Investment holdings 50 Large holdings The holding company

Investment holdings > 50% = Large holdings The holding company > The subsidiary

To give shareholders An overview of their investments An overall financial position and performance of the group

To prepare a group financial statement As a Single Economic Entity

Transactions between the group companies do not reflect transactions between the external parties and therefore should be eliminated

Inter company indebtedness e. g. inter company loan debentures proposed dividends

Long term investment of H Share capital + reserves of S

1. Unrealized Profits from intra-group transactions - on unsold inventories on fixed assets

Pre-acquisition Reserves Cost of control Minority interests

Pre-acquisition Reserves - Share Premium - General Reserve - Revaluation Reserve of subsidiary

Minority interests - Profit and loss account - Balance sheet

Proposed dividend pay out from Pre-acquisition Profit - should not be treated as investment income - It is a reduction in the cost of investment

Proposed dividend Pay out from Post-acquisition Profit - investment income

% of holdings: 4000/5000 = 80%

2. At the acquisition date, 1 January 2003 the shareholders’ equity of Jackson Ltd: ref (i) Ordinary share Capital $000 5, 000 Share premium 500 General reserve 1, 000 Profit and loss account 1, 500 Revaluation reserve 9, 800 -9, 000 8, 800

3. Calculation of Goodwill Answer (a) $000 Investment in Jackson Ltd Ordinary share Capital 5, 000 x 80% 7, 500 4, 000 Share premium 500 x 80% 400 General reserve 1, 000 x 80% 800 Profit and loss account 1, 500 x 80% Revaluation reserve 800 x 80% $000 1, 200 640 7, 040 460

4. Goodwill amortization 460 / 5 = 92 ------- Consolidated profit and loss account 460 – 92 = 368 ----- Consolidated Balance Sheet

5. At 31 March 2003, the shareholders’ equity of Jackson Ltd: $000 Ordinary shares of $1. 00 each 5, 000 Share premium 500 General reserve 1, 750 Profit and loss account 1, 750 Revaluation reserve 800 9, 800

6. Minority interests Ref: (ii) (3) Depreciation adjustment (iv) Unrealized profit on inventories $000 Ordinary shares of $1. 00 each 5, 000 x 20% 1, 000 Share premium 500 x 20% 100 General reserve 1, 750 x 20% 350 Profit and loss account 1, 750 x 20% 350 Revaluation reserve 800 x 20% 160 To share unrealized profit on inventories Transfer to consolidated balance sheet $000 1, 960 1, 800

Workings of the Consolidated Balance Sheet: 7. Freehold land : 10, 000 + 9, 800, 000 ( revised value) = $19, 800, 000

7. Plant and machinery: Unrealized profit on sale of fixed asset to Jackson: ref (iii) = 1, 000 – 600, 000 = 400, 000 consolidated profit and loss Depreciation to be reduced = 40, 000 Consolidated profit and loss Cost = 7, 900, 000 +4, 150, 000 - 400, 000 = 11, 650, 000 Provision for depreciation = 4, 980, 000 + 3, 150, 000 - 40, 000 = 8, 090, 000 Net book value = 3, 560, 000

8. Shareholders’ Fund: Ordinary shares of $1. 00 each $000 15, 000 Share premium 3, 000 General reserve 1, 400 + (1750 -1000) x 80% 2, 000

9. Unrealized profit on inventories: ref (ii)(3), (iv) Mark up = 25% = 1/4 Margin = 20% = 1/5 Unrealized profit on inventories = 4, 000 / 5 = 800, 000 Inventories = 5, 550, 000 + 1, 250, 000 – 800, 000 = 6, 000 800, 000 x 20 % = 160, 000 ------ share by Minority interests 800, 000 x 80% = 640, 000 ------- consolidated profit and loss

10. Intra-group indebtedness: ref: (v), (ii) (4), Accounts receivable: 1, 500, 000 +750, 000 -500, 000 = 1, 750, 000 Accounts payable: 3, 050 – 500 + 1, 600 = 4, 150 Dividend payable: 750 Dividend payable to Minority interests = 500 x 20% = 100, 000

11. Bank: 1, 450, 000 + 100, 000 = 1, 550, 000 Tax payable: 1, 200, 000 + 1, 000 = 2, 200, 000

12. Consolidated profit and loss account $000 Profit and loss account : M. Ltd S. Ltd (1, 750, 000 – 1, 500, 000) Unrealized profit on Sale of fixed asset Depreciation adjustment Goodwill amortization Unrealized profit on inventories Intra-group dividends 4, 520 200 (400) 40 (92) (640) 400 4, 028

To sum up: Fixed assets = H + S – I Current liabilities = H + S – I Long term liabilities = H + S – I Share Capital = H Reserves = H + Post-acquisition Reserves of Subsidiary