Accounts of Holding Companies PartIII BY BHOOMIKA GARG
Accounts of Holding Companies Part-III BY: BHOOMIKA GARG
Elimination of Mutual or Inter. Company Owings When holding company and its subsidiary trade with each other, it may result in common accounts appearing in the balance sheet of both the companies. While preparing the consolidated balance sheet, common accounts (or inter-company balances) are to be eliminated as follows: i. Debtors and Creditors ii. Bills of Exchange iii. Inter Company Loans iv. Debentures (Mutual): If there is difference in purchase price of debentures and their paid up value, the same is adjusted while calculating cost of control or goodwill or capital reserve as the case may be. Only the amount of debentures held by outsiders would be shown as separately on the liabilities side of the consolidated balance sheet.
Unrealized Profit on Stock In case the holding and its subsidiary trade with each other, the goods sold at a profit by one company may appear as unsold inventory in the balance sheet of another, if the entire quantity is not sold. It is not proper to credit the profit and loss statement with such unrealized profit. The basic accounting treatment of eliminating such profit is to deduct such unrealized profit from the consolidated profit as well as from the aggregate inventory in the consolidated balance sheet. Note: As per As-21 issued by ICAI , in case there are minority shareholders in the subsidiary, there is no need for adjustment for their share of unrealized profits.
Problem VII Mutual transactions, Unrealized Profit on Stock and Loss by Fire(Imp. )
Solution Working Notes 1) The ratio of equity acquired by H Ltd. And Minority Interest Total no. of shares of S Ltd = 2, 000 shares of Rs. 100 each 2) 3) Investment by H Ltd = 1, 500 shares, MI= 500 Shares Ratio (H: MI) = 3: 1 H’s share in pre acquisition loss of S Ltd. Total Pre acquisition loss = Rs. 1, 50, 000 H’s Share(1, 50, 000*3/4) = Rs. 1, 12, 500 H’s share in additional pre acquisition loss of S Ltd. Balance of Surplus as on 31. 3. 2016 = Rs. 1, 50, 000 Balance of Surplus as on 31. 3. 2017 = Rs. 1, 000 Profit earned during the year = Rs. 50, 000
Contd. Profit earned during the year = Rs. 50, 000 Add: Loss of stock by fire(6, 000 -2, 000) = Rs. 4, 000 _____ Profit made in 2016 -17 Rs. 54, 000 ______ Profit for pre acquisition period = 18, 000 ( 54, 000*4/12) (from 1. 4. 16 to 1. 8. 16) Less: Loss by Fire = (4, 000) ______ Rs. 14, 000 ______ H’s Share= 14, 000*3/4 = Rs. 10, 500
Contd. 4. H’s share in post acquisition profit Profit for post acquisition period = Rs. 36, 000 (54, 000*8/12) ( from 1. 8. 16 to 31. 3. 17) H’s Share (36, 000*3/4) = Rs. 27, 000 5. Cost of Control or Goodwill Investment in shares of S Ltd. = 1, 20, 000 Less: Paid up value of shares = (1, 50, 000) Add: Share in pre acquisition loss = 1, 12, 500 Less: Share in pre acquisition profit = (10, 500) ______ Goodwill 72, 000 ______
Contd. 6. Calculation of Minority Interest Paid up value of Share Capital Less: Share in accumulated Loss = 50, 000 = (25, 000) (1, 000*1/4) ____ Minority Interest 25, 000 _____ 7. Unrealized profit on stock Profit made on supply of goods worth Rs. 20, 000 = 2, 000 Profit on goods worth Rs. 10, 000 = 2, 000/20, 000*10, 000 Unrealized profit on stock = Rs. 1, 000
Consolidated Balance Sheet of H and S Ltd. As at 31 st March 2017 Particulars I. Note No. EQUITY AND LIABILITIES (1) Shareholder’s Fund (a) Share Capital (b) Reserves & Surplus (2) Minority Interest (3) Non Current Liability (a)6% Debentures (4) Current Liability (a) Trade Payables 1 2 Total Amt. 5, 000 2, 06, 000 _____ 7, 06, 000 25, 000 3 4 Total II. ASSETS (1)Non Current Assets Fixed Assets (a) Tangible Assets (b) Intangible(Goodwill) (2) Current Assets Amt. 5 40, 000 1, 000 _____ 8, 71, 000 _____ 5, 000 72, 000 2, 99, 000 _____ 8, 71, 000 _____
Notes to Accounts Particulars 1. Share Capital 5, 000 shares of Rs. 100 Each 2. Reserves & Surpluses Reserves(General) H Ltd. Amount 5, 000 1, 000 H Ltd. = 80, 000 S Ltd. = 27, 000 Less: Unrealized Profit on Stock 1, 000 Surplus 3. Non Current Liabilities 6% Debentures S Ltd. = 1, 000 Less: Held by H Ltd = (60, 000) ______ 4. Trade Payables: H Ltd. = 75, 000 S Ltd. = 45, 000 Less: Inter company owings =(20, 000) ______ 5. Current Assets Inventories ((H=90, 000+S=30, 000)-Unrealized Profit=1, 000) TR ((H=60, 000+ S=30, 000)- Mutual=20, 000)) Cash(H=75, 000= S=25, 000) 1, 07, 000 (1, 000) _____ 2, 06, 000 40, 000 1, 000 2, 99, 000
Preference Shares in the subsidiary company
Problem VIII Preference Shares in subsidiary company
Contd.
Solution Working Notes 1) The ratio of equity acquired by H Ltd. And Minority Interest Total no. of shares of S Ltd = 80, 000 shares of Rs. 10 each 2) Investment by H Ltd = 60, 000 shares, MI= 20, 000 Shares Ratio (H: MI) = 3: 1 H’s share in pre acquisition Profit Total pre acquisition profit = Rs. 70, 000 H’s share ( 70, 000*3/4) = Rs. 52, 500
Contd. 3) H’s share in pre acquisition Reserve Total pre acquisition reserve = Rs. 1, 10, 000 H’s share ( 1, 10, 000*3/4) 4) = Rs. 82, 500 H’s share in post acquisition surplus and reserve Balance of surplus and general reserve as on 31. 3. 16 = Rs. 3, 64, 000 Less: Opening surplus and general reserve = Rs. (1, 80, 000) _______ H’s share in preference dividend= 16, 000*20/100= Rs. 3, 200 Rs. 1, 84, 000 Minority shareholders share in pref. dd= 16, 000*80/100= 12, 800 Less: Preference Dividend for the year 2016 -17(2, 000*8/100) H’s share in revenue profits= 1, 68, 000* 3/4 = Rs. 1, 26, 000 H’s total share in revenue profits= Rs. 1, 26, 000+Rs, 3, 200 = Rs (16, 000) ________ Rs. 1, 68, 000 ________ = Rs. 1, 29, 200
Contd. 5) Calculation of Cost of Control or Goodwill Investment in equity shares of S Ltd. = 7, 50, 400 Investment in preference shares of S Ltd. = 42, 000 _____ Total investment in shares of S Ltd. = 7, 92, 400 Less: Paid up value of equity share capital = (6, 000) Less: Paid up value of preference share capital = (40, 000) Less: H’s share in pre acquisition profits = (52, 500) Less: H’s share in pre acquisition reserve = (82, 500) ______ Goodwill 17, 400 ______
Contd. 6. Minority Interest Paid up value of equity shares held = 2, 000 Add: Paid up value of preference shares held = 1, 60, 000 Add: Share in preference dividend = 12, 800 Add: Share in general reserve(1, 90, 000*1/4) = 47, 500 Add: Share in surplus((1, 74, 000 -16, 000)*1/4) = 39, 500 ____ Minority Interest 4, 59, 800 _____ 7. Unrealized Profit on Stock Profit made on supply of goods worth Rs. 40, 000 = 40, 000*1/4 Unrealized Profit on Stock = Rs. 10, 000
Consolidated Balance Sheet of H and S Ltd. As at 31 st March 2016 Particulars I. Note No. EQUITY AND LIABILITIES (1) Shareholder’s Fund (a) Share Capital (b) Reserves & Surplus (2) Minority Interest (3) Non Current Liability (a)6% Debentures (4) Current Liability (a) Trade Payables 1 2 Amt. 50, 000 22, 19, 200 _______ 72, 19, 200 4, 59, 800 1, 000 3 9, 76, 000 _____ 87, 55, 000 _____ Total II. ASSETS (1)Non Current Assets Fixed Assets (a) Tangible Assets (b) Intangible(Goodwill) (2) Current Assets Total 67, 000 17, 400 ______ 4 67, 17, 400 20, 37, 600 _____ 87, 55, 000 _____
Notes to Accounts Particulars Amount 1. Share Capital 5, 000 equity shares of Rs. 10 Each 2. Reserves & Surpluses Reserves(General) H Ltd. + S Ltd. share H Ltd. = 6, 000 S Ltd. = 1, 29, 200 Less: Unrealized Profit on Stock Amount 50, 000 15, 000 Surplus 3. 4. Trade Payables: 7, 29, 200 (10, 000) _____ H Ltd. = 6, 50, 000 S Ltd. = 3, 26, 000 ______ 22, 19, 200 9, 76, 000 Current Assets H Ltd. = 15, 57, 600 S Ltd. = 4, 90, 000 ______ Less: Unrealized Profit on stock 20, 47, 600 (10, 000) ______ 20, 37, 600
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