Holding company accounts and consolidated Balance Sheet

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

StudentsSt. 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)

3

HOLDING COMPANIES –IMPORTANT ISSUES TO SOLVE PROBLEMS

1.ANALYS OF CAPTAL PROFIT-2.ANALYSYS OF REVENUE PROFIT3.CALCULATION OF CAPITAL RESERVE/COST OF CONTROL(GOODWILL)4.CALCULATION OF MINORITY INTEREST5.Consolidated Balance sheet

4

1.ANALYSYS OF CAPTAL PROFIT

MEANING:

PROFIT/RESERVE OF ANY TYPE IN THE SUBSIDIARY COMPANY BEFORE THE DATE OF ACQUISITION

5

CAPTAL PROFITEXAMPLE -I

BALANCE SHEET OF SUBSIDIARY LIMITED AS ON 31-03-2007

LIABILITIES

GENERAL RESERVE

(1-4-2006) 5,00,000

PROFIT AND LOSS 2,00,000

THE BUSINESS WAS ACQUIRED ON

O1-O1-2007

6

ANSWER EX.1

RESERVE BEFORE ACQUISITION-5,00,000

PROFIT UP TO O1-O1-2007 (2,OO,OOO*9/12) 1,50,000TOTAL CAPITAL PROFIT 6,50,000

HOW MUCH IS THE REVENUE PROFIT?

7

REVENUE PROFIT?

2,OO,OOO-1,5O,OOO= 50,000

Exercise-2:SUPPOSING THE BUSINESS WAS ACQUIRED ON 30-09-2006 HOW MUCH IS CAPITAL PROFIT? /REVENUE PROFIT?

8

ANSWER-2CAPITAL PROFIT:RESERVE(PRE-ACQISITION) 5,OO,OOO

SHARE OF P/L A/C(2,OO,OOO*6/12) 1,OO,OOOTOTAL 6,OO,OOOREVENUE PROFIT:(2,OO,OOO *6/12) 1,OO,OOOENTIRE RESERVE PROFIT EARNED BY THE

SUBSIDIARY WAS PRE-ACQUISITION PROFIT

9

CALCULATION OF CAPITAL RESERVE

AMOUNT INVESTED BY THE HOLDING COMPANY IN SUBSIDIARY COMPANY(REFLECTED AS INVESTMENT IN THE ASSET SIDE)

LESS:1.AMOUNT RECEIVED OUT OF CAPITAL PROFIT IN THE FORM OF

DIVIDEND

2.PAID UP VALUE OF THE SHARE(NOMINAL VALUE)

3. SHARE OF REMAINING CAPITAL PROFIT OF HOLDING COMPANY

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?

H Ltd S ltd H Ltd S Ltd

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

5,00,000

Nil

1,30,000

60,000

80,000

2,00,000

1,00,000

60,000(CP)

20,000(CP)

70,000(CP)

Goodwill

Shares in S Ltd

(2000 equity shares and 500 preference shares)

Preliminary expenses

20,000

3,50,000

---------

10,000

10,000(CL)

Date of acquisition was 31-3-2008

Balance sheet as on 31st March 2008

13

1.Total Capital profitsGeneral reserve 60,000

Profit on 1-4-2007 20,000

Profit during the year 2007-08 70,000

Total 150,000

Less:-Preliminary expenses (10,000)

Less: Preference share holders (12,000)

(cumulative preference shares)

Profit to equity share holders 1,28,000

14

Have You observed that all profits are capital profits. Why?

It is not due to real capital profits. But because profits are earned by subsidiary before the date of acquisition.Note:1. General reserve before the date of acquisition, Revenue profit before the date of acquisition and all capital profits after the date of acquisition less all wasteful preliminary expenses(Capital loss) are capital profit.Note:2: Any benefits(money,dividend, bonus shares) derived by holding company out of capital profits reduce their cost of control(Investments)

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.

17

Balance sheet of subsidiary as on 31st March 2008

Equity shares 4,00,000

(Rs.100 per share)

General reserve 50,000

Profit and loss a/c 30,000

(on 31-3-2007)

Profit and loss a/c 80,000

(For the year 2007-2008)

3,000 shares were acquired by holding company in subsidiary company on 1st January 2008 for Rs.4,50,000.

Exercise-5

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

TotalRs.1,40,000 Rs.20,000

Before or

After acquisition

Date of acquisition is 1st January 2008

19

Minority/Majority

Minority

Capital profits

Rs.1,40,000

Majority

¼ x 1,40,000

=Rs.35,000¾ 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.1,40,000Total

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

1,00,0003,000x 100

3,00,000

Valu

e on th

e

Date of acq

uisitionRs.4,05,000

20

Good will/Capital reserveIt is calculated from the point of view of Holding

companyWhat is the value of total investment made by

Holding company?It is Rs.4,50,000What was it worth on the date of acquisition?It is Rs.4,05,000.Have they invested more than the real worth?Yes. It means they had paid extra for the goodwill

of the subsidiary company.

21

Suppose subsidiary company declares dividend after the acquisition out of revenue profits which were earned before the date acquisition?

Holding company had invested in subsidiary.If dividend is declared out of pre-acquisition profits of subsidiary, the holding company gets parts of its investments back.Therefore such dividend received to be reduced from investment of the holding company in subsidiary.

Does it affect goodwill/capital reserve of the company?

22

Yes.It affects goodwill.It decrease the goodwill.

Suppose subsidiary declares dividend out of general reserve

(Capital profit because it was earned before acquisition)

Rs.40,000 to all share holders, the holding

company’s share of general reserve is ¾ of 40,000=30,000.

Since 30,000 is received by holding out of their investments

The investment value decreased to Rs.4,20,000(4,50,000-30,000).

Therefore goodwill is Rs.15,000.

Exercise-6

23

If dividend declared by subsidiary out of post acquisition profit?

Post acquisition profit is a revenue profit.Such dividend received by holding from subsidiary does not reduce the value of investment of the holding company. It is included with the profits of holding company.The journal entry in the books of holding company is:

Cash a/c debit

Profit and loss a/c credit

24

Elimination of common transactions

1.Bills drawn by holding company on subsidiary company or vice-versa:

Holding company Subsidiary company

Bills receivable a/c debit

To subsidiary company a/c

Holding company a/c debit

To Bills payable a/c

Balance sheet Asset side

Bills receivable

Balance sheet Liability side

Bills payable

25

When we prepare a consolidated Balance sheet?

Treat the holding and the subsidiary company as one unit.Therefore eliminate both bills receivables and payable to the extent of holding company’s share of Bills receivable from consolidated balance sheet.

The same treatment is applicable for debtors and creditors on goods sold by holding to subsidiary or vice versa.

Suppose a girl friend given loan to her Boy friend before marriage and they get married; who has to pay to whom?

No one has to pay to no one( after their marriage) provided???????????!!!!!!!!!!!

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Provided??????!!!!!

They get married each other.

27

How do you deal in the consolidated Balance sheet?

1. Loan given by holding company to subsidiary?

2. Debentures issued by holding to subsidiary?

3. Loan given by subsidiary to holding?

Only one answer: In one company balance sheet

they are shown as asset

and an another company they are shown as liability.

If combined(Consolidated) both asset and liability

are eliminated.Only outsiders’ liabilities are shown in

the consolidated balance sheet

See the exercise in the next page

Exercise-8

28

H ltd

Rs.

’00,000

S Ltd

Rs.

’00,000

H Ltd

Rs

’00,000

S Ltd

Rs.

’00,000

Share Capital Rs.10 each

9% debentures

Creditors

Bills payable

20.00

Nil

4.0

0.2

10.00

2.0

2.0

0.1

Shares in S ltd(80,000 shares)

9% debentures in S ltd

Debtors

Bills receivables

8.8

0.8

1.8

0.1

Nil

Nil

2.7

0.15

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

29

H ltd

Rs.

’00,000

S Ltd

Rs.

’00,000

H Ltd

Rs

’00,000

S Ltd

Rs.

’00,000

9% debentures

Creditors

Bills payable

Nil

4.0

0.2

2.0

2.0

0.1

9% debentures in S ltd

Debtors

Bills receivables

0.8

1.8

0.1

Nil

2.7

0.15

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?

30

1. Bills accepted by H Ltd is B/P in H ltd Balance sheet.

Remove Rs.8000 from B/P and B/R

2. Creditors of S Ltd. of Rs. 20,000 is equal to Rs.Debtors of

H Ltd. Both to be eliminated to the extent of Rs. 20,000

3. Debentures of Rs.80,000 of S ltd is an investment for H Ltd.

Both to be eliminated in the consolidated Balance sheet.The

Remaining debentures belong to outsiders to be shown in the

Consolidated Balance sheet.

See the consolidated Balance sheet in the next slide

31

’00,000 ’00,000

Debentures

Creditors

Bills Payable

1.2

5.8

0.22

9% Debentures

Debtors

Bills receivables

Nil

4.3

0.17

Consolidated Balance sheet

How do you show share capital of both the companies in

The consolidated Balance sheet?

See in the next slide

32

Consolidated Balance sheet

Holding company

Rs.20,00,000Subsidiary 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

33

Explanations

1. Share capital of holding company appears in the

consolidated Balance sheet

2. Minority interest appears as liability in the consolidated B/S

3. Investments of Holding company in subsidiary disappears

in the consolidated Balance Sheet

4.Goodwill estimated appears along with other existing goodwill

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

companySubsidiary

company

Added to

Minority

Interest

Do not disclose separately the proposed

Dividend in the consolidated B/S??

40

Do not disclose separately the proposedDividend in the consolidated B/S Why?

It is because, the proposed dividend of subsidiary is shown with the minority interest(Minority’s share )and also in the P/L A/c of Holding (Holding company’s share).

41

A Ltd

Rs.

’00,000

B Ltd

Rs.

’00,000

A Ltd

Rs

’00,000

B Ltd

Rs.

’00,000

Share Capital Rs.10 each

General reserves

Profit and loss a/c

Trade creditors

25.00

3.6

2.4

3.5

34.5

6.00

1.2

1.8

1.0

10.00

Land and building

Machinery

Furniture

40,000 shares in B Ltd.

Stock on hand

Debtors

Bank Balance

6.4

12.6

1.4

5.0

4.1

3.8

1.2

34.5

2.0

3.4

0.6

----

2.5

1.0

0.5

10.00

Balance Sheet as on 31st 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 31st March 2008

Exercise-11

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.1,73,333Minority

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 ProfitRs.13,333

Share of revenue

profitRs.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 dividendRs.40,000

Less:-Holding company’s share of

Remaining capital profitsRs.26,667

Good will Rs.33,333

46

Liabilities Rs.00,000 Assets Rs.00,000

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

25.00

3.60

3.73

4.50

3.00

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

0.3333

8.40

16.00

2.00

6.6

4.8

1.7

39.83

Consolidated Balance sheet(Exercise-11)

47

Important observations in consolidated Balance sheet

1.All assets of Holding and subsidiary are added and disclose in the consolidated Balance sheet.

2. All third party liabilities of both the companies are added and disclosed(displayed)

3.From the profits of holding company and holding company’s share of subsidiary’s revenue profits subtract capital profits received in the form form of dividend as such dividend taken to calculate capital reserve(reduced from investments).

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

A Ltd

Rs.

’00,000

B Ltd

Rs.

’00,000

A Ltd

Rs

’00,000

B Ltd

Rs.

’00,000

Share Capital Rs.100 each

General reserves

Profit and loss a/c

Trade creditors

90.00

20.00

15.00

20.00

145.00

25.00

5.00

10.00

5.00

45.00

Fixed assets

Current Assets

20,000 shares in S Ltd.

65.00

50.00

30.00

145.00

20.00

25.00

------

45.00

Balance Sheet as on 31st March 2008

A Ltd. acquired 20,000 shares of B Ltd on 31st 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

50

Cost of control before issue of Bonus sharesCost of 20,000 shares 30,00,000Less: Face value 20,00,000 share of capital profits 1. Reserves 5,00,000 x 4/5=4,00,000 2. Profit 2,00,000 x 4/5=1,60,000 5,60,000 25,60,000 Cost of control 4,40,000

Step-1

Cost of acquiring 20,000 shares 30,00,000

Less:-Paid up value including bonus shares (24,000 x 10 ) 24,00,000

Less:Share of Capital profits ( 7,00,000 x 4/5) 5,60,000

Cost of control 40,000

Step-2 Cost of control after issue of Bonus sharesNumber of shares after bonus issue are (20,000 + 1/5 x 20,000) =24,000

51

Why there is a difference in the cost of control before and after issue of Bonus shares?

The Bonus shares are issued out of revenue profits. How does company issue bonus shares?The bonus shares are considered as capitalisation of profits.What do you mean by capitalisation of profits?It means Revenue profits are converted into capital profits before the issue of bonus shares.Once profit is capitalised it amounts to return of investment made by holding company in subsidiary if bonus shares issued. Therefore, it reduces cost of control.

52

Revenue Profits

Out of Rs.10,00,000 profits Rs2,00,000 were earned pre-acquisition period.The revenue profit is (10,00,000-2,00,000) Rs.8,00,000.

Bonus shares are issued out of revenue profit. It reduces revenue profit. Remaining profit is[Rs.8,00,000-(25,00,000 x1/5)] Rs.3,00,000.

Step-3

53

Share of remaining revenue profitStep-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

54

Minority InterestWhat ever belong to them whether capital profit or revenue profit or bonus shares.No of shares after bonus shares

[5000 + (5000 x 1/5)] 6000 sharesFace value (6000 x 10 ) Rs.6,00,000Share in capital profits Rs.1,40,000(Rs.7,00,000 x 1/5)Share of remaining revenue profit Rs.60,000Minority interest Rs.8,00,000

Step-5

55

Rs. Rs.

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

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

Fixed assets

Current assets

Cost of control(goodwill)

85,00,000(H+S)

75,00,000(H+S)

40,000(Balance)

1,60,40,000

Consolidated Balance sheet as on 31st March 2008Step-6

56

How do you deal the following?1.Unclaimed dividend given in the Liability side of

subsidiary company.

2.Preliminary expenses given in the asset side of subsidiary company

Answer:

Exercise-13

1.Unclaimed dividend is assumed to belong to minority

Share holders.Add to minority Interest.

2.Preliminary expenses is a wasteful expenses. It can not be

Realised in cash. The net worth should be brought down.Capital profit

Of pre-acquisition period should be brought down

to the extent of preliminary expenses.

57

How do you deal the following?

Preference shares given in the subsidiary company balance sheet

Answer: a)Share of Minority share holders to be added to minority interest.

b)Share of Holding company to be added with equity shares held by majority

before calculating goodwill/capital reserve.

Exercise-14

58

How do you deal if debentures of Subsidiary company acquired by Holding company?

We know that debentures are third party liabilities.If same debentures are acquired by holding company from subsidiary company it is known as intra company debts. Remove from either side of the Balance sheet.

Debentures Rs.40,000 Investments in debenture 10,000

1.Balance sheet before

S Ltd H Ltd.

2.Consolidated Balance sheet

Debentures Rs.30,000 Investment in subsidiary Nil

Exercise-15

59

Debenture interest accrued from subsidiary to holding-How do you deal?

It is also inter company debts. Remove from both sides of Balance sheet to the extent belong to holding company.

How ever outsider’s interest due will appear in the liability side of consolidated Balance sheet

Exercise-16

60

What is the Journal entry in the books of Holding company if dividend is received from subsidiary?

Answer:-A. If dividend declared by subsidiary out of pre-acquisition profits, the Journal entries are

1.Bank a/c debit

To Dividend received

2. Dividend received A/c debit

To Investment in shares of subsidiary A/c

Note: Any dividend received from pre-acquisition profits are to be reduced from investments in subsidiary account in order to calculate goodwill/capital reserve.

Exercise-17

61

B.If Dividend received on investments made by holding in subsidiary out of post acquisition profits, Journal entry is

Dividend received A/c debit

To Profit and Loss A/c

Note:- Such dividend is considered as income from investment. It is added to holding company’s profit and loss a/c.

62

Acquisition of shares on different date

If acquired on different dates, AS-21 consolidated Balance sheet only from the date on which holding and subsidiary relationship comes into existence.

63

How do you deal dividend tax?

Dividend paid by Indian company has to pay 15% dividend tax +3% educational cess.It is equal to 15.45%.

The dividend paid and tax reduce profit and loss account.

Even preference dividend reduces profit.

64

Thank U

all professors

and teachers

Knowledge is meant to share, and not to store

Life is to give, and not to receive