MCom I Semester Accounts Holding Companies Study Material Notes ( Part 2 )

MCom I Semester Accounts Holding Companies Study Material Notes ( Part 2 ) : Issue Bonus Shares Post Acquisition Profits Consolidated Balance Sheet Discussion  Question Long Answer Question Short Answer Questions Numericals Questions :

CTET Paper Level 2 Questions Answer Language II English Model paper

(B) Issue of Bonus Shares out of Post-acquisition Profits: In this case, the revenue profits of the subsidiary will be reduced by the number of bonus shares. This will have the effect of reducing the holding company’s share in the revenue profits of the subsidiary company and increasing the paid-up value of shares held. Increased paid-up value of shares held without increasing the cost of shares and without reducing the pre-acquisition profits of the subsidiary will reduce the cost of control or increase the capital reserve. However, this will have no effect on the amount of minority interest because the increase in the paid-up value of minority holdings will be offset by a reduction of an equal amount in minority shareholders’ share in the revenue profits of the subsidiary, Illustration 20. H Ltd. acquired 20,000 shares in S Ltd. on 1st January 2003. Balance Sheets of the two companies at the end of the year were as follows:

Discussion Questions

Long Answer Questions

1 Define a Holding and Subsidiary Company and state what documents relating to subsidiary company should be attached to the Balance Sheet of holding company.

2. What information, according to Section 212 of Companies Act, 1956, is required to be attached to the Balance Sheet of a holding company in respect of each of its subsidiary companies ?

3. Discuss the nature of statements to be prepared in accordance with Section 212 (3) and 212 (5) of the Indian Companies Act. Also prepare such statements with imaginary figures.

4. What is a Consolidated Balance Sheet? How is it prepared ? What points should be taken into consideration while preparing a Consolidated Balance Sheet?

5. What is cost of control ? How is it calculated and dealt with while preparing consolidated balance sheet?

6. What do you understand by minority interest in connection with a consolidated balance sheet? How is it calculated and dealt with while preparing a consolidated balance sheet?

7. Write short notes on the following:

(a) Minority Interest

(b) Pre-acquisition Profits

(c) A Statement of Holding Company’s Interest in Subsidiary

Short Answer Questions

(i) Define a subsidiary company as per Companies Act.

(ii) What is minority interest ? How would you ascertain it?

(iii) How is dividend received from the subsidiary company accounted for in the books of holding company ?

(iv) Explain procedure of preparing consolidated balance sheet.

(v) Describe the effect of bonus issue of shares out of post-acquisition profit on  (i) cost of control  (ii) minority interest.

(vi) How is the proposed dividend of subsidiary company is treated in the preparation of consolidated balance sheet?

(vii) How would you deal with unrealized loss in consolidated balance sheet?

(viii) While consolidating the financial statement, the minority interest was calculated as (-) Rs. 50,000. The Accountant wants to show it in assets side of consolidated balance sheet. Comment

(Answer : Rs. 50.000 is to be adjusted with majority interest on liabilities side)

(IX) Explain the accounting treatment of goodwill, capital reserve and minority interest in holding companies.

Numerical

(i) Dividend payable by the holding company is Rs. 2.00.000 and by 100% owned subsidiary Rs. 50.000, What amount should be shown in the consolidated balance sheet as dividends payable?

(Answer: Rs. 2,00,000)

(ii) SLtd. has in stock goods of Rs. 12,000 supplied by its holding company at a profit of 20% on cost. Its holding company’s interest is 80%, calculate the amount of stock which should be shown in Consolidated Balance Sheet.

(Answer : Rs. 10,000)

(iii) A Ltd. holds 80% shares of B Ltd. The closing stock of A Ltd. included goods of Rs. 72,000 purchased from B Ltd. and closing stock of B Ltd. included goods of Rs. 80,000 purchased from A Ltd. B Ltd. sells goods to A Ltd. at cost plus 20% while A Ltd. sells goods to B Ltd. by charging 25% profit on sales. Calculate unrealised profit for adjustment on consolidation.

Answer: Rs. 32,000)

(iv) On 30th June 2006, H Ltd. acquired two-third of the shares of S Ltd. (with a capital of Rs. 6,00,000) for Rs. 4,50,000. The balance sheet of S Ltd. showed a debit balance of Rs. 3,00,000 on 1-1-2006 and a credit balance of Rs. 1,80,000 on 31-12-2006. Calculate the amount of goodwill to be shown in consolidated balance sheet.

(Answer: Rs. 90,000)

(v) A Ltd. purchased 80% shares of B Ltd. on October 1, 2005. The balance sheet of B Ltd. on 31st March 2005 included building of the book value of Rs. 1,00,000 which was valued by A Ltd. at Rs. 1,50,000 on the date of its acquisition of shares of B Ltd. B Ltd. has charged depreciation on its building at 10% p.a. by written down value method. How will you show building of B Ltd. in the consolidated balance sheet of A Ltd. on 31st March 2006 ?

(Answer: Rs. 1,42,250)

Objective Type Questions

State whether the following statements are True or False :

(i) Every holding company is required to present a consolidated balance sheet under the Companies Act, 1956.

(ii) Dividends from pre-acquisition profit of a subsidiary company must be treated as capital profit by the holding company.

(iii) Minority interest shown in the consolidated balance sheet is the equity held by the outsiders in the subsidiary company.

(iv) The board of subsidiary company can be controlled by the holding company without buying a single share in some cases.

(v) Profit on revaluation of fixed assets of subsidiary at the time of acquisition is a revenue profit.

(vi) Loss on revaluation of fixed assets of subsidiary after its becoming a subsidiary is a revenue loss.

(vii) Issue of bonus shares out of pre-acquisition profit by the subsidiary company has no effect on the accounting treatment.

(viii) Debentures of the subsidiary company not held by holding company must be added to the minority interest.

(ix) Interim dividend paid by a subsidiary company is in the nature of revenue income to the holding company.

(x) Revaluation of assets of subsidiary company always benefits holding company only.

(xi) Unrealized profit on stock supplied by subsidiary company to the holding company or vice versa is a loss to the minority interest.

(xii) Investment in the preference shares of the subsidiary company is also taken into account for calculating cost of control.

(xiii) No holding company can become the subsidiary of another company.

(xiv) The financial year of holding company and subsidiary company must be the same.

(xv) Dividend received by holding company out of pre-acquisition profit of subsidiary should be credited to Investment in Subsidiary Account.

(Answer : True : ii, iii, iv, vi, vii, ix, xii, xv; False : i, v, viii, x, xi, xiii, xiv)

Holding Companies Study Material

[B] Fill in the blanks :

(i) The parent organisation acquiring controlling interest in another company is called the ……… company.

(ii) For acquiring controlling interest the holding company has to possess more than …….. of the equity share capital of another company.

(iii) While preparing a consolidated balance sheet, investment of the holding company in the equity shares of the subsidiary is replaced by ………… and ……. of the subsidiary company.

(iv) The group share of proposed dividends by the subsidiary is added to ………..

(v) Dividends paid out of pre-acquisition profits must be credited to ………… account by the holding company.

(vi) Issue of bonus shares out of post-acquisition profits by the subsidiary company has the effect of ………… the paid-up value of shares and ……….. the cost of goodwill of the holding company.

(vii) Dividend payable by the holding company is Rs. 2,00,000 and by 100% owned subsidiary Rs. 50,000, the amount shown in the consolidated balance sheet as dividends payable is …

(viii) S Ltd. has in stock goods of Rs. 12,000 supplied by its holding company at a profit of 20% on cost. Its holding company’s interest is 80%, the stock should be shown in Consolidated Balance Sheet at

(ix) On 30th June 2000, H Ltd. acquired two-third of the shares of S Ltd. (with a capital of Rs. 6,00,000) for Rs. 4,50,000. The balance sheet of S Ltd. showed a debit balance of Rs. 3,00,000 on 1-1-2001 and a credit balance of Rs. 1,80,000 on 31-12-2001. The consolidated balance sheet should show goodwill of Rs..

(Answer: (i) holding (ii) 50% (iii) assets; liabilities (iv) consolidated revenue profits (v) Investment in Subsidiary (vi) increasing; reducing (vii) Rs. 2,00,000 (viii) Rs. 10,400 (ix) Rs. 90,000.)

[C] Indicate the correct answer :

(i) Dividend received out of pre-acquisition profits of subsidiary should be credited to

(a) Profit and Loss Account

(b) Investment in Subsidiary Account

(c) Profit and Loss Appropriation Account

(d) Capital Reserve Account

(ii) Consolidated financial statements are prepared on the principle

(a) In form the companies are one entity; in substance they are separate.

(b) In form the companies are separate; in substance they are one.

(c) In form and substance the companies are one entity.

(d) In form and substance the companies are separate.

Holding Companies Study Material