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 partiesand 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 dividendPay out from Post-acquisition Profit - investment income
% of holdings: 4000/5000 = 80%
2. At the acquisition date, 1 January 2003the shareholders’ equity of Jackson Ltd: ref (i)
$000
Ordinary share Capital 5,000
Share premium 500
General reserve 1,000
Profit and loss account 1,500
Revaluation reserve 9,800-9,000 800
8,800
3.
Calculation of Goodwill Answer (a)
$000 $000
Investment in Jackson Ltd 7,500
Ordinary share Capital 5,000 x 80% 4,000
Share premium 500 x 80% 400
General reserve 1,000 x 80% 800
Profit and loss account 1,500 x 80% 1,200
Revaluation reserve 800 x 80% 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 $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 1,960
To share unrealized profit on inventories 160
Transfer to consolidated balance sheet 1,800
Workings of the Consolidated Balance Sheet:
7.
Freehold land : 10,000,000 + 9,800,000 ( revised value) = $19,800,000
7. Plant and machinery:
Unrealized profit on sale of fixed asset to Jackson: ref (iii)
= 1,000,000 – 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: $000
Ordinary shares of $1.00 each 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 = 4,000,000 / 5 = 800,000
Inventories = 5,550,000 + 1,250,000 – 800,000 = 6,000,000
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 + 1,000,000 = 2,200,000
12. Consolidated profit and loss account $000
Profit and loss account :
M. Ltd 4,520
S. Ltd (1,750,000 – 1,500,000) 200
Unrealized profit on Sale of fixed asset (400)
Depreciation adjustment 40
Goodwill amortization (92)
Unrealized profit on inventories (640)
Intra-group dividends 400
4,028
To sum up:Fixed assets = H + S – ICurrent assets = H + S – ICurrent liabilities = H + S – ILong term liabilities = H + S – IShare Capital = HReserves = H + Post-acquisition Reserves of Subsidiary