting -t 4.42 Holding Company Accounts A minority interest is the proportion of the subsidiary company’s net assets/shareholders’ fund which belongs to the minority shareholders. Therefore, the value of the minority interest is the portion of the share capital and reserves at the date when the holding company acquires its controlling interest and the share of income after acquisition. The minority interest is calculated as follows : Paid-up value of the shares held by outsiders Add: (+) roportionate share in the company’s profits and reserves (4) Proportionate share in the increase in the value of the assets of the subsidiary (+) Less). Proportionate share in the loss of the subsidiary, if any’ (4) Proportionate share in the decrease in the value of ascets ofthe subsidiary (-) -. Minority Interest If preference shares are held by outsiders, the face value of such shares with the dividend due thereon (if there are profits) will be included in the minority interest. If the subsidiary company does not have any profit and the preference shares are cumulative, then the dividend due will be shown by way of a note. The proportionate share of the outsiders in the profits or losses will be calculated only with reference to the equity shares held by them since the profits and reserves, if any, belong only to the equi Rule 3: Goodwill or Capital Reserve on Consolidation i) Goodwill on Consolidation : If value of “Investment in Subsidiary” in the holding company’s Balance Sheet is more than the book value of the net assets acquired, the difference represents “Goodwill on Consolidation”. In this case, Investment in Subsidiary will not cancel out against the share capital of the subsidiary, unless a goodwill equal to the difference of the two items is shown on the assets side of the Consolidated Balance Sheet. Capital Reserve on Consolidation : If the value of Investment in Subsidiary is less than the book value of the net assets acquired, the difference represents Capital Reserve on Consolidation. In this case also, Investment in Subsidiary will not cancel out against the share capital of the subsidiary unless a capilal reserve equal to the difference of the two items is shown on the liabilities of the Consolidated Balance Sheet To calculate goodwill or capital reserve, the value of the net assets acquired by the holding company in the subsidiary company must be compared with the cost of the investment. This value can be ascertained by adding together proportionate share capital and reserve of the subsidiary. Calculation of Cost of Control or Goodwill : The shares acquired by the holding company appear under the head “Investment in subsidiary company’, in the Balance Sheet of the holding company. This figure appears at the cost at which it has been acquired or the purchase cost. This is therefore the price actually paid for purchasing the shares in the subsidiary company. This price is psid against the nominal value of the shares as well as the profits or losses already existing in the Balance Sheet of the subsidiary company on the date of acquisition. These profits or losses already existing in the balance sheet of the subsidiary company are therefore known as pre-acquisition profits or losses. When the price paid is more than the nominal value of the shares acquired and pre-acquisition profits (or losses) put together, then the differential amount represents the excess price paid and therefore calledCorporate Accounting «Il 4.43 Holding Company Accounts Goodwill. If on the other hand, the price paid is less than the total of nominal value of shares and. pre-acquisition profits or losses, then the resulting figure is known as Capital Reserve, This is explained in the following format. Investment in the subsidiary company (Cost of acquiring, the shares or the price paid for shares) Less: Nominal value of shares acquired Less: Pre-acquired profits (including reserves) (Capital profits) o ‘s. Cost of control or Goodwill (Capital Reserve) 1. If the figure works out to be negative, then the amount is known as capital reserve, ssince what has been acquired is more than what has been paid for. 2. Pre-acquisition losses are added instead of deducting those (shown above) as in case of pre-acquisition profits, ule 4: Pre-acquisition ar Capital Profits and Post-acquisition or Revenue Profits The profits of the subsidiary may be divided into Capital Profit; and Revenue Profit. Profits existing in, or eamed by, the subsidiary company upon the date of acquisition of shares by the holding company are Capital Profits or (pre-acquisition profits) and the holding company’s share or the same is to be calculated and shown separately under the heading ‘Capital Reserve’ for adjusted against the cost of control. The profits earned by the subsidiary company after the purchase of shares by the holding company are Revenue Profits (or post-acquisition profits) and the holding company’s shate of it is to be added to the profits of the holding company. The share in the capital profit and revenue profit of the minority shareholders are added to the minority interes ‘Any increase in the value of fixed assets of the subsidiary company whether before or after the date of acquisition will also be treated as Capital Profit and if there is reduction in the value of fixed assets as on the date of acquisition, it must be treated as Capital Loss and deducted from the Capital Profits. But if the fall in the value of the assets occurs afler the date of acquisition, the loss is treated as an ordinary revenue loss. “Thus, to decide whether profits of losses and reserves of the subsidiary company are Capital Profits or Revenue Profits, the date of purchase of shares by the holding company is the deciding factor. Similarly, the losses of the subsidiary company up to the date of acquisition is treated as a Capital Loss and subsequent to the acquisition as a Revenue Loss. | 4.2.1 ADJUSTMENT OF INTER-COMPANY TRANSACTIONS) Inter Company Transactions results into certain amounts owned by holding to its subsidiary and by subsidiary to their holding, which have to be adjusted while preparing a consolidated Balance-Sheet as per Rule-5 which is as follows: [Rute 5 : Cancellation of Inter-company Debls and Acceptances] It is very common that member companies have business dealings not only with outsiders, but also with each other. Inter-company transactions may lead to intercompany debts and ‘acceptances. At the time of consolidation, inter-company debts and acceptances which are part of the group, are to be cancelled out as follows :Corporate Accounting - I 444 Holding Company Accounts i) Debtors and Creditors : These relate to sale and purchases of goods on credit between the holding and the subsidiary company. This results in the mutual indebtedness in the form of debtors in the books of the company selling the goods and creditors in the Balance Sheet of the purchasing company on credit basis. The amount of debtors and creditors are eliminated by deducting the common owing amount from the total of the debtors and creditors in the consolidated Balance Sheet. ii) Bills Receivable and Bills Payable = Bills of Exchange drawn by the company on another company appears as an asset in the Balance Sheet of the company drawing the bill, whereas the same amount will appear as Bills Payable on the liabilities side in the Balance Sheet of the company accepting the bills. The mutual indebtedness is eliminated by deducting the common amount of bills receivable and bills payable from the total of the bills receivable and total of bills payable in the consolidated Balance Sheet. [Rule 6: Cancellation of Inter-company Loans and Advanced Usually, a Current Account is used to record inter-company loans and advances. When a loan is provided by either of the companies to the other, a current account will exist between the holding company and its subsidiary. Inter company transactions refers to those transactions between the holding and subsidiary with regard to loans given and taken or sales and purchases of goods effected between the tw entities. Sales and purchase of goods on credit basis result in debtors and creditors relationships between the two companies. Since it amounts to purchase and sales of goods by the same company or loan given or taken by the same company, the transactions deserve elimination. Such transactions are as follows : Rule 7: Contingent Liability on Bills Discount Contingent Liability is an uncertsin liability which materialises on the happening of a particular event. Till then, it is not an actual liability and therefore cannot appear on the face of the Balance Sheet. However, it appears as a note at the foot of the Balance Sheet. If the company has discounted any of its bills receivables with its bankers and the transaction involved is between the company in the group and outside third party, it will appear as a note to the balance sheet of the company as a contingent liability to the extent of the bills discounted. But if the contingent liability is in respect of a transaction between the holding and subsidiary it will disappear from the footnote of individual company, Balance Sheet, as it lity in the consolidated Balance Sheet Certain assets may be revalued on the date of acquisition of shares by the holding company. Any such revaluation of the assets results in capital profit or capital losses. If there is an increase in the value of the asset, it results in capital profits. If there is a decrease in the value of the asset, it results in capital loss. The proportionate share of holding company will be adjusted against the cost of control, thereby reducing or increasing the amount of goodwill or resulting in capital reserve a5 the case may be. The minority shareholders would be entitled to their proportionate share in capital profits or capital reserves.Corporate Accounting - I 145 Holding Company Accounts Further, for adjustment for depreciation on the increase or decrease in the value of assets should be made in the Profit and Loss Account of the subsidiary. It may be noted that for revaluation profit (due to increase in the value of the asset), higher depreciation provision will be necessary, on the other hand, for revaluation loss (due to decrease in the value of asse depreciation provisions should be written back Rule 9: Adjustment of Bank Balanced Bank accounts may be held by the holding company and its subsidiary at different banks. While some balances are favourable, others are overdrawn balances, they should appear in the Consolidated Balance Sheet as assets and liabilities respectively. It would be incorrect to adjust the overdraft balances against credit balances for the purpose of the Consolidated Balance Sheet. [Rule 10: Unrealised Profit on Fixed Asset] A member company may transfer fixed assets or stock which becomes fixed assets of the transferee company at a profit. In this case, a similar problem arises as that seen in connection with trading stock transfer. At the time of consolidation, unrealised profits should be deducted from consolidated profit as well as aggregate value of fixed assets. 1.2.2 UNREALISED PROFIT OF STOCK| It is quite possible that the holding company can buy goods from the subsidiary company. which sells it at costs plus certain margin of profits. Such goods purchased by the holding company may still remain in its closing stock as uncold as on the date of balance sheet. In such a case, it becomes necessary to eliminate the profit of the subsidiary company to the extent of the holding company’s share, since such profits have not yet been earned to the extent to which it has been included in the closing stock. Therefore, a proportionate share of the holding company's Profits included in the stock of the goods remaining unsold is eliminated from the figure of closing stock of the holding company along with simultaneous elimination of such unrealised Profits from the profits of the subsidiary company. It may be noted that the minority interest remains unaffected in this regard, since for them the profit has already been earned on the sale effected by the subsidiary to the holding company. It is only the share of the holding company in the profits of the subsidiary on such sale which matters, since the same has not been earned as Jong as it remains in the closing stock of the holding company as unsold. Similarly, if the holding company has sold goods to the subsidiary company and the closing stock of the subsidiary company still contains such goods as unsold stock, such elimination effects of profits is necessary. Since the holding company has not earned profits till the goods are sald by the subsidiary, the unrealised profits included in such goods to the extent Iying in closing stock requires elimination. Such unrealised profits to the extent of holding company share is eliminated both from the closing stock of subsidiary company as well as from the profits of the holding, company. Some authors have argued in favour of elimination of the full provision of unrealised profits. However, as a matter of normal practice and as per the standards prescribed by well known authors on the subject, it is considered prudent to eliminate only to the extent of holding, company’s share. All problems solved in this book have, therefore, been given treatment accordingly For example, a subsidiary company may sell to the holding company goods of the value of % 30,000 on which the subsidiary has put a profit of 20% on the selling price and the entire goods may remain unsold at the date of consolidation. Supposing the holding company holds, 3,000 shares of the subsidiary’s 4,000 shares, the stock reserve would be :Corporate Accounting - 1.46 Holding Company Accounts. * § %30,000x 1/5 x 3/4 = 74.500 (only to the extent of the holding company’s share). ‘The modem practice is to create the whole of the unrealised profit as Stock Reserve without adjusting the share of the minority shareholders. The Stock Reserve is created whether the goods are sold by the holding company to the subsidiary company or vice -versa at a profit, The amount of unrealised profit (Stock Reserve) is deducted from the stock on the asset side and also: from the Profit and Loss Account on the liability side of the consolidated Balance Sheet. Thus, stock will be shown at its true cost and the Profit and Loss Account will show only realised profit. [Accounting iment The accounting treatment of certain important items while preparing Consolidated Financial Statements are simplified as follows : 1) Issue of Bonus Shares: ‘Treatment of issue of bonus shares by the subsidiary will depend upon the source from which bonus shares are issued. Bonus shares may be issued out of pre-acquisition profits or reserves or post acquisition profits or reserves. 1 Issue of Bonus Shares out of Pre-acquisition Profits : In this case, there will be no effect on the consolidated balance because while calculating the cost of control, the holding, company’s share in the pre-acquisition profit is reduced (because of capitalisation of profil) while on the other hand, the paid up value of shares held increases. So the cost of control or goodwill will remain the same as it was, before the issue of bonus shares. Il) Issue of Shares out of Post-acquisition Profits: Ifa subsidiary company issues bonus shares out of post-acquisition profit, it will have a direct effect on the Consolidated Balance Sheet, In such a situation, the holding company’s share of revenue profit in the subsidiary company will be reduced and the paid-up value of the shares held by the holding company in its subsidiary will be increased because of the issue of bonus shares. This will reduce the value of goodwill or increase the value of capital reserve. The portion of the bonus shares of the minority interest will be added to the minority interest, as before. 2) Preference Shares held by the Holding Company When pre shares are issued by a subsidiary company and are held by the holding, company (whether wholly or partly), it should be treated in the same way as equity shares. Ef the holding company acquires the preference shares at par, the cost of investment of the holding company cancels out the shares shown on the Balance Sheet of the subsidiary. When the preference shares are acquired at a premium or a discount, the balance is carried to goodwill or capital reserve in the Consolidated Balance Sheet. The portion of the preference shares owned by the minority shareholders are added to minority interest. 3) Debentures of the Holding Company: ‘The debentures of the holding company will appear in the liability side of the Consolidated Balance Sheet, just like equity or preference share capital, Debentures issued either by the holding company or the subsidiary and held by others should be cancelled out when they are acquired a par. When part of the debentures arc held by the minority sharcholders, it should appear in the liability side of the Consolidated Balance Sheet. The holding company's “investment in debentures in the subsidiary” will cance! out against the nominal value of debentures shown in the subsidiary company’s Balance Sheet.Corporate Accounting - 447 Holding Company Accounts If the debentures are acquired at a premium or at 2 discount, the difference between cost and nominal value is adjusted against goodwill or capital reserve in the Balance Sheet. 4) Inter-company Dividends: Holding company owns majority of the shares of its subsidiary. When a dividend is paid out of profit of the subsidiary company, the holding company islikely to receive a majority portion of it as a sharcholder. It should be noted that such dividends may be paid out of pre-acquisition profit or post-acquisition profit If any dividend received by the holding company from its subsidiary come out of pre- acquisition profits, such dividend should be treated as a return on capital to the holding company, since it transfers to the holding company part of the net assets in the subsidiary company that have been paid for. In this situation, the correct accounting treatment is to deduct such dividend from the cost of investment in the subsidiary for calculating goodwill or capital reserve. ILLUSTRATIONS| Preparation of Consolidated Balance Sheet of a Holding Company with Ono Subsidiary ILLUSTRATION 1 A Led, acquired 16,000 Equity Shares of B Ltd, of € 10 each on 31* March, 2020. The summarised Balance Sheet of A Lid, and B Ltd, as on that date were as under: Balance Sheet as on 31 March, 2020 Liabilities Ald. | B Ltd. Assets Aud.) Bud, | [ete Dee | Share Capital: Land and Buildings | 1,30,000 | 1,80,000 A) Issued, Subscribed Plantand Machinery | 2,40,000 |1,09,400 | and Paid-up: 500,000 | 2,00,000 | Investment inShares in | 340000/ — Equity Shares of € 10 each Bud General Reserve 2.40000 | 1,20.000 (at cost) Trofitand Lowe 5720) 36,000] Stock 120,000 | 36,000 | Bank Overdraft 80,000 ~ | sundry Debtors 44.000 49,000) Bills Pavable ~ | 8,400] Bills Receivables 15800) = {including ® 3000 payable to (including & 3000 from Alta) Bld) Sundry Creditors 47100 | 9900] Cash at Bank | [Total 924,300 | 3,73,400| Total You are supplied with the following information i) The directors are advised that Land and Buildings of B Ltd. are undervalued by % 20,000 and Plant and Machinery of B Ltd., are overvalued by ¥ 10,000, Their assets have to be adjusted accordingly ii) Sundry Creditors of A Ltd., include 8 12.000 due to B Ltd. You are required to prepare the Consolidated Balance Sheet as at 314 March, 2020 alongwith necessary consolidation workings.Corporate Accounting «fl 4.48 Holding Company Accounts (SOLUTIO: Consolidation Working Notes: DA Ltd, acquired Equity Shares of B Ltd., on 31 March, 2020 2D 16,000 shares 20,000 shares aa 5 3). Statement of Capital Profit: z i) General Reserve on 31 March, 2029 1,20,000 ii) Profit and Loss Account (Cr) on 31™ March, 2020 36,000 iii) Undervatuation of Land and Buildings of B Ltd. (+) 20,000 iv) Overvatuation of Plant and Machinery of B Ltd. Capital Profit Division of Capital Profit 166,000 A Lad. Minority 9 eho 2132800 223200 (Goodwill) (Minority Interest) Since the Shares have been acquired on the date of Balance Sheet ie. on 31+ March, 2020, all profits shown in the Balance Sheet of B Ltd, as on that date ore to be treated as Capital Profit the consolidation working note for Revenue Profit/ Loss és net necessary at al 4) Statement of Minority Interest z Face Value of shares held by Mino 40,000 (4,000 Shares x @10) Add : Capital Profit (4) 33200 Minority Interest 73,200 5) Statement of Goodwill: t Cost of Shares acquired by A Ltd. 3,40,000 Less: Face Value of Shares acquired (16,000 Shares x 10) ) L60,000 Excess Amount Paid 1,80,000 Less: A Ltd's share in Capital Profit () 1.32,800 2 Goodwill _47,200Corporate Accounting -t 1.49 Holding Company Accounts Consolidated Balance Sheet of A Ltd., and its Subsidiary B Ltd., as on 31 March, 2020 Liabilities [ek ge Assets zg zg | Share Capital: Goodwill 47200 | [AY Issued, Subscribed and Land and Buildings | 350,000 Paid-up: 5.00.00 © Aled 150,000 | 0.001 Ey Bares 81 ach 2 pL 1,90,000 | | General Reserve Add : Increase (+) 20,000 | 2.00,000 | | Profit and Loss | | | | Minority Interest Plant and Machinery | | 3.39,400 | Bonk Overdratt + ALtd 2A0.000 | Alita 30,000 + Bled 1.09,400 | | * BLtd, (| NIL Less : Decrease {) 10.000 | 99,400 | | | Bills Payable Bills Receivables | 123.800 | + Alt. NIL * Aled. 15,500 | ° Blt. (9) |__ 8400 | + Blt. | Nt! mr) 715.80 | Less: Inter-Company | Less : Inter-Company | ‘Owings )|__ 3000 | Owings | Creditors | Debtors ] AL. 47,100 A ltd | + Bui. | 9'000 + Bud. Inter-C bo Less: Inter-C | Less: Inter-Company ess: Inter-Company Owings PG) 12,000, Owing ‘Aled Ried sh at Bank, ‘ALtd | Bled [Total ILLUSTRATION 2] On 1 October, 2019, 5 Ltd., purchased 5,500 shares of @ 10 each fully paid in W Ltd., for & 20 each. At that time, it was estimated that the tangible assets and liabilities of W Ltd, might be taken at book valuation except the Buildings which were undervalued by ® 25,000. Each Company prepares a Balance Sheet as on 31% March, 2020 which can be condensed as follows: | Liabilities Sed |W iad aims 5 Lid. 7 W bd.) | Share Capital: 7 2,00,000 | 60,000 | Buildings 71.50,000 7 65,000) A) Issued, Subscribed Sundry Assets 50,000 11,000 | and Paid-up : Debtors 20,000, 15,000 | Shares of 8 10 cach | | Shares in W Ltd. | 110,000, = General Reserve on 50,000) 6,000 1 April, 2019 | | | | Creditors 15,000, 5,000 | | Profit and Loss Balance | | on 1# April, 2019 25,000 8,000 | | | Profits for the year 40,000/ 12,000 | 2019-2020) { {|__| _| [Total 3,30,000 | 91,000 Total 3,30,000 | 91,000] The debtors of § Ltd, included & 5,000 due from W Ltd. Prepare a consolidated Balance Sheet as on 31¢ March, 2020 showing your consolidation workings clearly.Corporate Accounting .00 Less: S Lids share in Capital Profit (9 di30 = Goodwill 13730 7) Statement of Consolidated Profit and Loss Account: ia Profit and Loss Account Balance on 1* April, 2019 25,000 Add: Profits forthe year (2019-2020) 40.000 Add: Std share in Revenue Profit © Am “Profit and Loss Account (Cob —Considated Balance Sheet of. Ud. and ts Subsidiary W_Lid.as on 31¢ Barc, xia Liabilities Lele Atsets 1 ‘Share Capital 2.00600 | Gooxtwill 70 Buildings 240,900 STR 150900 ao Shaves of 1Weach | Zana wud 65000 | General Reserve as on Snevo] Add: Appreciation (6)25,000 90,000 Apa 2019 | Profitand Loss || raf Debons 30,000) | gaso}e sta 15000]+ | Whe w | 15,000 | ©) | 5.00 | Less: Inter-Company | Owings a Lesa: Inter-Company sundry Ascot 61.0001 Onings sta. 50,000 + wos, 11,0 Tot The Balonce Sheet of § Ltd, and P Ltd. as on 31 March, 2020 2 follows Balance Sheet a8 on 314 March, 2020 S lid P Ltd. 7S Led) P Ltd e x Aves rt ‘Share Capital Machinery Allssued, Subscribed 10,00,000 4,00,000] Stock and Paid-up: Debtors Shares of & 10 each Cash) General Reserve 150,000 =| Investments: Profit and Lows 421000 60,000] 24.000 Shares of P Ltd | Creditors TsZ00 $7,000] atCont 192,000 | Bills Payable | loon | Bills Receivable =| 15000 Total 1434,000 Total 14,94,000 "547,000, ‘Other Informatio SLtd,, acquired the shares in P Ltd.,on 1* October 2019. fi) The Profit and Loss Account of P Lid, showed 2 debit balance of € 20,000 on 1 April, 2019, fit) Included in the Stock of P L1d,, are goods of % 20,000 which were supplied by $ Ltd., at cost plus 25%. iv) The bills Payable in S Ltd, represented & 15,000 issued in favour of P Ltd, Prepare a Consolidated Balance Sheet as on 31” March, 2020. arte Aeconting tn Heng Company Azar (Consetasan Wishing Notes 1) SLid. ecauired Shares of P Lid..on 1* October 2019Corporate Accounting «I 422 Holding Company Accounts SOLUTION) Consolidation Working Notes 1) S Ltd, acquired Shares of P Ltd,,on 1 October, 2019 2) Share of § Ltd, in P Ltd. Shares ac Shares issued by PLtd. 24,000 shares 9,000 shares 3 3). Statement of Capital Profit: i) General Reserve as on 1" April, 2019 ii) Profit and Loss Account (Dr) on 1* April, 2019 ie. Loss iii) Profits earned from 1¥ April, 2019 to 1" October, 2019 1, (Geren Reserve _ Profit and Loss i Prost) NIL 7 2 NIL * 780,000 1 = yx 80.000 = 240,000 $0,000 Copital Profit 20,000 Division of Capital Profit 20,000 std it 3/5) 212.000 (Goodwill) (Minority Interest) 4) Statement of Revenue Profit: z }) Profits earned from I October, 2019 to 31 March, 2020 wa (Gener Reserve | Profit and Loss i. Prost) = 2" NIL * 350,000 1 = 3x 80,000 % 40,000, (+)40,000 Revenue Profit 40,000 Division of Revenue Profit 40,000 sithd. Mintrity 0/3) cn) 224,000 216,000 (Consolidated Profit and Loss) (Minority Interest)Corporate Accounting - I 123 Holding Company Accounts 3 o ON, Statement of Minority Interest : z Face Value of Shares held by Minority (16,000 Shares x % 10) 1,60,000 Add: Capital Profits (+) 8.000 1,68,000 Add: Revenue Profits (+) 16,000 5 Minority Interest 1,81,000 Statement of Goodwill : z Cost of Shares acquired by Ltd. 1,92,000 Less: Face Value of Shares acquired (24,000 Shares x @ 10) (240,000 © Capital Reserve 48,000 Add: $Lid’s share in Capital Profit ® (+) 12,000 Capital Reserve 60,000 Add: Balance in Goodwill as per Balance Sheet S Ltd. P Ltd.) (feo. * 2000) (+) 80,000 Goodwill 20,000 This item is added and not deducted since the resulting figure (Le. & 1,92,000 - % 240,000) is negative 8 48,000 which is Capital Reserve). n Calculation of Unrealised Profit : $ Ltd., supplied goods to P Ltd., for 20,000 at cost plus 25° sp = cP+P 125 100 +25 : z= = + = 3 = 24.000 x 5 = 72,400 Hence, Proportionate Unrealised Profit of % 2,400 will be deducted from the Stock of P Ltd. and from the Consolidated Profit and Loss ofS Ltd., in the Consolidated Balance Sheet. Statement of Consolidated Profit and Loss Account : x Profit and Loss (Cr.) 142, Add: $ Ltd's share in Revenue Profit «) 24,000 1,66,000 ‘Less: Unrealised Profit © 2400 + Profitand Loss (Cr) 1,63,600Corporate Accounting «I 424 Holding Company Accounts Consolidated Balance Sheet of S Ltd., and its Subsidiary P Ltd, as on 31 March, 2020 Liabilities wlio Assets wt Share Capital 10,00,000 | Goodwill 720,000 A) Issued, Subscribed and Machinery 10,04,000 d-up: + Sid. 100,000 Shares of 1cach | $9.00000 + Pua, w Profit and Loss 1,63,400 | Debtors General Reserve 1,50,000]+ Std. Creditors | ze9.000]+ PLid. w + SLitd, 182,000 Bills Receivable + Pd. (+) |_'87,000 | + Suid. NIL Minority Interest 184.0007 Pind (| 15,000 Bills Payable 5,000] 15,000 + Sita 20,000 Lens :Iner-Company Owings (-) | 15,000 + PL. (| Nt Stock 2,67,600 20,000 + Siu. 180,000 Less Inter-Company = Pld. (4) |_90,000 Owings © [15:00 | 2,70,000 ] Lesa: Unrvalised Profit (—) | 2.400 | Cash 62,000 + Slt. 35,000 + Pld. (9) 27,000 Total Total 17,71 600 ILLUSTRATION @ The following are the summarised Balance Sheets of H Ltd. and $ Ltd, as on 314 March, 2020, Balance Sheet as on 31% March, 2020 Lubin) PS Lie. Aue Wiad |S ted, | 2 |e _ g g Share Capital: 180,000 | ~1,00,000 | Buildings 0,000 | 40,000 A) Issues, Subscelbed | Machinery 80,000 | 20,000 and Paid-up : Furniture 60,000 20,000 Equity Shares of 10 each | Debtors 0,000 | 25,000 Sundry Creditors Investments : 35,000 - Bills Payable 8,000 Equity Shares in $ Ltd, Bank Overdraft Profit and Lows | 25,000 Profit and Loss Total Total 2,95,000 | 1,30,000 Additional Informatio Debtors include & 10,000 due from § Ltd. ii) H Ltd, acquired the shares of § Ltd, on 1 April, 2019, when S Ltd. had a debit balance of & 40,000 in its Profit and Loss Account Prepare a Consolidated Balance Sheet as on 31 March, 2020. SOLUTION] Consolidation Working Not. (In this problem the Subsidiary Company had a debit balance in Profit and Loss on the date of acquisition as well as on the Balance Sheet date. The important point to be noted is the debit balance still continues, but at a lower figuire on the Balance Sheet date resulting in post acquisition reventic profit), 1) HH Ltd., acquires Shares of S Ltd., on 1" April, 2019.Corporate Accounting «tt 41.25 Holding Company Accounts 2) Share of H Ltd,, in S Ltd. _ Shares acquired by H Ltd. = “Shares issued by $ Ltd 8,000 shares = [0,000 shares 4 3 3). Statement of Capital Loss : z i) Profit and Loss (Dr.) on 1 April, 2019 ie, Loss + 40,000 Capital Loss 40,000 Divisi i + t + HLtd. Minority 7/5) ass) 32,000 78,000 (Goodwill) (Minority Interest) 4) Statement of Revenue Profit : v Profits earned from 1* April, 2019 to 31 March, 2020, (i) Profit and Loss i.e. Profit 40,000 ~ & 25,000) * (+) 15,000 Revenue Profit 15,000 Division of Revenue Profit 715,000 + + Hid Minority ass) «assy 212.000 23,000 (Consolidated Profit and Loss) (Minority Interest) (0 NB: The loss of & 40,000 in case of S Ltd, has reduced at the end of the year to & 25,000; which means that there was a profit of & 15,000 during the year ie. ( 1" April, 2019 to 31° March, 2020) 5) Statement of Minority Interest: z Face Value of Shares held by Minority 20,000 (2,000 Shares x 2 10) Less: Capital Loss 8.000 12,000 Add: Revenue Profit (+) 3.000 . Minority Interest 15,000 ©) Statement of Goodwill : v Cost of Shares acquired by H Ltd. 55,000 Less: Face Valute of Shares acquired (6,000 Shares x @ 10) () 80,000 =. Capital Reserve 25,000 Add: H Ltd's share in Capital Loss (+) 32,000 Goodwill -7,000 (© N.B, : Share in Capital Loss of % 32,000 is adjusted to the figure of Capital Reserve Le. (-) & 25,000 resulting in Goodwill of % 7,000 (i.c. 32,000 - % 25,000).Corporate Accounting - I 126 19 Company Accounts 7) Statement of Consolidated Profit and Loss Account : x Profit and Loss (Cr.) 35,000 Add :H Ltd's share in Revenue Profit (4) 12,000 . Profit and Loss (Cr.) 47,000 Consolidated Balance Sheet of H Ltd, and its Subsidiary S Ltd., as on 31% March, 2020 Liab T [2 z Share Capital: | 7,000 A) Issued, Subscribed 90,000 and Paid-up : 50,000 18,000 Eauity Shares of 10 each | (#)|__ 40.000 Profit and Loss 47,000 | Sundry Debtors ) 65,000 Sundry Creditors 50,000] * Ltd. 50,000 * HLtd. 40,000 © SLtd. (+) 25,000 * Sku. (+) | 20.000 75,000 | 60,000 Less: Inter-Company | 10,000 Owings 10,000 Machinery I * 1,009,000 Minority Interest 15,000} HLtd. 80,000 Bills Payable 30000] + SLtd. (+4) |__ 20,000 * HItd. 20,000 Fumiture | 7 80,000 + SLtd. (+) | 10,000 + HL. 60,000 Bank Overdraft 20,.00]° SLtd. (+) | 20,000 + HLtd. 20,000 * SLtd. | _NIL _| Total Total 3,42,000 | ILLUSTRATION 3} The following is the summarised Balance Sheet, of H Ltd. and § Ltd, as on 31¢ March, 2020. Llabilities wees ue Assets nee | s ef Share Capital: 2,00,000 | 50,000 | Sundry Assets: 7,80,000 | 1,20,0007 A) Issued, Subscribed ‘Shares in S Ltd. 2,30,000 - and Paid-up : Cash at Bank 20,000] 10,000 Shares of & 10 each Reserves as.on [+ April, 2019 | 30,000} 10,000 Profit and Loss. (Balance ason ¥ April, 2019) | 60,000} 30,000 Profits for the year 40,000} 10,000 (2019-2020) Creditors 3,00,000| 30,000 Total 430,000 | _1,30,000 | Total 4,30,000 | 1,30,000 H Ltd,, there is & 30,000 Loan to § Ltd., shown as Creditors of S Ltd, 14 October, 2019 TH Ltd, acquired 80% of the shares in S Ltd., on 1* October, 2019. Included in the assets of Sundry Assets of S Ltd., include Furniture and Fittings of 40,000 to be revalued at ® 50,000 being over depreciated as at Prepare a Consolidated Balance Sheet of H Ltd., as at 31* March, 2020.Corporate Accounting - 427 Holding Company Accounts SOLUTION] Consolidation Working Notes: D) H_Ltd, acquired 80% Shares of S Ltd, on 1* October, 2019, 2) Share of H Ltd, in S Ltd. tired by H Ltd. Shares issued by S Ltd. 4,000 Shares 5,000 Shares 4 3 3) Statement of Capital Profit: x i) Reserves as.on 1 Apsil, 2019 10,000 ii) Profit and Loss Cr.) on 1 April, 2019 30,900 iii) Profits earned from 1+ April, 2019 to 14 October, 2019 1 (ofits forthe year) =2*\ 10,000" 5,000 = 25,000 iv) Appreciation in the value of Sundry Assets (ce. Furniture and Fittings) of S Ltd., being cover depreciated on I October, 2019 (+) 10.000 Capital Profit 55,000 Division of Capital Profit %55,000 + $ y Hid. Minority a/s) a/s) 744,000 211,000 (Goodwill) (Minority Interest) 4) Statement of Revenue Profit i) Profits earned from 1* October, 2019 to 314 March, 2020 1 _ (Profits for the year =3*( 210,000 © ) (+) 5.000 = 75,000 Revenue Profit 5,000 Division of Revenue Profit 5,000 + nite. Minbrty (4/5) (1/5) 74,000 71,000 (Consolidated Profit and Loss) (Minority Interest) 5) Statement of Minority Interest: qv Face Value of Shares held by Minority 10,000 (1,000 Shares of 10) Add: Capital Profit ( LL00 21,000 Add: Revenue Profit (4) 1.000 Minority Interest 722,000Corporate Accounting. 128 Holding Company Accounts 6) Statement of Goodwill : ze Cost of Shares acquired by H Ltd. 2,30,000 Less: Face Value of Shares acquired (4,000 Shares x 10) -) 39.000 Excess Amount Paid 1,90,000 Less: H Ltds share in Capital Profit (-) 44,000 2. Goodwill 1446,000 7) Statement of Consolidated Profit and Loss Account: z Profit and Loxs (Cr.) Balance on 1 April. 2019 60,000 Add: Profits for the year (2019-2020) 40,000 Add: H Ltd's share in Revenue Profit (+) 4,000 Profit and Loss (Cr) 1.04,000 Consolidated Balance Sheet of H Ltd., and its Subsidiary $ Ltd, as on 314 March, 2020 2 | Liab’ zo Assets |e | | Share Capital : | Goodwill 146,000 | A) Issued, Subscribed | | ‘Cash at Bank } 30,000 and Paid-up | 2,00,000}* HLtd. 20,000 20/KOShatesofE 10 each | zn + SLtd. (4) | 10,000, Reserves axon 4 Apni, 2019 | 30,000 | Sundry Assets 2,80,000 Profit and Loss | 104,000] ¢ HH Ltd. 140,000 Minority Interest 22,000] * SLtd. 1,20,000, Creditors | 1,00,000 | Add : Appreciation in + HL. | 100,000 | Furniture and Fittings + Sid. (+) | 30,000 (+) 10,000 | 1.30000 Less: Inter-Company | 1,30,000 () | 3.10,000 Loan (| _30,000| Less: Inter: Company L Loan ()|_ 30,000) | Total | | Total | 4,56,000 | USTRA A Ltd,, holds 80% of the Equity Share Capital of B Ltd., which was acquired on 31 March, 2019 when the latter company had a credit balance on Profit and Loss Account of & 15,000 and General Reserve of 8 20,000, Stocks held by A Ltd, include 8 5,000 for goods supplied by B Ltd, at a profit of 20% on the selling price. From the following Balance Sheet, prepare a consolidated Balance sheet as on 31 March, 2020. IN 6]Corporate Accounting Il 123 Holding Company Accounts Balance Sheet as on 314 March, 2020 Liabilities Aud, | BU Assets Aba | Be ‘Share Capital : | Fixed Assets 245,500) 23,000 A) Issued, Subscribed Investments: and Paid-up : 5,00,000 | 1,00,000] 8,000 Shares of B Ltd. | 1,20,000 ~ Equity Shares of & 10 each Stocks 414,000) 1,23,000 Capital Reserve 1.,00,000 -] Debiors 's7,000| ‘37,400 General Reserve 1,20,000 30,000] Cash | 64,500 - Profit and Loss 40,000 10,000 Creditors 149,700 | 36,000 Bills Payable 21,300, 1,000 Bank Overdraft | | | Total Total 931,000 1,83,400 [SOLUTION] Consolidation Working Notes : TV) ALLL. acquired 80% of Equity Shares of B Ltd., on 31” March, 2019. 2) Share of A Lid, in B Ltd.: Shares acquired by A Ltd. = “Shares issued by 8 Ltd. 8,000 shares = 70,000 shares _ "5 3) Statement of Capital Profit: zw i) Profit and Loss (Cr.) on 31# March, 2019 15,000 1) General Reserve on 314 March, 2019 (+) 20000 Capital Profit 35,000 Division of Capital Profit ©35,000 Alte Minority 4/5) a/s) 23,000 7.000 (Goodwill) (Minority Interest) 4) Statement of Revenue Profi z Profits earned from 31 March, 2019 to 31# March,2020 1) Profit and Lossi.e. Loss 5,000 fi) General Reserve ie. Profit 10.000 s. Revenue Frofit 5.000 Division of Revenue Profit 5,000 Alta. Minority, ays) (1/5) 24,000 1,000 (Consolidated Profitand Loss) (Minority Interest)Corporate Accounting - 1.30 Holding Company Accounts 3) 8 1,20,000 8) Statement of Minority Interest : z Face Value of Shares held by Minority (2,000 Shares x % 10) 20,000 Add: Capital Profit (+) 7,000 27,000 Add: Revenue Profit (+) L000 s. Minority Interest 28,000 Statement of Goodwill : z Cost of Shares acquired by A Ltd. Less: Face Value of Shares acquired (8,000 Shares x 8 10) ©) $0,000 . Excess Amount Paid 40,000 Less: A Ltd's share in Capital Profit (-) 28,000 ©. Goodwill 12,000 This Goodwill of % 12,000 is adjusted against Capital Reserve of A Ltd., in the Consolidated Balance Sheet. Calculation of Unrealised Profit: B Ltd, supplied goods to A Ltd., for 85,000 at a profit of 20% on selling price. sP = cree 100 = 80+ 20 P - 20 SP ~ 100 7 ¥ x 85,900 2 21,000 a = 21,000 x 5 = 7800 Hence, Proportionate Unrealised Profit of % 800 will be deducted from the Stock of A Ltd., and from the Consolidated Profit and Loss Account of A Ltd., in Consolidated Balance Sheet. Statement of Consolidated Profit and Loss Account: z Profit and Loss (Cr.) 40,000 Add: ALtd’s share in Revenue Profit (+) 4,000 44,000 Less: Unvealised Profit (-) _800Corporate Accounting =I 43 Holding Company Accounts. +. Profit and Loss (Cr.) 43,200 |___ Consolidated Balance Sheet of A Ltd, and its Subsidiary B Ltd, as on 31% March, 2020, [ Lia tye Assets zope Share Capital Fixed Assets 2.68500 A) Issued, Subscribed + Altd. | 245,500 and Paid-up: | 5.00.00] + BLtd. +) | 23,000 | 50.000 Equty Sharesof® 10e2en (+) | 5,00,000 | Stock 536.200 Capital Reserve 1,00,000/88,000]+ A Ltd. | 4.14,000 Less : Goodwill adjusted "12.000 * Bled. (4) |.1123,000 General Reserve 120,000 15.37,000) Profit and Loss 43.200] Less : Unrealised Creditors 1,85,700 Profit ° vALtd, 149,700 | Debtors © Bltd «| “36.000 + ALtd. Bills Payable 2300]+ BLtd. je ALtd, 21,300 | Cash + BLtd. (+) 1000 | «© Altd. | Minority Interest 28000]. BLid. Bank Overdraft 6400 + Altd, NIL| + BLtd, (+) __¢400 | Total 19,93,600 | Total | '9,93,600 ILLUSTRATION 7] H Ld, acquired 31M March, 2020 was as fol Shares in $ Ltd., as on 1 April, 2019, Their Balance Sheet as on Liabilities | H Ltd. |S Ltd. Assets Ltd. |S Ltd. | lok z z z | Share Capital: T y Land and Buildings 7 1,00,000 | 20,000 | A) Issued, Subscribed Plant and Machinery 130,000 30,000 and Paid-up 250,000 50,000] Investments : Equity Shares of 8 100 400 Equity Shares in S Ltd. | 50,000 - each, fully paid {atcost) General Reserve Stock 40,000) 25,000 (as on 1 April, 2019) 50,000 20,000] Debtors 30,000 | 15,000 Profit and Loss 70,000 25,000] Cash 30,000 10,000 | Creditors |__ 30,000 | “5,000 | | [Total 4,00,000 | 1,00,000 J Total 4,00,000 | 1,00,000 | Additional Information : i} Sundry Debtors of H Ltd., include 8 5,000 due from $ Ltd. fi) Stock ofS Ltd, includes goods purchased from H Ltd., for & 20,000 on which I Ltd., made a profit of 25% on Sales. fii) On 1 April, 2019 the Profit and Loss of S Ltd., showed a credit balance of & Prepare a Consolidated Balance Sheet of H Ltd, and its Subsidiary 5 31 March, 2020. Consolidation Working Notes : VD HLtd., acquired Equity Shares of $ Ltd, on 14 April, 2019. 2) Share of H Ltd,, in $ Lt Shares acquired by H Ltd. Shares issuedCorporate Accounting - 4.32 Holding Company Accounts 3) Statement of Capital Profit : zg i) General Reserves as on 1“ April, 2019 20,000, and Loss (Cr.) on 14 April, 2019 ie. Profit (+) 5,000 z+ Capital Profit 25,000 Division of Capital Profit © 25,000 + ¥ + Led. Minority 5) «/5) 220,000 25,000 (Goodwith (Minority Interest) 4) Statement of Revenue Profi z Profits earned from 1* April, 2019 to 31" March, 2020 General Reserve NIL Profit and Loss ie. Profit (+) 20.000 Revenue Profit 20,000 Division of Revenue Profit 20,000 + + Hed. Minority a/5) (ays) 216,000 24,000 (Consolidated Profit and Loss) (Minority Interest) 5) Statement of Minority Interest z Face Value of Shares held by Minority 10,000 (100 Shares x % 100) Add: Capital Profit (+) 5,000 15,000, Add: Revenue Profit (+) 4,000 :. Minority Interest 19,000 6) Statement of Capital Reserve: z ‘Cost of Shares acquired by $ Ltd. 50,000, Less: Face Value of Shares acquired (400 Shares x 8 100) ) 40.000 Excess Amount Paid 10,000, Less: H Ltd.'s share in Capital Profit -) 20,000 «. Capital Reserve 10,000Corporate Accounting - It 133 Holding Company Accounts 7 Calculation of Unrealised Profit: H_Ltd., sold goods to $ Ltd., for 20,000 at a profit of 25% on Sales. sr = cree 100 = B+ Bs ‘ t * SP . 100 . dt 20000 - 35,000 i = 25,000x3 - 4,000 Hence, Proportionate Unrealised Profit of % 4,000 will be deducted from Stock of $ Ltd.. and from the Consolidated Profit and Loss of EI Ltd,, in the Consolidated Balance Sheet. 8) Statement of Consolidated Profit and Loss Account: x Profitand Loss (Cr) 70.000 Add: HLtd's share in Revenue Profit (4) 16,000 26,000 Less: Unrealised Profit (4.000 + Profit and Loss (Cr) 82,000 Consolidated Balance Sheet of H Ltd., and its Subsidiary $ Ltd, as on 31 March, 2020 Liabilities x g Assets mm z Share Capital: | Land and Buildings | 1,20,000 A) Issued, Subscribed + HLtd, | 100,000 | and Paid-up | 2 Sita, oe 2,500 Equity Shares of @ 100 2,50,000 | rlant and Machinery 1,80,000 each, fully paid (+) | 230,000 + Hitd 150,000 Profit and Loss 82,000] + SLtd (+) | 30,000 | Capital Reserv: | 10,000] stock | 61,000 General Reserve © Ht 40,000 (as on 1# April, 2019) | 50000]+ sit. (+) | 25,000 | Creditors 30,000 65,000 © HLtd. 30,000 Less: Unrealised Profit (-) | 4,000 + SLtd, (+) 5.000 Debtors 40,000 35,000 | © HLtd. 30,000 | Less :Inter-Company Owings (-) 3.000 + SLitd. (+) | 15,000 | | Minority Interest 19,000 45,000] | Less ster Company Owiegs | © | 5,000) | Cash 40,000 | + HL 30,000 | + SLi. @) [Total | 441,000 J TotalCorporate Accounting - I 134 Holding Company Accounts ILLUSTRA: a] Prepare a Consolidated Balance Sheet with necessary consolidation workings from the Balance Sheet of H Ltd, and S Lid, and additional information given below as on 31 March, 2020. __Balance Sheet as on 314 March, 2020 Huta. | Sita. Assets | Share Capital: | A) Issued, Subscribed and Paid-up: Land and Buildings | Plant and Machinery | 1,50,000| 2,00,000 Investments | Shares of ® 100 each 2,700SharesinS Ltd. | 2,97,000| General Reserve Stock | “yo.000| 30,000 | Profit and Loss Debtors 50,000} 60,000 | Bills Payable Bills Receivable 63,000 10,000. Creditors t 4 | [Total Total 8,00,000 | 4,00,000 i) On the date of purchase of shares there was no balance in General Reserve whereas Profit and Loss showed a debit balance of & 10,000 in the books of $ Ltd. ii) Sundry Debtors of Ltd. include & 40,000 due trom H Ltd. clude % 18,000 in favour of H Ltd.. which has discounted in) hnek of § Tt includes 2 £000 being purchased from I Lt er made a profit of 33 !/3% on cost. fon which the Later Consolidation Worki: 3 1) tis assumed that H Ltd., purchased the shares of S Ltd., on 15 April, 2019. 2). Share of H Ltd, in S Ltd. Shares acquired by H Ltd. ‘Shares issued by 5 Ltd. 3) Statement of Capital Loss : t i) General Reserve as on 1* April, 2019 NIL ii) Profit and Loss (Dr.) on 1* April, 2019 ie. Loss (+) 10.000 :. Capital Loss 10,000 Division of Capital Loss 10,000 l | | HLtd. ‘Minority (9/10) a/10) 9,000 1,000 (Goodwill) (Minority Interest)Corporate Accounting = 1.35 Holding Company Accounts 4) Statement of Revenue Profit: z Profits earned from 1* April, 2019 to 31 March, 2020 i) General Reserve 10,000 ii) Profit and Loss ie. Profit (+) 15,000 = Revenue Profit 25,000 Division of Revenue Profit 725,000 ¥ ¥ + Ltd. Minority (9/10) a/10) 22,500 22,500 (Consolidated Profit and Loss) (Minority Interest) 5) Statement of Minority Interest : z Face Value of Shares held by Minority (300 Shares x & 100) 30,000 Less: Capital Loss © L000 29,000 Add: Revenue Profit (+) 2.500 ©. Minority Interest 31,500 ©) Statement of Goodwill : z Cost of Shares purchased by H Ltd. 297,000 Less: Face Value of Shares purchased (2,700 Shares x 100) (-) 2.20.00 Excess Amount Paid 27,000 Add: H Ltd's share in Capital Loss (+) 9,000 Goodwill 36,000 7) Calculation of Unrealised Profit: H_Ltd,, sold goods to $ Ltd., for € 4,000 at a profit of 33 1/3% on Cost. sP = cP+P 133°J; = 100 + 33"/5 Pr = t x %4,000 = 71,000 9 = T1000x 75 = %900 Hence, Proportionate Unrealised Profit of € 900 will be deducted from Stock of $ Ltd., and from the Consolidated Profit and Loss of H Ltd., in Consolidated Balance Sheet.Corporate Accounting - t 4.36 Holding Company Accounts 8) Statement of Consolidated Profit and Loss Account: zg Profit and Loss (Cr.) 70,000, Add: II Ltd’s share in Revenue Profit (+) 22.500 92,500 Less: Unrealised Profit () _900 +, Profit and Loss (Cr.) 91,600 Consolidated Balance Sheet of H Ltd., and its Subsidiary S Ltd., as on 314 March, 2020 [ Liabilities [Lottie Assets jor oe) | Share Capital: Goodwill 36,000 | A) Issued, Subscribed | Land and Buildings | 300,000 | and Paid-up | 500,00] ¢ HLtd. 2,00,000 $000 Shares of €100each (*)| 5.00.00 * SLid. (+), 1,00,000 | General Reserve | 40,000] Plant and Machinery 3,50,000 Profit and Loss 91,600] © Ltd. 150,000 Bills Payable | 0000] +s 2 \* | 50,000 ills Receivable 58,000 \* «| 25.000 Hid. 63,000 Less: ne-CompanyOwngs | 75,000 * SLid. (+), 10,000 | | 15.000 73.000 Minority Interest Less: Inter-Company Owings (-) 15.000 Creditors | Debtors 70,000 + HLtd. | 140,000 + MLtd. 50,000 + Siid. «| 60,000 * Skid (+), 60,000 | | | 200,000 1,10,000 Less : Imer-Copany Owings =) | 40,000 Less :Inter-Compary Owings(-) _40,000 Contingent Liability for Stock 69,100 Bills Receivable discounted © HLtd. 40,000, by EL Ltd, 2 3,000 | © SLid. (+), 30,000 | 70,000 | | = Less: Unrealised Profit (-), 900, | Total | 83,100) Total I 883,100 | ILLUSTRATION 9] The following is the condensed Balance Sheet of A Ltd., and its Subsidiary B Ltd, as on * March, 2020. Balance Sheet as on 31 March, 2020 | A Ld. | B Ltd. Assets ] A Ltd, |B Ltd. | L_ en ee Lt ie ‘Share Capital : Fixed Assets 5,85,000 | 3,45,000, | A) Issued, Subscribed | Stock 2,00,000 1,358,000 | and Paid-up : | Sundry Debtors 2.85.00 | 1,55,000 | Shares. of 8 10¢ach 11,00,000 | 4,00,000 | Investments = | Share Premium 130,000 = 36,000 Shares in B Ltd., 3,90,000 - | General Reserve ~ 1,00,000 | at cost | Profit and Loss 1.40,000 30,000] Cash at Bank 5.000| 45,000 Sundry Creditors | Total Total 14,65,000 | 6,80,000 | You are required to prepare a Consolidated Balance Sheet as on 31# March, 2020 with necessary consolidation workings, having regard to the follow:Corporate D) ii) Accounting 137 Holding Company Accounts On the date, when A Ltd., acquired the Shares of B Ltd., the latter Co. had a General Reserve of % 25,000 and a credit balance on Profit and Loss of & 5,000. B Ltd. had purchased goods from A Ltd, of which & 70,000 are still in Stock. A Lid., sells to B Ltd, at cost plus 25%. id. pitt 2 SI lation Working Notes : is assumed that A Ltd. acquired Shares of B Ltd. on 14 April, 2019 hare of A Ltd, in B Ltd. Shares acquired by A Ltd. ‘Shares issued by B Ltd. _ 36,000 shares 40,000 shares 2 * 10 3) Statement of Capital Profit : g i) General Reserve as on I April, 2019 25,000 ii) Profit and Loss (Cr.) on 1+ April, 2019 ie. Profit (+) 5,000 c Capital Profit 30,000 Division of Capital Profit 30,000 ¥ ' + A Lid, Minority (9/10) (1/10) 227,000 23,000 (Goodwill) (Minority Interest) 4) Statement of Revenue Profit: z Profits earned from 1 April, 2019 to 31¥ March, 2020 i) General Reserve 75,000 ii) Profit and Loss (Cr. ie. profit (+) 25,000 s. Revenue Profit 1,00,000 Division of Revenue Profit 1,00,000 ¢ ¥ + A ld. Minority (9/10) (1/10) 90,000, © 10,000 (Consolidated Profit and Loss) (Minority Interest)Corporate Accounting «I 1.38 Holding Company Accounts 5 ° 7 8 Statement of Minority Interest: t Face Value of Shares held by Minority (4,000 Shares x 10) 40,000 Add: Capital Profit (+) 3,000 43,000 Add: Revenue Profit (+)_10,000 + Minority Interest 53,000 Statement of Goodwill : t Cost of Shares acquired by A Ltd. 3,90,000 Less: Face Value of Shares acquired (36,000 Shares x & 10) (-)3.60.000 Excess Amount Paid 30,000 Less: A Ltd’s share in Capital Profit () 22000 . Goodwill 3,000 Calculation of Unrealised Profit: ALLtd,, sold goods to B Ltd., for 8 70,000 at cost plus 25%. sP = cr + Pr 135 = 100, + 3 FL Bh ern = 714,000, : . 2 14,000 x 75 < 212,600 Hence, Proportionate Unrealised Profit of 8 12,600 will be deducted from Stock of B Ltd, and from the Consolidated Profit and Loss of A Ltd., in the Consolidated Balance Sheet. Statement of Consolidated Profit and Loss Account: zt Profit and Loss (Cr.) 1,40,000 Add: ALLtd’s share in Revenue Profit (+) _90,000 2,30,000 Less: Unrealised Profit (12.600 + Profit and Loss (Cr) 217,400Corporate Accounting - 4.39 Holding Company Accounts Consolidated Balance Sheet of A Ltd., and its Subsidiary B Ltd, as on 31“ March, 2020 Liabilities Tt Assets g z Share Capital: Goodwill 3,000 A) Issued, Subscribed Fixed Assets 930,000 | | and Paid-up: | 11,00,000] + A Lid. | 585,000 | 1.10,000 Stares of 10 each (+) | 11.00.00 * BLid (+) | 345,000 | | Share Premium 130,000 | Stock. 3,22,400 Profit and Loss | 217,400]= ALtd. 200,000 Minority Interest 53,000] * BLtd. (+) 135,000, | Sundry Creditors | 245,000 73,35,000) | + ALtd. | 95,000 Less: Unrealised Profit(-) | 12.600 | BLtd. (+)| 0,000 Sundry Debtors y_ 440,000 | * ALtd. 285,000 * BLtd. (+) 155,000 | Cash at Bank 50,000 | © ALtd. 5,000 ° BLid. (+) 45,000 | 117,43,400 Total The Balance Sheet of two companies viz. A Ltd-and C Ltd. as at 31 March, 2020 is as follows. Balance-Sheet as on 314 March, 2020 ni Altd. | Lid Aled. | ¢ Lid. Liabilities ne lg Assets og c | [Share Capital: | Land and Buildings | 2,00,000/ 1,50,000 | |A) Issued, Subscribed Machinery 3,00,000 | 3,00,000 and Paid-up = | Stock 73.000 | 50,000 Equity Shares of & 10 each | 10,00,000 5,00,000] Sundry Debtors 50,000 | 60,000 General Reserve 1,00,000 1,00,000 } Investments at cost in. | | (as on IY April, 2019) the Shares of CLtd. | 5,00,000| -| Profit and Loss 50,000 | 30,000 Bills Receivable 19,000) 5,000 | (as on 1* April, 2019) Cash at Bank 1,533,000 | 1,60,000 Profit for the year 60,000) $0,000 (2019-2020) Sundry Creditors Bills Payable [Total Additional Information 70.000 12,90,000 | 7,25,000 | i) ALItd,, acquired 49,000 Equity Shares of € Lid., on 1* April, 2019. Bills Receivable of A Lid, include % 3,000 accepted by C Lid. Sundry Debtors of A Ltd., include % 10,000 due from C Ltd. Stock of C Ltd., includes goods purchased from A Ltd., for % 30,000 which were invoiced by A Ltd., at a profit of 25% on the invoice price. Prepare a Consolidated Balance Sheet of A Ltd, and its Subsidiary C Ltd, as at 31" March. 2020. iti) iv)Corporate Accounting =I 1.40 [SOLUTION Consolidation Working Notes : 1D ALtd., acquired Equity Shares of C Ltd., on 1* April, 2019. 2) Share of A Ltd,, in C Ltd. Shares acquired by A Ltd. ‘Shares issued by C 40,000 shares 50,000 shares "3 3) Statement of Capital Profit: I Reserve on 1 April, 2019 ind Loss (Cr.) on 1 April, 2019 ie. Profit 1 Profit Division of Capital Profit Holding Company Accounts z 1,00,000 + 30,000 130,000, %1,30,000 A fey (4/5) a/s) 2 1,04,000 726,000 (Goodwill) (Minority Interest) 4) Statement of Revenue Profit : z 1) Profits earned from 1+ April, 2019 to 31 March, 2020 NIL ie. Profit for the year 2019-2020 (+) 40,000 + Revenue Profit 40,000 Division of Revenue Profit 40,000 t ¥ A Ltd. Minority u/s) a/s) 832,000 8,000 (Consolidated Profit and Loss Account) (Minority Interest) 5) Statement of Minority Interest : g Face Value of Shares held by Minority 1,00,000 (10,000 Shares x 10) Add: Capital Profit (+) _ 26,000 126,000 Add: Revenue Profit (+) 8.000 + Minority Interest 134,000 6) Statement of Capital Reserve: v Cost of Shares acquired by A Ltd. 5,00,000 Less: Face Value of Shares acquired (40,000 Shares x % 10) ©) 4.00,000 +. Excess Amount Paid 1,00,000 Less: share in Capital Profit ©) Los‘o00 +. Capital Reserve 4,000Corporate Accounting -t sat Holding Company Accounts 7) Calculation of Unrealised Profit: ALLL, invoiced goods to C Ltd, for € 30,000 at a profit of 25% on the invoice price. wor oP + 3 1 = ¥«t30000 = 7500 t is = t7500x5 26,000 Hence, Proportionate Unrealised Profit of 2 6,000 will be deducted from Stock of C Ltd, and from the Consolidated Profit and Loss of A Ltd., in Consolidated Balance Sheet. 8) Statement of Consolidated Profit and Loss Account : zg Profit and Lesson 1* April, 2019 (Cr) 50,000 Add: Profit or the year 2019-2020 60,000 Add: ALtd’s share in Revenue Profit @) 32000 142,000 Less: Unrealised Profit ©) 6.000 Profit and Loss (Cr) 136,000 Consolidated Balance Sheet of A Ltd, and its Subsidiary C Ltd,, as on 31 March, 2020 Liabilities jek Assets z x Land and Buildings] | 3:50,000 | | + ALi 2,00,000 and Paid-up: | + Clid. (+) | 1.50,000 | | on010 Eau Srawsctt rae | LoonoN Machinery 6,00,000 Capital Reverve + Ald 3,00,000 General Reserveon | + Clu. (+) 3,00.000 | 1 April 2019 [Sundry Debtors 1.00,000 Profitand Loss | + Ald 30,000 | Sundry Creditors | + Cia. (#)|_ 60,000 | + ALtd. 7y900 1,10.000 Je Cited (+) 0000 Lets: ie Conpary Owings) 120000 Bills Receivable Lets :rie-Compary Owns (-)| 10.000 © ALtd Bills Payable + Chia. | + ALtd. | 10,000 + Cltd. @ 5,000 | 75,000 | ters ctieecorpryOemes (-)) __3:000 Minority Interest | + CLid (+) |_ 50.000 | | 125000 | | Less: Unreatised Profit (-)| 6.000 [Cash at Bank 3.15.00 = Ald 1,35,000 | * Cl Total TotalCorporate Accounting - 1.42 Holding Company Accounts From the following information, relating to the financial position prepare a Consolidated Balance Sheet of H Ltd., and its Subsidiary $ Ltd, as at 31“ March, 2020 giving detailed consolidation workings: Balance Sheet as on 314 March 2020 | Liabilities s a Share Capital : ] ] | A) Issued, Subscribed and Paid-up: 4,00,000 2,00,000 | Equity Shares of 810 each General Reserve 200,000 60,000 Profit and Loss 1,00,000, 40,000, 6% Debentures =| 1,00,000 | Loan from H Ltd. | 10,000] ‘Sundry Creditors 1,00,000 40,000 | Bills Payable | 30,000 | 30,000 Total __18.50,000 | 4,80,000 | Wid.) S Lid. | | Assets I 2 | z | Goodwill 1,00,000 = Fixed Assets 00,000 | 2,50,000 Investments: i) 16,000 Shares of € 10 each in Ltd., at cost 2,00,000 | - ii) 6% Debentures of S Ltd., (Face Value % 60,000) 60,000 - iii) Government Securities | =| 50,000 | Stock 1,00,000 40,000 Sundry Debtors 80,000) 40,000 Bills Receivable 40,000 -| Bank Balance 60,000 | 1,00,000 Loan to $ Ltd. |_10,000 | -| | Total 8,50,000 | 4,80,000 | Additional information made available is as follows : i) Sundry Creditors of H Ltd., include & 20,000 due to § Ltd. The Closing Stock of H Ltd., includes stock worth ® 30,000 supplied by $ Ltd, which had invoiced at cost plus 20% profit on cost iii) Bills Payable of $ Ltd., include % 24,000 issued in favour of H Ltd. which was discounted but not yet matured 4,000 of them. iv) H Ltd, acquired 16,000 Equity Shares in $ Ltd., on 1* April, 2019 on which date the Balance Sheet of 5 Ltd.. showed General Reserve at & 20,000 and Profit and Loss - credit balance of € 10,000. ¥)__HILtd,, revalued Fixed Assets of S Ltd. as on I April. 2019 at & 2,60,000. SOLUTIO’ Consolidation Working Notes: TD) HLLtd., acquired Shares in § Ltd. on 1# April, 2019. 2) Share of H Ltd, in S Ltd. Shares acquired by H Lt: Shares issuedCorporate Accounting = 143 Holding Company Accounts 16,000 shares. * 20,000 shares 4 "3 3) Statement of Capital Profit: x i) General Reserve as on 1* April, 2019 20,000 ii) Profit and Loss (Cr.) as on 1 April, 2019 10,000 iii) Increase in value of Fixed Assets of S Ltd., as on 1 April, 2019 (+) 10,000 +. Capital Profit 40,000 Division of Capital Profit 40,000 ¥ y + HLtd. Minority (f5) (1/5) 732,000 28,000 (Goodwill) (Minority Interest) 4) Statement of Revenue Prof z Profits earned from 1¥ April, 2019 to 31% March, 2020 i) General Reserve 40,000 ii) Profit and Loss (Cr.) (4) 30,000 Revenue Profit 70,000 Division of Revenue Profit % 70,000 ¥ ¥ + HL td. Minority W/3) 5) 256.000 @14,000 (Consolidated Profit and Loss) (Minority Interest) 5) Statement of Minority Interest : z Face Value of Shares held by Minority 40,000 (4,000 Shares x & 10) Add: Capital Profit 8,000 Add: Revenue Profit (+) 14,000 Minority Interest 62,000 6) Statement of Goodwill: z Cost of Shares acquired by H Ltd. 200,000 Less: Face Value of Shares acquired (16,000 Shares x % 10) ©) 160,000 ©. Excess Amount Paid 40,000, Less: H Ltd.'s share in Capital Profits (-) 32.000 :. Goodwill 8,000 Add: Goodwill as per Balance Sheet (H Ltd., 2 1,00,000) (+) 1.00,000 =. Goodwill 1,08,000Corporate Accounting, 1.44 Holding Company Accounts 7) Calculation of Unrealised Profit: The Closing Stock of H Ltd, includes Stock worth & 30,000 supplied by § Ltd. invoiced at cost plus 20%, sP cr o+ Pp 120 100 + =(20 ee = T20 1 . & * ©30,000 = 25,000 = 25,000 x = 4,000 Therefore, Proportionate Unrealised Profit of & 4,000 will be deducted from the Closing Stock of § Ltd., and from the Consolidated Profit and Loss Account of H Ltd., in Consolidated Balance Sheet 8) Statement of Consolidated Profit and Loss Account : gt Profit and Loss as on 31¢ March, 2020 1,00,000 Add: HLLtd/'s share in Revenue Profit (+) 56,000 1,56,000 Less: Unrealised Profit ©) 4.000 Profit and Loss (Cr) 752,000 Consolidated Balance Sheet of H Ltd., and its Subsidiary S Ltd. as on 31* March, 2020 - abilities toes ‘Assets i en ol oN 600 AD Tasued, Subscribed and Fixed Auch 490,000 Paid-op: amocoo fe Hed 2,00,900 40,000 Equty Shares of 19each {+} | 00.00 | © sit 4) | 260,000 | General Reserve Investments Profit and Lose 1) Government Secunties 0,00 6% Debentures A) 6 Debentures 6000 = Stud 100,000 Less: Held by HILn rc) NIL Less held by H Lid. ©) _s0.000 Stock 136,000 Minority Interest * HL 1,00 000 Loan from IT Led 10,000 + Stud 4) |_“40,000 | Less: Intcr-Company Owings (-) | _10,000 | 149.000 Sundry Creditors Less: Unrealsed Profit ©) "4900 © HL. 1,00,000 Sundry Debtors 100,000 © Std (©) 49000 + Hoe 80.000 140.000 | © Skid 46) | $0,000 | Leas: tnter- Company Owings (-) | 22000 120,000 Bills Payable Less: Inter Company Owings (-) | "20,000 | + HL, 0000 | 29,000 © Skint (30.009 40,900 wo Nt Lene: Inter Company Owings (-) | _ 39,000 Fgo.000 7 Gomtingent Labaity for Leas Inter Company Owings (-) | 20,000 | Till Receivable discounted by Bank Balance 1.60,000 Led, 4.000 oo Hat 0.000 + stat (4) | 1.90.00 | Loan tS La. 10,000 Leas: InteeCompany Owings (-) | 10000, NIL Total TotalCorporate Accounting =I 145 ILLUSTRATION 12] ares of € 100 each in M Ltd H Ltd. acquired 800 Equity Additional Information : i) Creditors of H Ltd,, include 8 6,000 due to M Ltd. 21,500 of the bills are deawn by H Ltd, on M Ltd. its Plant is overvalued by & 5,000. Holding Company Accounts The summarised Balance Sheets of H Ltd., and M Ltd, acon 314 March, 2090 were as follows, Liabitities Hite | at Lae Assets Tut [oe lk t z ‘Share Capital: | Premises 75,000| 90,000 A) Issued, Subscribed Pont 120000] 54,700 and Paid-up: 2.5000 | 100,000] Investment 1,70,000 - Equity Shares of 7100 each | (Shares in M Ltd, at cost) Capital Reserve | - 60,000 | Stock 70,000) 18,000 General Reserve | 120.000 ~| Debtors 21,000) 20,000 Profit and Loss 28,600 18000] M Ltd's Current Account 11000 - (Prefts for tha year 2019-2020) Cashat Bank 7250 4,000 Bank Overdraft 50,000 ~ | Bills Receivabte - Bills Payable -| 4200 Creditors 23550 4,000 HlUtds Current Account| -| 50 | | Total 4.72.150 | 186,700 Total 472:150| 1.96,700] ‘on 30 June, 2019. The directors are advised that the Premises of M Ltd. are undervalued by 10,000 and iv) A cheque for % 500 sent by M Ltd., to H Ltd., on 30% March, 2020 was received by HLtd.,on 3% April, 2020. Prepare a Consolidated Balance Sheet on 314 March, 2020, [SQLUTION] Consolidation Working Notes : 1D H.Ltd,, acquired Equity Shares in M Ltd., on 30% June, 2019. 2). Share of H Ltd, in M Ltd. ares acquired by H Lt Shares issued by M Ltd. 3) Statement of Capital Profit: i) Capital Reserve i) Profits earned from 1* April, 2019 to 30% June 2019 3. (Profits for the year 2019-2020 2% 218,000 iii) Undervaluation of Premises of M Ltd. iv) Overvaluation of Plant of M Ltd. Capital Prof 60,000 4500 (+) 10.000 74,500 © 5.000 69,500Corporate Accounting - 1.45 Holding Company Accounts Division of Capital Profit 769,500 ¥ + HLtd. Minority ass) ays) %55,600 713,900 (Goodwill) (Minority Interest) 4) Statement of Revenue Profit zg i) Profits earned from 1* July, 2019 to 31“ March, 2020 9 ‘rofits for the year 2019-2020 =12* z 18,000 ) (+) 13,500 :. Revenue Profit 13,500 Di n of Revenue Profit @13,500 + HU. Minority (8/5) ass) 210,500 22,700 (Consolidated Profit and Loss) (Minority Interest) 5) Statement of Minority Interest zg Face Value of Shares held by Minority 20,000 (200 Shares x 2 100) Add: Capital Profit (+) 13,900 33,900 Add: Revenue Profit (+) 2.700 «. Minority Interest 36,600 6) Statement of Goodwill: z Cost of Shares acquired by H Ltd. 1,70,000, Less : Face Value of Shares acquired (800 Shares x 100) (-) $0,900 Excess Amount Paid 90,000 Less: H Ltd.’s share in Capital Profit () 55,600 -. Goodwill 34,400 71 Statement of Consolidated Profit and Loss Account: z Profit and Loss (Cr.) 28,600 Add: H Ltd.'s Share in Revenue Profit (+) 10,200 ©. Profit and Loss (Cr) 39,400 8) Cash in Transit: Cash in Transit represents % 500 cheque sent by M Ltd., to H Ltd., on 30 March. 2020, but received by H Ltd., on 3“ April, 2020 ie. after the date of preparation of Balance ‘Sheet as on 31™ March, 2020. Hence, shown as Cash in Transit as on the date of Balance Sheet ie. 31% March, 2020. This reflects the difference in the Current Account Balance of both the companies which gets squared off against each other.Corporate Accounting I! 147 Holding Company Accounts Consolidated Balance Sheetof H_ Ltd. and its Subsidiary M Ltd. as on 31* March, 2020 [ Liabilities Lele Assets z z | Share Capua: | 3800 AY sued, Subscribed and 175900 | op: 250000 75000 zamena our tover 4) 2000) sao ese General Reserve | 120000] Add stncresse (+) 10.00 | Profit and Lose 39.100] Plant Minority Interest + Hud 12000 Rank Overdraft + Mud 51700| 49700 Je Heed 5000 Less :Deerease (-) 5000) (>) NL | Bills Receivable + Whd + Mie. o Less :rier-Correany Owings (-) | Less: tnter-Company Owings tiers Creditors © Hee. + HL, * Mud, © Je std. | Less : ter Company Onings (-) Cach in Transit Stock + Hud. snd , Cash at Bank, + Mt. + Mud ©] Less :Inte-Company Owings Toul Total QUESTIONS FOR SELF-STUDY] I Theory Questions : What do you understand by “Holding Company’ ? fi) Define a Subsidiary Company’ iii) What points should be kept in mind while consolidating a Balance Sheet ? iv) Write short notes on: 2) Minority Taterest, b) Unrealised Profil, -) Goodwill or Cast of Control, d) Capital Profit cr Loss, ¢) Revenue Profit or Loss, f) Inter-Company Owings.Corporate Accounting - I 1.48 Holding Company Accounts TI. Practical Problems : 1)_The Balance Sheet of K Ltd., and P Ltd., as on 31* March, 2020 were as under: K Ltd. P Ltd. K Ltd. P Ltd. Liabi le t Assets ‘ t ‘Share Capital : 2,00,000 50,000 | Buildings 60,000 - Shares of @ 10 each = |rtant 200,000) = | Reserve Fund 30,000 10,000] Stock 40,000, 85,000 Profit and Loss | Debtors 10,000 30,000, | Balance ason 1* Apri, 2019 | 40,000 20,000] Bank 10,000) 10,000 Profits for the year | 3,000 Shares in P Ltd. 65,000 = 2019-2020 | 50,000 25,000} Bills Receivable - | 10,000 Creditors | 30,000 30,000 | | Bank Overdraft | 20,000 7 | | Bills Payable | 15,000 - | | | Total | 385,000 1,35,000 | Total |. 385,000 | 1,35,000 K Ltd., purchased Shares of P Ltd., on I October, 2019 at a cast of & 65,000. The Bills Payable of K Ltd,, included bills amounting to 10,000 drawn by P Ltd., and payable to P Ltd. The Debtors of P Ltd., included the debts due from K Ltd., in respect of goods supplied to them for % 6.000. Prepare a Consolidated Balance Sheet as on 31™ March, 2020. 2. The following are the Balance Sheets of M Ltd., and N Ltd, as on 314 March, 2020. M Ltd,, acquired the shares in N Ltd, at a cost of & 2,10,000 on I April, 2019, M Lid. | N Ltd. J Maud | oN utd | Liabilities lie lee Assets t t | Share Capital: 7.00000 90,000] Fremices | 330,000) 56,000, ‘Shares of €10 cach Pant | 140,000) 52,000 General Reserve 2,00,000) 4.000] Shares in NLtd., 2.10,000 - (As on 14 April, 2019) | fateost | Profitand Loss 180,000 72,000 Stock | 124,000) 36,000 Creditors 20,000} 28,000] Debtors 70000) 28,000 Cash 1.26000 22,000 11,00,000 |_1,91,000 | Total 10,00,000 |_1,94,000 The Creditors include € 10,000 due to N Ltd., for purchases on which the latter Co. made a profit of & 2,000. The Stock includes & 3,000 of the above purchases from N Ltd. Prepare a Consolidated Balance Sheet as on 31 March, 2020.Corporate Accounting - 1 1.49 ___3)_ The following are the Balance sheets of X Ltd., and Y Ltd. as.on 31 March, 2020 X Ltd. Y Ltd. Liabilities Assets t + | * | Equity Share Capital : Fixed Assets Equity Shares of % 100 10,00,000 4,00,000] Stock | each | Debtors General Reserve, 2,00,000 - Investments — Profit and Loss | 190,000 - |i) 6% Debentures in ¥ Creditors | 1,20,000 90,000 Ltd. 6% Debentures: 00,000} ii) 3,000 Shares in Y | Ltd. at cost Cash Profit and Loss [Total the goods were still in Stock on 31" March, 2020. Prepare a Consolidated Balance Sheet as on 31+ March, 2020. Holding Company Accounts XLtd. YLtd. ze | ev] 7,00,000 3,00,000 180,000, 80,000 1,20,000 | 60,000 | 1,20,000) = 240,000) = 1,50,000 | 50,000 | 2,00,000 15,10,000 __6,90,000 X Ltd., acquired the Shares in Y Ltd., on 1* October, 2019. The Profit and Loss of ¥ Ltd., showed a debit balance of & 3,00,000 on 1 April, 2019. Creditors of Y Ltd., include 40,000 for goods supplied by X Ltd., on which X Ltd., made a profit of & 4,000. Half of 4) $ Ltd., acquired 8,000 Equity Shares of V Ltd., on 1* April, 2019. The following are the Balance Sheets of the two companies as at 31* March, 2020. tbe sid. | Vv Ltd. ‘hanes sud. | Vv ud. root x x ‘Share Capital | 20.00,000 |” 10,0,000 | Buildings | s.c0,000/ 3,00,000 Equity Shares of Machinery 5.00.00 6,00,000 R100 each Stock 1,50,000 | 1,00,000 General Reserve Debtors 1.90.00 1,20,000 Jason 1 April,2019 | 400,000) 200,000 | Investments in shares of V Ltd. | 10,00,000 -| Profit and Loss 1,00,000/ 60,000 | Bills Receivable | so.000 -| ason 1* April, 2019 Cash and Bank 5.00.00 330,000 | Profits forthe year | | | 2019-2020 2.00.00 | 0,000 | | Creditors 100,000 1,00,000 | | | Bills Payable | 30,000 10,000 | | | [Total |_28.30,000 |_14,50,000 | Totat 28,30,000 | _14,50,000Corporate Accounting «I 1.59 Holding Company Accounts Other information is as follows: 4) Bills Receivable ofS Ltd, includes € 10,000 by V Ltd. ii) Debtors of § Ltd. include # $0,000 due from V Ltd. iil) Stock of V Lid. includes goods purchased from $ Lid, for % 60,000 which were invoiced by S Ltd. ata profitof 25%. on cost. Frepare a Consolidated Balance Sheet of S Ltd., and its Subsidiary V Ltd, as on 31* March, 2020. 5._The Balance Sheet of A Ltd, and B Ltd. as on 31 March, 2020 were as follows: aud | Bue. aus | Buta iwi Assets | Lek | «| «| Shave Capital: J recaoo | 250.000] Gonxbwil oom) 50.000 Fyuity Sharesof® IDeach | Land 2ponm | 1.90,900 ralReervetApril2019 | 200000, 80200] rant 500900 | 2,0,00 Fofitand Los 12 Apri.2019 | «9.900, 60,990 sock 200900 1,00,000 Trofits forthe year | Investments 34000 - ended 31 March, 2020 | 1150.000| 50,000 J Bills Receivable 30000) 30,000 Creditors | 250,000 | 1.30,000 | Cash at Bank: 50000 20,000 Debtors 2anpe0 79,000 Tota 1660000 | $70,200] Tout 1660000 | 5,70,000 The following information is given = i) ALtd,, acquired 15,000 Equity Shares of BLtd., for & 1,90,000 on 1 April, 2019. ii) Debtors of A Ltd. include % 30,000 due from B Ltd. di) Bills Receivable of B Ltd., include © 10,000 due from A Ltd. iv) The Stock of B Lid., include goods purchased from A Lid. of & 10,000 which includes profit charged by A Ltd., at 25% on cost. Prepare a Consolidated Balance Sheet as on 31+ March, 2020. 2kUnit 2 Absorption of Companies Synopsis 2.1 Introduction 2.2. Meaning 2.3. Vendor and Purchasing Companies 2.4 Purchase Consideration 2.5. Process of Accounting for Absorption 2.5.1 Accounting Entries in the Books of Vendor Company 2.5.2. Joumol Entries in the Books of Purchasing Company 2.5.3 Preparation of Bolance-Sheet after Absorption in the + Illustrations * Questions for Self-Study Books of Purchasing Compony 2.1 INTRODUCTION Absorption is the process under which an existing large company purchases the business of another small company ¥ companies during similar business. In other words, when an existing, company takes over the business of one is called absorption, or more existing companies carrying similar business, it Amalgamation means formation of a new company to take over alleast two existing companies which go into liquidation. Hence in amalgamation, there is birth of a new company with the closure of atleast two companies which wind up their business. The business of the companies going into liquidation are transferred to a new company formed for this purpose, in return for a purchase consideration. Therefore, in amalgamation, there are minimum of two companies going into liquidation simultaneously and a new company formed at the same time to take over the business of the liquidated companies. Amalgamation is a much wider term and includes absorption. According to Companies Act, the term ‘Amalgamation’ includes absorption. Amalgamation and Absorption signify the merging of two or more joint stock companies either for eliminating competition amongst them or for growing in size to reap the economics of large-scale production or for controlling the market. 2.2 MEANING Amalgamation is an event or transaction in which two or more companies, or their net assets are brought under common control, in a single legal entity. The concept of control relates to the ability to dictate operating and financial policies. an