1. The document discusses concepts related to holding companies including analysis of capital profits, calculation of capital reserve/goodwill, treatment of minority interest, and preparation of consolidated balance sheets. 2. Capital profits refer to profits of a subsidiary earned prior to acquisition by the holding company. Revenue profits are earned after the acquisition date. 3. In a consolidated balance sheet, common transactions between the holding company and subsidiary like bills receivable/payable are eliminated to show only balances with outside parties.

1. Holding company Accounts and Preparation of consolidated balance sheet By Prof. L.Augustin Amaladas M.Com.,AICWA., PGDFM., B.Ed. www.augustin.co.nr Free web B.Com., M.com ICWA CA CS Students St. Joseph’s College of Commerce, Bangalore Presents global students’ community New 30/10/2008

2. Dedicated to All my beloved sisters Prof.Dr.L.Josephine MCA.,M.Phil.,Phd., L.Xavier Arokia Selvi M.Sc.,M.Phil.,B.Ed., L.Arul Georginal B.E(CS)(WIPRO Ltd)

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

11. The excess amount paid over real worth to acquire subsidiary company’s share is known as goodwill. Example-3 4000 shares are purchased for Rs. 50,000. The nominal value is Rs.10. The excess amount of Rs.10,000 is goodwill. Goodwill is shown in the consolidated balance sheet. How do you calculate goodwill on the shares acquired by Holding company? Assumed no profits in the balance sheet

12. If goodwill appears already in the holding and subsidiary company? Date of acquisition was 31-3-2008 Balance sheet as on 31 st March 2008 10,000 10,000(CL) 20,000 3,50,000 --------- Goodwill Shares in S Ltd (2000 equity shares and 500 preference shares) Preliminary expenses 2,00,000 1,00,000 60,000(CP) 20,000(CP) 70,000(CP) 5,00,000 Nil 1,30,000 60,000 80,000 Equity shares(Rs.100 each) 12% preference shares(Rs.100 each) General reserve Profit and loss a/c (1-4-2007) Profits during the year S Ltd H Ltd S ltd H Ltd

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

16. What is capital profit? What is the reason of differentiating between Capital profits and revenue profits? Capital profits : 1. Profits of subsidiary company earned by operation or non-operation prior to holding company’s acquisition. 2. Capital profits earned after acquisition Capital profits are not available for declaration of dividend. After the acquisition date, profits earned by subsidiary company by a normal business operations is a revenue profit. Such profits are available for declaration of dividend.

18. Reserves and Profits Capital Profit Revenue Profit General reserve (Before ) 50,000 Nil P/L on 31-3-2007 (Before) 30,000 Nil P/L for 2007-08 (9 months before And 3 months after) 9 months profit 9/12 x 80,000 =60,000 3 months profit 3/12 x 80,000 =20,000 Total Rs.1,40,000 Rs.20,000 Before or After acquisition Date of acquisition is 1 st January 2008

19. Minority/Majority Minority Capital profits Rs.1,40,000 Majority ¼ x 1,40,000 =Rs.35,000 ¾ x1,40,000 =Rs.1,05,000 Revenue profits Rs.20,000 ¼ x 20,000 =Rs.5000 ¾ x 20,000 =Rs.15000(P/L) Rs.1,40,000 Total Rs.5,60,000 Rs.4,05,000-goodwill purpose Rs.15,000-profit and loss a/c In the consolidated B/S Shares Capital 4,00,000 1000x 100 1,00,000 3,000x 100 3,00,000 Value on the Date of acquisition Rs.4,05,000

28. Balance Sheet Bills receivable of S ltd. include bills for Rs.8000 accepted by H Ltd and creditors of S Ltd include Rs.20,000 due to H Ltd. How do they appear in the combined(consolidated) balance Sheet? Exercise-9 Nil Nil 2.7 0.15 8.8 0.8 1.8 0.1 Shares in S ltd(80,000 shares) 9% debentures in S ltd Debtors Bills receivables 10.00 2.0 2.0 0.1 20.00 Nil 4.0 0.2 Share Capital Rs.10 each 9% debentures Creditors Bills payable S Ltd Rs. ’ 00,000 H Ltd Rs ’ 00,000 S Ltd Rs. ’ 00,000 H ltd Rs. ’ 00,000

29. Balance Sheet( observe other than share capital ) Bills receivable of S ltd. include bills for Rs.8000 accepted by H Ltd and creditors of S Ltd include Rs.20,000 due to H Ltd. How do they appear in the combined(consolidated) balance Sheet? Nil 2.7 0.15 0.8 1.8 0.1 9% debentures in S ltd Debtors Bills receivables 2.0 2.0 0.1 Nil 4.0 0.2 9% debentures Creditors Bills payable S Ltd Rs. ’ 00,000 H Ltd Rs ’ 00,000 S Ltd Rs. ’ 00,000 H ltd Rs. ’ 00,000

31. Consolidated Balance sheet How do you show share capital of both the companies in The consolidated Balance sheet? See in the next slide Nil 4.3 0.17 9% Debentures Debtors Bills receivables 1.2 5.8 0.22 Debentures Creditors Bills Payable ’ 00,000 ’ 00,000

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

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

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

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

37. Exercise-10 On February 2008 H. Ltd sold goods to S Ltd. goods costing Rs.8000 for Rs.10,000.25% of such goods not yet sold by subsidiary (S.Ltd.).Creditors of S.ltd include Rs.4,000 Due to H Ltd on account of these goods. Solution: 75% of the goods are sold out side the boundary. So, profits are realised on those goods.But on 25% of the goods not yet sold are not yet realised. The unrealised profit is Rs.500(2000 x25%). 1.We remove from stock Rs. 500 2.We remove profit Rs.500 3. Eliminate from debtors and creditors Rs.4000.

38. If goods supplied by subsidiary to holding or vice versa Are not fully sold on the date of balance sheet? 1.Unrealised profit on supplied goods with in the group to be eliminated from closing stock. 2.Eliminate the profit on such unsold stock from the supplier company(either H or S) to the extent of holding company’s share.

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

41. Balance Sheet as on 31 st March 2008 A Ltd. acquired 40,000 shares of B Ltd . On the date of acquisition, the B Ltd. had profits and reserves undistributed Rs. 1,00,000. Out of pre- Acquisition profits Rs.60,000 was distributed as dividend. Prepare :-1.Minority Interest 2.Cost of control/goodwill 3.Consolidated Balance sheet as on 31 st March 2008 Exercise-11 2.0 3.4 0.6 ---- 2.5 1.0 0.5 10.00 6.4 12.6 1.4 5.0 4.1 3.8 1.2 34.5 Land and building Machinery Furniture 40,000 shares in B Ltd. Stock on hand Debtors Bank Balance 6.00 1.2 1.8 1.0 10.00 25.00 3.6 2.4 3.5 34.5 Share Capital Rs.10 each General reserves Profit and loss a/c Trade creditors B Ltd Rs. ’ 00,000 A Ltd Rs ’ 00,000 B Ltd Rs. ’ 00,000 A Ltd Rs. ’ 00,000

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

43. Step-2:Revenue profit(Post acquisition profit) =[Rs.1,20,000-(1,00,000-60,000)](Remaining Reserve) +1,80,000(P/L A/c)=Rs.2,60,000 The reserve of Rs.1,20,000 remains in the Balance sheet is after paying dividend of Rs.60,000 (ie.,out of the capital Profits of Rs.1,00,000.) to the share holders. Rs.2,60,000 Majority(A Ltd) Rs.2,60,000 x2/3=Rs.1,73,333 Minority Rs.2,60,000 x1/3=Rs.86,667

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

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

46. Consolidated Balance sheet( Exercise-11 ) 0.3333 8.40 16.00 2.00 6.6 4.8 1.7 39.83 Goodwill Land and Building (6,40,000 + 2,00,000) Machinery (12,60,000 + 3,40,0000) Furniture (1,40,000 + 60,000) Stock in trade (4,10,000 + 2,50,000) Debtors (3,80,000 + 1,00,000) Bank (1,20,000 + 50,000) Total 25.00 3.60 3.73 4.50 3.00 39.83 Share capital 2,50,000 shares of 10 each General reserve Profit and loss a/c(Note-3) (2,40,000 – 40,000 + 1,73,333) Trade creditors (3,50,000 + 1,00,000) Minority Interest Total Rs.00,000 Assets Rs.00,000 Liabilities

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

49. Balance Sheet as on 31 st March 2008 A Ltd. acquired 20,000 shares of B Ltd on 31 st March 2007. On the date of acquisition, the B Ltd. had reserves undistributed Rs. 5,00,000 and Rs.2,00,000 in the Profit and Loss Account when A Ltd. acquired B Ltd. B Ltd.issued bonus shares @1 for every 5 shares Held out of post-acquisition profits. Calculate: 1. Cost of control before and after issue of bonus shares 2. prepare consolidated Balance sheet Exercise-12 20.00 25.00 ------ 45.00 65.00 50.00 30.00 145.00 Fixed assets Current Assets 20,000 shares in S Ltd. 25.00 5.00 10.00 5.00 45.00 90.00 20.00 15.00 20.00 145.00 Share Capital Rs.100 each General reserves Profit and loss a/c Trade creditors B Ltd Rs. ’ 00,000 A Ltd Rs ’ 00,000 B Ltd Rs. ’ 00,000 A Ltd Rs. ’ 00,000

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

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