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CONTENTS

Page No.

Study Note - 1

Introduction to IAS, USGAAP, Indian Accounting Standard ............................................................ 1

1.1 Framework of Accounting ............................................................................................................... 2

1.1.1 Introduction ............................................................................................................................ 2

1.1.2 Meaning of Accounting ......................................................................................................... 2

1.1.3 Objectives and Functions of Accounting ............................................................................ 3

1.1.4 Fundamental Accounting Assumptions ............................................................................. 3

1.1.5 Limitations of Accounting .................................................................................................... 4

1.1.6 Financial Statements .............................................................................................................. 4

1.1.7 Qualitative Characteristics of Financial Statements .......................................................... 5

1.2 Accounting Standards - Applicability, Interpretation, Scope and Compliance ............... 7

1.3 US GAAPS .......................................................................................................................................... 10

1.3.1 Established Accounting Principles in the US ..................................................................... 10

1.3.2 Other Accounting Literature ................................................................................................ 11

1.3.3 AICPA ...................................................................................................................................... 11

1.3.4 FASB ......................................................................................................................................... 11

1.3.5 Components of US GAAP ..................................................................................................... 11

1.4 International Accounting Standards .............................................................................................. 13

1.4.1 Introduction ............................................................................................................................ 13

1.4.2 Extract of the International Accounting Standards ........................................................... 13

1.5 International Financial Reporting Standards ................................................................................ 29

1.6 A Comparison IGAAP - US GAAP - IFRS ..................................................................................... 39

Study Note - 2

Preparation of Company Accounts under Various Circumstances .................................................... 49

2.1 Merger and Acquisitions .................................................................................................................. 50

2.1.1 Introduction ............................................................................................................................ 50

2.1.2 What is Merger? ..................................................................................................................... 50

2.1.3 Varieties of Mergers ............................................................................................................... 51

2.1.4 Acquisitions............................................................................................................................. 51

2.1.5 Types of Acquisitions ............................................................................................................ 52

2.1.6 Distinction Between Mergers and Acquisitions ................................................................ 52

2.2 Accounting for Mergers and Acquisitions..................................................................................... 54

2.2.1 Methods of Accounting ......................................................................................................... 55

Pooling of Interest Method .................................................................................................. 55

Purchase Method .................................................................................................................... 56

2.2.2 How to Value an Acquisition ............................................................................................... 60

Page No.

2.2.3 Sources of Gains from Acquisitions .................................................................................... 60

2.2.4 Valuation Procedures ............................................................................................................ 61

2.3 External Reconstruction.................................................................................................................... 62

Illustrations........................................................................................................................................ 66

I Computation and Discharge of Purchase Consideration ................................................. 66

II Basics of Amalgamation and Absorption ........................................................................... 73

III Purchasing Company holding shares in Selling Company ............................................. 118

IV Selling Company holding shares in Purchasing Company ............................................. 142

V Cross Holding ......................................................................................................................... 146

VI Chain Holding ........................................................................................................................ 155

VII Internal Reconstruction ......................................................................................................... 158

VIII Reverse Merger ....................................................................................................................... 171

IX External Reconstruction ........................................................................................................ 176

X Surrender of Shares ................................................................................................................ 179

XI Demerger ................................................................................................................................. 182

XII Sales of Division ..................................................................................................................... 205

XIII Impact of Reconstruction over Wealth of Investor and Company ................................. 208

XIV Buy back of Shares ................................................................................................................. 211

XV Conversion .............................................................................................................................. 217

Study Note - 3

Group Financial Statements ...................................................................................................................... 225

3.1 Holding Company ............................................................................................................................. 226

3.2 Methods of Combination ................................................................................................................ 226

3.3 Accounting Treatment ...................................................................................................................... 227

3.4 Preparation of Group Cash Flow Statement ................................................................................. 299

3.5 Statement of Cash Flows .................................................................................................................. 300

3.6 Illustrations on Cash Flow Statement ............................................................................................. 304

Study Note - 4

Segmental Reporting ................................................................................................................................... 359

4.1 Introduction ........................................................................................................................................ 360

4.2 Need for Segmental Reporting ........................................................................................................ 360

4.3 Arguments against Segmental Reporting ...................................................................................... 361

4.4 International Scenario ....................................................................................................................... 362

Page No.

4.5 The Indian Scenario ........................................................................................................................... 370

4.5.1 Definitions ............................................................................................................................... 370

4.5.2 Disclosure Requirements ...................................................................................................... 373

4.5.3 Accounting and Auditing Issues ......................................................................................... 373

4.6 Segmental Reporting Problems & Difficulties .............................................................................. 375

4.7 Specific Issues Relating to Management Accountants ................................................................. 377

4.8 Segmental Disclosure – A Practical Example ................................................................................ 381

4.9 Illustrations on Segmental Reporting ............................................................................................. 385

Study Note - 5

Development in External Reporting ........................................................................................................ 389

5.1 Indian Accounting Standards .......................................................................................................... 390

5.1.1 Companies (Accounting Standards) Rules, 2006 ............................................................... 390

5.1.2 Applicability of Accounting Standard to Non-corporate Entities .................................. 392

5.2 Accounting Standards ...................................................................................................................... 395

5.3 Financial Reporting across the world ............................................................................................. 473

5.4 Post Balance Sheet Events ................................................................................................................ 477

5.5 External Reporting under Capital Market Regulations ............................................................... 479

5.6 Value Added Statement ................................................................................................................... 494

5.7 Economic Value Added Statement ................................................................................................. 507

5.8 Human Resource Accounting .......................................................................................................... 512

5.9 Environmental Accounting .............................................................................................................. 512

5.10 Guidance Notes on Accounting for Tax Matters .......................................................................... 516

5.11 Guidance Notes on Derivatives ....................................................................................................... 533

5.12 Guidance Notes for Special Businesses / Reports ........................................................................ 556

Study Note - 6

Government Accounting in India ............................................................................................................. 571

6.1 Government Accounting in India ................................................................................................... 572

6.2 General Principles of Government Accounting ............................................................................ 572

6.3 Methods of Government Accounting ............................................................................................. 573

6.4 Comparison with Commercial Accounting ................................................................................... 573

6.5 Comptroller and Auditor General of India ................................................................................... 574

6.6 Audit of Government Companies (Commercial Audit) .............................................................. 574

6.7 Audit Board Setup in Commercial Audit ...................................................................................... 574

Page No.

Section - 11 Comptroller and Auditor General to Prepare and Submit Accounts to the

President, Governors of State and Administrators of Union Territories having

Legislative Assemblies ...................................................................................................................... 576

6.8 Public Accounts Committee............................................................................................................. 576

6.9 Role of Public Accounts Committee ............................................................................................... 581

6.10 Committee on Public Undertakings ............................................................................................... 582

6.11 Specimen Report ................................................................................................................................ 583

Introduction to

IAS, USGAAP,

Indian

Accounting

Standard

STUDY NOTE - 1

This Study Note includes:

• Framework of Accounting

• Indian Accounting Standard

• US GAAP

• International Accounting Standards

• International Financial Reporting Standards

• Comparative Analysis of the Indian Accounting

Standard, IFRS and USGAAP

Framework of Accounting

1.1 Framework of Accounting

1.1.1 Introduction

Most of the world’s work is done through organizations-groups of people who work together to

accomplish one or more objectives. In doing its work, an organization uses resources-labor, materials,

various services, buildings, and equipment. These resources need to be fi nanced, or paid for. To work

effectively, the people in an organization need information about the amounts of these resources, the

mean of fi nancing them and the results achieved through using them. Parties outside the organization

need similar information to make judgments about the organization. Accounting is a system that provides

such information.

Organizations can be classifi ed broadly as either for-profi t or nonprofi t. As these names suggest, a

dominant purpose of organizations in the former category is to earn a profi t, whereas organizations in

the latter category have other objectives, such as governing, providing social services, and providing

education. Accounting is basically similar in both types of organizations.

1.1.2 Meaning of Accounting

The Committee on Terminology set up by the American Institute of Certifi ed Public Accountants

formulated the following defi nition of accounting in 1961:

“Accounting is the art of recording, classifying, and summarizing in a signifi cant manner and in terms of

money, transactions and events which are, in part at least, of a fi nancial character, and interpreting the

result thereof.

As per this defi nition, accounting is simply an art of record keeping. The process of accounting starts

by fi rst identifying the events and transactions which are of fi nancial character and then be recorded

in the books of account. This recording is done in Journal or subsidiary books, also known as primary

books. Every good record keeping system includes suitable classifi cation of transactions and events as

well as their summarization for ready reference. After the transaction and events are recorded, they are

transferred to secondary books. i.e. Ledger. In ledger transactions and events are classifi ed in terms of

income, expense, assets and liabilities according to their characteristics and summarized in profi t & loss

account and balance sheet. Essentially the transactions and events are to be measured in terms of money.

Measurement in terms of money means measuring at the ruling currency of a country, for example, rupee

in India, dollar in the U.S.A. and like. The transactions and events must have at least in par, fi nancial

characteristics. The inauguration of a new branch of a bank is an event without having fi nancial character,

while the business disposed of by the branch is an event having fi nancial character. Accounting also

interprets the recorded, classifi ed and summarized transactions and events.

1.1.3 Objectives and Functions of Accounting

The main objectives are Systematic recording of transactions, Ascertainment of results of recorded

transactions and the fi nancial position of the business, providing information to the users for rational

decision-making and to know the solvency position. The functions of accounting are Measurement,

Forecasting, Decision-making, Comparison & Evaluation, Control, Government Regulation and Taxation.

Advanced Financial Accounting & Reporting

Accounting concepts

Accounting concepts defi ne the assumptions on the basis of which fi nancial statements of a business

entity are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide

a unifying structure and internal logic to accounting process. The word concept means idea or notion,

which has universal application. Financial transactions are interpreted in the light of the concepts, which

govern accounting methods. Concepts are those basic assumptions and conditions, which form the basis

upon which the accountancy has been laid. Unlike physical science, accounting concepts are only result

of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting

principles are formulated.

Accounting principles

“Accounting principles are a body of doctrines commonly associated with the theory and procedures of

accounting serving as an explanation of current practices and as a guide for selection of conventions or

procedures where alternatives exists.”

Accounting principles must satisfy the following conditions:

1. They should be based on real assumptions;

2. They must be simple, understandable and explanatory;

3. They must be followed consistently;

4. They should be able to reflect future predictions;

5. They should be informational for the users.

Accounting conventions

Accounting conventions emerge of accounting practices, commonly known as accounting, principles,

adopted by various organizations above a period of time. These conventions are derived by usage and

practice. The accountancy bodies of the world may change any of the convention to improve the quality

of accounting information. Accounting conventions need not have universal application.

1.1.4 Fundamental Accounting Assumptions

The Financial Statements are prepared with the following three Fundamental Accounting Assumptions.

Unless otherwise specifi ed the readers of the Financial Statements assume that the Financial Statements

are prepared in line with these assumptions. They are Going Concern, Consistency & Accrual. Accounting

Standard 1 describes them as follows

Going Concern: The enterprise is normally viewed as a going concern, that is, as continuing in operation

for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of

liquidation or of curtailing materially the scale of the operations.

Consistency It is assumed that accounting policies are consistent from one period to another.

Accrual Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as

money is received or paid) and recorded in the fi nancial statements of the periods to which they relate.

(The considerations affecting the process of matching costs with revenues under the accrual assumption

are not dealt with in this Statement.)

Framework of Accounting

1.1.5 Limitations of Accounting

The Financials Statements are prepared on the basis of the above-mentioned assumptions, conventions

and the Accounting Principles which the accountant chooses to adopt. These bring in lot of subjectivity

to the Financial Statements and hence these basis assumptions conventions and principles become the

limitation of accounting.

The Financial Statements as the name states, accounts only for the items that can be measured by Money.

There are lots of items that money cannot measure but still are the most valuable assets for the enterprise,

like Human Resources, which the Financial Statements does not depict.

The language of accounting has certain practical limitations and, therefore, the fi nancial statements should

be interpreted carefully keeping in mind all various factors infl uencing the true picture.

1.1.6 Financial Statements

Financial statements form part of the process of fi nancial reporting. A complete set of fi nancial statements

normally includes a balance sheet, a statement of profi t and loss (also known as ‘income statement’), a

cash fl ow statement and those notes and other statements and explanatory material that are an integral

part of the fi nancial statements. They may also include supplementary schedules and information based

on or derived from, and expected to be read with, such statements. Such schedules and supplementary

information may deal, for example, with fi nancial information about business and geographical segments,

and disclosures about the effects of changing prices. Financial statements do not, however, include such

items as reports by directors, statements by the chairman, discussion and analysis by management and

similar items that may be included in a fi nancial or annual report.

Users and Their Information Needs

The users of fi nancial statements include present and potential investors, employees, lenders,

suppliers and other trade creditors, customers, governments and their agencies and the public. They

use fi nancial statements in order to satisfy some of their information needs. These needs include the

following:

(a) Investors. The providers of risk capital are concerned with the risk inherent in, and return provided by,

their investments. They need information to help them determine whether they should buy, hold or

sell. They are also interested in information which enables them to assess the ability of the enterprise

to pay dividends.

(b) Employees. Employees and their representative groups are interested in information about the stability

and profitability of their employers. They are also interested in information which enables them

to assess the ability of the enterprise to provide remuneration, retirement benefits and employment

opportunities.

and the interest attaching to them, will be paid when due.

(d) Suppliers and other trade creditors. Suppliers and other creditors are interested in information which

enables them to determine whether amounts owing to them will be paid when due. Trade creditors

are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent

upon the continuance of the enterprise as a major customer.

Advanced Financial Accounting & Reporting

(e) Customers. Customers have an interest in information about the continuance of an enterprise, especially

when they have a long-term involvement with, or are dependent on, the enterprise.

(f) Governments and their agencies. Governments and their agencies are interested in the allocation of resources

and, therefore, the activities of enterprises. They also require information in order to regulate the

activities of enterprises and determine taxation policies, and to serve as the basis for determination

of national income and similar statistics.

(g) Public. Enterprises affect members of the public in a variety of ways. For example, enterprises may

make a substantial contribution to the local economy in many ways including the number of people

they employ and their patronage of local suppliers. Financial statements may assist the public by

providing information about the trends and recent developments in the prosperity of the enterprise

and the range of its activities.

The Objective of Financial Statements

The objective of fi nancial statements is to provide information about the fi nancial position, performance

and cash fl ows of an enterprise that is useful to a wide range of users in making economic decisions.

Financial statements prepared for this purpose meet the common needs of most users. However, fi nancial

statements do not provide all the information that users may need to make economic decisions since

(a) they largely portray the financial effects of past events, and

(b) do not necessarily provide non-financial information.

1.1.7 Qualitative Characteristics of Financial Statements

Qualitative characteristics are the attributes that make the information provided in fi nancial statements

useful to users. The qualitative characteristics are

• Understandability

• Relevance

• Reliability

• Comparability.

• Faithful Representation

• Substance Over Form

• Neutrality

• Prudence

• Completeness

Among these characteristics most important are Prudence and Substance over form.

Prudence

The preparers of fi nancial statements have to contend with the uncertainties that inevitably surround many

events and circumstances, such as the collectability of receivables, the probable useful life of plant and

machinery, and the warranty claims that may occur. Such uncertainties are recognised by the disclosure

Framework of Accounting

of their nature and extent and by the exercise of prudence in the preparation of the fi nancial statements.

Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the

estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities

or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation

of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the

deliberate overstatement of liabilities or expenses, because the fi nancial statements would then not be

neutral and, therefore, not have the quality of reliability.

Substance Over Form

If information is to represent faithfully the transactions and other events that it purports to represent,

it is necessary that they are accounted for and presented in accordance with their substance and

economic reality and not merely their legal form. The substance of transactions or other events is not

always consistent with that which is apparent from their legal or contrived form. For example, where

rights and benefi cial interest in an immovable property are transferred but the documentation and

legal formalities are pending, the recording of acquisition/disposal (by the transferee and transferor

respectively) would in substance represent the transaction entered into.

Accounting Standards

Accounting standards codify acceptable accounting practices. They are the primary source of the

Generally Accepted Accounting Principles (GAAP) and, therefore, they are at the top in the hierarchy

of GAAP. Other sources of GAAP are technical pronouncements issued by various professional

bodies, regulating the accounting and auditing profession, that stipulate accounting principles and

methods.

Accounting standards are issued by institutions that are authorized to set accounting standards. The

standard-setting body that issues accounting standards is constituted by representatives from various

stake holders such as the accounting profession, the industry and regulators. The process of formulating

standards is a long ‘due-diligence’ process. The process is somewhat akin to a ‘political process’ because

the objective is to establish accounting standards.

(a) that are practical in the sense that those can be implemented with reasonable costs and efforts; and

(b) that are acceptable to all stake holders.

Most countries have their own accounting standard setting bodies. In USA Statements of Financial

Accounting Standards (SFAS) are issued by the Financial Accounting Standards Board (FASB). In

India accounting standards are issued by the Institute of Chartered Accountants of India (ICAI). With

globalization of capital markets, a trend towards convergence of accounting practices in different

territories emerged in 1970s. The International Account Standards Committee (IASC) was formed in 1973

to formulate International Accounting Standards (IAS). In 2001 IASC was restructured and now it is known

as International Accounting Standards Board (IASB). Accounting standards issued by IASB are called

International Financial Reporting Standards (IFRS). Each territory (a country or a group of countries like

European Union) has initiated actions to harmonise its accounting practices with accounting principles

and methods stipulated in IAS / IFRS. Many countries use IAS / IFRS without modifi cation.

Details of Indian Accounting Standards, US GAAP and IFRS are discussed in the ensuing Sections.

Advanced Financial Accounting & Reporting

l.2 Accounting Standards - Applicability, Interpretation, Scope and Compliance

Introduction

Accounting standards are written , policy documents issued by expert accounting body or by Government

or other regulatory authorities covering the aspects of recognition, measurement, treatment, presentation

and disclosure of accounting transaction in the fi nancial statement.

The main purpose of formulating accounting standard is to standardize the diverse accounting policies

with a view to eliminate to the extent possible the incomparability of information provided in fi nancial

statements and add reliability to such fi nancial statements. To discuss on whether such standards are

necessary in present days it will be benefi cial to go through the advantages and disadvantages which they

are said to provide.

ADVANTAGES:

1. It provides the accountancy profession with useful working rules.

2. It assists in improving quality of work performed by accountant.

3. It strengthens the accountant’s resistance against the pressure from directors to use accounting policy

which may be suspect in that situation in which they perform their work.

4. It ensures the various users of financial statements to get complete crystal information on more

consistent basis from period to period.

5. It helps the users compare the financial statements of two or more organisaitons engaged in same

type of business operation.

DISADVANTAGES:

1. Users are likely to think that said statements prepared using accounting standard are infallible.

2. They have been derived from social pressures which may reduced freedom.

3. The working rules may be rigid or bureaucratic to some user of financial statement.

4. The more standards there are, the more costly the financial statements are to produce.

Accounting Title of Accounting Standard

Standard No.

AS-1 Disclosure of Accounting Policies

AS-2 Valuation of Inventories (Revised)

AS- 3 Cash Flow Statements (Revised)

AS-4 Contingencies and Events (Occurring after the Balance Sheet Date)

AS-5 Net Profi t or Loss for the Period, Prior Period Items and Changes in Accounting Policies

(Revised)

AS-6 Depreciation Accounting

AS-7 Construction Contracts (Revised)

AS- 8 Accounting for Research and Development (stands withdrawn after introduction of AS-26)

Framework of Accounting

AS-9 Revenue Recognition

AS-10 Accounting for Fixed Assets.

AS-11 The Effect of Changes in Foreign Exchange Rates (Revised)

AS-12 Accounting for Government Grants

AS-13 Accounting for Investments

AS-14 Accounting for Amalgamations

AS-15 Employee Benefi ts (Revised)

AS-16 Borrowing Cost

AS-17 Segment Reporting

AS-18 Related Party Disclosures

AS-19 Leases

AS-20 Earnings Per Share

AS-21 Consolidated Financial Statements

AS-22 Accounting for Taxes on Income

AS-23 Accounting for Investment in Associates in Consolidated Financial Statements

AS-24 Discontinuing Operations

AS-25 Interim Financial Reporting

AS-26 Intangible Assets

AS-27 Financial Reporting of Interests in Joint Venture

AS-28 Impairment of Assets

AS-29 Provisions, Contingent Liabilities and Contingent Assets

AS-30 Financial Instruments: Recognition and Measurement

AS 31 Financial Instruments: Presentation

AS 32 Financial Instruments: Disclosures

Applicability of Accounting Standards:

A three tier classifi cation has been framed to ensure compliance of accounting standards for reporting

enterprises.

Level I Enterprises:

• Enterprises whose equity or debt securities are listed whether in India or outside India.

• Enterprises which are in the process of listing their equity or debt securities as evidenced by the

Board resolution in this regard.

• Banks including co-operative banks

• Financial institutions

• Enterprises carrying insurance business

• Enterprises whose turnover exceeds Rs.50 crores

• Enterprises having borrowings in excess of Rs.10 crores at any time during the accounting period.

Advanced Financial Accounting & Reporting

• Holding companies and subsidiaries of enterprises falling under any one of the categories mentioned

above.

Level II Enterprises:

• Enterprises whose turnover exceeds Rs.40 lakhs but does not exceed Rs.50 crores.

• Enterprises having borrowings in excess of Rs.1 crore but not in excess of Rs.10 crores at any time

during the accounting period.

• Holding companies and subsidiaries of enterprise falling under any one of the categories mentioned

above.

Level III Enterprises:

• Enterprises which are not covered under Level I and Level II.

Accounting Standard Applicability (Based on the three tier classifi cation)

AS1,2,4-16,22,26,28 All Enterprises

AS 3,17,18,24, Not applicable to Level II and Level III enterprises in their entirety.

AS 19,20,29 All enterprises but relaxation given to Level I and Level II enter prises for certain

disclosure requirements.

AS 21,23,27 Not applicable to Level II and Level III enterprises

AS 25 Not mandatorily applicable to Level II and Level III enterprises

AS 30,31,32 W.e.f. accounting periods commencing on or after 1-4-2009 and will be

recommendatory in nature for an initial period of two years.

It will be mandatory for on or after 1-4-2011 for all commercial, industrial and business entities except to

a Small and Medium-sized Entity.

Framework of Accounting

1.3 US GAAPS

GAAP refers to accounting policies and procedures that are widely used in practice. Unlike India where

accounting has its basis in law , US GAAP has evolved to be a collection of pronouncements issued by a

particular accounting organization. US GAAP are the accounting rules used to prepare fi nancial statements

for publicly traded companies and many private companies in United States. Generally accepted accounting

principles for local and state governments operates under different set of assumptions, principles, and

constraints, as determined by the Governmental Accounting Standards Board. (GASB).

In the United States, as well as in other countries practicing under the English common law system,

the government does not set accounting standards, in the belief that the private sector has the better

knowledge and resources. The Securities and Exchange Commission (SEC) has the ultimate authority to

set US accounting and fi nancial reporting standards for public (listed) companies. The SEC has delegated

this responsibility to the private sector led by the Financial Accounting Standards Board (FASB). Other

private sector bodies including the American Institute of Certifi ed Public Accountants (AICPA) and the

FASB’s Emerging Issues Task Force(EITF) also establish authoritative accounting Standard Board(FIN)

also provide implementation and interpretation guidance. The SEC has the Statutory authority to establish

GAAP for fi lings made with it. While allowing most of the Standard settings to be done in the private

sector, the SEC is still very active in both its oversight responsibility as well as establishing guidance and

interpretations, as it believes appropriate. US GAAP have the reputation around the world of being more

perspective and detailed than accounting standards in other countries. In order to organize and make clear

what is meant by US GAAP, a GAAP hierarchy has been established which contains four categories of

accounting principles. The sources in the higher category carry more weight and must be followed when

confl icts arise. The table given below summaries the current GAAP hierarchy for fi nancial statements of

non-governmental entities.

1.3.1 Established Accounting Principles in the US

Category(a)

Financials Accounting Standards Board(FASB) statements and Interpretations, American Institute of

Certifi ed Public Accountants (AICPA), Accounting Principles Board (APB) Opinions , and AICPA

Accounting Research Bulletins(ARB).

Category(b)

FASB Technical Bulletins, cleared AICPA Industry Audit and Accounting Guides, and cleared AICPA

Statement of Position (SOPs).

Category(c)

Consensus positions of the FASB Emerging Issues Task Force (EITF) and cleared Accounting Standards

Executive Committee of AICPA(ACSEC)Practice Bulletins.

Category(d)

AICPA Accounting Interpretations, FASB Implementation Guides (QSAs), and widely recognized and

prevalent Industry practices.

Advanced Financial Accounting & Reporting

1.3.2 Other Accounting literature

Other accounting literature, including FASB concepts statements, APB Statements; AICPA Issues Papers;

International Accounting Standards Committee Statements; Pronouncements of other professional

associations or regulatory agencies ; AICPA Technical Practice Aids; and accounting textbooks, handbooks,

and articles.

The US GAAP provisions differ somewhat from International Financial Reporting Standards though

efforts are underway to reconcile the differences so that reports created under international standards

will be acceptable to the SEC for companies listed on US markets.

1.3.3 AICPA

The AICPA sets generally accepted professional and technical standards for CPAs in many areas. Until

the 1970’s, the AICPA held a monopoly in this fi eld. In the 1970’s however, it transferred its responsibility

for setting generally accepted accounting principles (GAAP) to the newly formed Financial Accounting

Standards Board (FASB). Following this, it retained its standards setting function in areas such as fi nancial

statement auditing, professional ethics, attest services, CPA fi rm quality control , CPA tax practice and

fi nancial planning practice. Before passage of the Sarbanes-Oxley law, AICPA standards in these areas

were considered “generally accepted” for all CPA practitioners.

Accounting Principles Board(APB) Opinions were published by Accounting Principles Board(APB). APB

was the main organization setting the US GAAP and its opinions are still an important part of it.

1.3.4 FASB

The Financial Accounting Standards Boards(FASB) is private, not-for- profi t organization whose primary

purpose is to develop generally accepted accounting principles in the United States (US GAAP). The

FASB’s mission for the private sector is similar to that of the Governmental Accounting Standards Board for

local and state governments in the United States. The FASB was created in1973, replacing the Accounting

Principles Board of the American Institute of Certifi ed Public Accountants (AICPA). The FASB.s mission is

‘to establish and improve standards of fi nancial accounting and reporting for the guidance and education

of the public, including issuers, auditors, and users of fi nancial information.”

The U.S. Securities and Exchange Commission (SEC) has statutory authority to establish fi nancial

accounting and reporting standards for publicly held companies under Securities Exchange Act of 1934.

The SEC designated the FASB as the organization responsible for setting accounting standards for public

companies in the U.S.

FASB has so far issued 158 Statements of Financial Accounting Standards (FAS).

1.3.5 Components of US GAAP

Given below are important components of US GAAP:

• FASB Statement of Financial Accounting Standards (FAS).

• FASB Interpretations(FIN).

Framework of Accounting

• FASB Statements of Financual Accounting Concepts(FAS Conc.)

• FASB Technical Bulletins(FTB).

• AICPA Accounting Research Bulletins(ARB).

• AICPA Accounting Principles Board Opinions(APB Opinions)

• AICPA Accounting Interpretations(AIN)

Not only there are an extremely large number of different standards under US GAAP, the volume

and complexity is also increasing. This complexity of US GAAP makes it critically important that the

independent accountants that are assisting a company in fi ling with SEC are acknowledgeable and experts

in US GAAP.

Advanced Financial Accounting & Reporting

1.4 International Accounting Standards

1.4.1 Introduction

The International Accounting Standard Board (IASB) was formulated and began in operations in 2001.

The objective of IASB is as follows

“Committed to developing, in public interest, asingle set of high quality, global accouting standards that require

transparent and comparable information in general purpose fi nancial statements”

The IASB is selected, overseen and funded by the International Accounting Standards Committee (IASC)

Foundation, consisting of 22 trustees. The responsibility of the trustees, besides others include,

• Appointment of members of the IASB and Standards Advisory Council and the IFRIC

• Monitoring the IASB’s effectiveness and adherence to its due process and consultation procedures

• Establishing and maintaining appropriate financing arrangement

• Approve of the budget for the IASC Foundation and

• Responsibility for constitution changes.

1.4.2 Extract of the International Accounting Standards

The following are the Extract of the International Accounting Standards and International Financial

Reporting Standards, prepared by IASC Foundation staff (The same has not been approved by the IASB.

For the requirements reference must be made to International Financial Reporting Standards.)

International Accounting Standard 1

Presentation of Financial Statements

Objective

This Standard prescribes the basis for presentation of general purpose fi nancial statements to ensure

comparability both with the entity’s fi nancial statements of Previous periods and with the fi nancial

statements of other entities. It sets out overall requirements for the presentation of fi nancial statements,

guidelines for their structure and minimum requirements for their content.

Scope

An entity shall apply this Standard in preparing and presenting general purpose fi nancial statements

in accordance with International Financial Reporting Standards (IFRSs).

International Accounting Standard 2

Inventories

International Accounting Standard 2 Inventories (IAS 2) replaces IAS 2 Inventories (revised in 1993)

and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is

encouraged. The Standard also supersedes SIC-1 Consistency—Different Cost Formulas for Inventories.

Framework of Accounting

Reasons for revising IAS 2

The International Accounting Standards Board developed this revised IAS 2 as part of its project on

Improvements to International Accounting Standards. The project was undertaken in the light of queries

and criticisms raised in relation to the Standards by securities regulators, professional accountants and

other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies

and confl icts within the Standards, to deal with some convergence issues and to make other improvements.

For IAS 2 the Board’s main objective was a limited revision to reduce alternatives for the measurement

of inventories. The Board did not reconsider the fundamental approach to accounting for inventories

contained in IAS 2.

Objective and scope

The objective and scope paragraphs of IAS 2 were amended by removing the words ‘held under the

historical cost system’, to clarify that the Standard applies to all inventories that are not specifi cally

excluded from its scope.

Scope clarifi cation

IN6 The Standard clarifi es that some types of inventories are outside its scope while certain other types of

inventories are exempted only from the measurement requirements in the Standard. Paragraph 3 establishes

a clear distinction between those inventories that are entirely outside the scope of the Standard (described

in paragraph 2) and those inventories that are outside the scope of the measurement requirements but

within the scope of the other requirements in the Standard.

International Accounting Standard 7

Cash Flows Statements

Objective

Information about the cash fl ows of an entity is useful in providing users of fi nancial statements with a

basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to

utilise those cash fl ows. The economic decisions that are taken by users require an evaluation of the ability

of an entity to generate cash and cash equivalents and the timing and certainty of their generation. The

objective of this Standard is to require the provision of information about the historical changes in cash

and cash equivalents of an entity by means of a statement of cash fl ows which classifi es cash fl ows during

the period from operating, investing and fi nancing activities.

Scope

An entity shall prepare a statement of cash fl ows in accordance with the requirements of this Standard and

shall present it as an integral part of its fi nancial statements for each period for which fi nancial statements

are presented.

This Standard supersedes IAS 7 Statement of Changes in Financial Position, approved in July 1977.

Users of an entity’s fi nancial statements are interested in how the entity generates and uses cash and cash

equivalents. This is the case regardless of the nature of the entity’s activities and irrespective of whether

cash can be viewed as the product of the entity, as may be the case with a fi nancial institution. Entities

need cash for essentially the same reasons however different their principal revenue-producing activities

might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to

their investors. Accordingly, this Standard requires all entities to present a statement of cash fl ows.

Advanced Financial Accounting & Reporting

International Accounting Standard 8

Accounting Policies, Changes in Accounting Estimates and Errors

Objective

The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies,

together with the accounting treatment and disclosure of changes in accounting policies, changes in

accounting estimates and corrections of errors. The Standard is intended to enhance the relevance and

reliability of an entity’s fi nancial statements, and the comparability of those fi nancial statements over time

and with the fi nancial statements of other entities.

Disclosure requirements for accounting policies, except those for changes in accounting policies, are

set out in IAS 1 Presentation of Financial Statements.

Scope

This Standard shall be applied in selecting and applying accounting policies, and accounting for changes

in accounting policies, changes in accounting estimates and corrections of prior period errors.

The tax effects of corrections of prior period errors and of retrospective adjustments made to apply changes

in accounting policies are accounted for and disclosed in accordance with IAS 12 Income Taxes.

International Accounting Standard 10

Events after the Balance Sheet Date

Objective

The objective of this Standard is to prescribe:

(a) when an entity should adjust its financial statements for events after the reporting period; and

(b) the disclosures that an entity should give about the date when the financial statements were authorised

for issue and about events after the reporting period.

The Standard also requires that an entity should not prepare its fi nancial statements on a going concern

basis if events after the reporting period indicate that the going concern assumption is not appropriate.

Scope

This Standard shall be applied in the accounting for, and disclosure of, events after the reporting period.

International Accounting Standard 11

Construction Contracts

Objective

Accounting for construction contracts involves measurement and recognition of costs and revenue

in the books of “Contractor”. Objective of this standard is the allocation of contract revenue and

contract costs to the period in which the work is performed.

Scope

This Standard shall be applied in accounting for construction contracts in the financial statements of

contractors.

Framework of Accounting

Defi nitions

The following terms are used in this Standard with the meanings specifi ed:

A construction contract is a contract specifi cally negotiated for the construction of an asset or a combination

of assets that are closely interrelated or interdependent in terms of their design, technology and function

or their ultimate purpose or use.

A fi xed price contract is a construction contract in which the contractor agrees to a fi xed contract price, or

a fi xed rate per unit of output, which in some cases is subject to cost escalation clauses.

A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or

otherwise defi ned costs, plus a percentage of these costs or a fixed fee.

International Accounting Standard 12

Income Taxes

Objective

The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal

issue in accounting for income taxes is how to account for the current and future tax consequences

of:

(a) The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in

an entity’s statement of financial position; and

(b) Transactions and other events of the current period that are recognized in an entity’s financial

statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle

the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying

amount will make future tax payments larger (smaller) than they would be if such recovery or settlement

were to have no tax consequences, this Standard requires an entity to recognize a deferred tax liability

(deferred tax asset), with certain limited exceptions.

Scope

This Standard shall be applied in accounting for income taxes.

International Accounting Standard 16

Property, Plant and Equipment

Objective

The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so

that users of the fi nancial statements can discern information about an entity’s investment in its property,

plant and equipment and the changes in such Investment. The principal issues in accounting for property,

plant and equipment are the recognition of the assets, the determination of their carrying amounts and the

depreciation charges and impairment losses to be recognised in relation to them.

Scope

This Standard shall be applied in accounting for property, plant and equipment except when another

Standard requires or permits a different accounting treatment.

Advanced Financial Accounting & Reporting

International Accounting Standard 17

Leases

Objective

The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting

policies and disclosure to apply in relation to leases.

Scope

This Standard shall be applied in accounting for all leases other than:

(a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources; and

(b) licensing agreements for such items as motion picture films, video recordings, plays, manuscripts,

patents and copyrights.

However, this Standard shall not be applied as the basis of measurement for:

(a) property held by lessees that is accounted for as investment property (see IAS 40 Investment

Property);

(b) investment property provided by lessors under operating leases (see IAS 40);

(d) biological assets provided by lessors under operating leases (see IAS 41).

International Accounting Standard 18

Revenue

Objective

Income is defi ned in the Framework for the Preparation and Presentation of Financial Statements as

increases in economic benefi ts during the accounting period in the form of infl ows or enhancements of

assets or decreases of liabilities that result in increases in equity, other than those relating to contributions

from equity participants. Income encompasses both revenue and gains. Revenue is income that arises in

the course of ordinary activities of an entity and is referred to by a variety of different names including

sales, fees, interest, dividends and royalties.

The objective of this Standard is to prescribe the accounting treatment of revenue arising from certain

types of transactions and events.

The primary issue in accounting for revenue is determining when to recognize revenue. Revenue is

recognised when it is probable that future economic benefi ts will fl ow to the entity and these benefi ts can

be measured reliably. This Standard identifi es the circumstances in which these criteria will be met

and, therefore, revenue will be recognised. It also provides practical guidance on the application of

these criteria.

Scope

This Standard shall be applied in accounting for revenue arising from the

following transactions and events:

(a) the sale of goods;

(b) the rendering of services; and

Framework of Accounting

International Accounting Standard 19

Employee Benefi ts

Objective

The objective of this Standard is to prescribe the accounting and disclosure for employee benefi ts. The

Standard requires an entity to recognise:

(a) a liability when an employee has provided service in exchange for employee benefits to be paid in the

future; and

(b) an expense when the entity consumes the economic benefit arising from service provided by an

employee in exchange for employee benefits.

Scope

This Standard shall be applied by an employer in accounting for all employee benefi ts, except those to

which IFRS 2 Share-based Payment applies.

International Accounting Standard 20

Accounting for Government Grants and Disclosure of Government Assistance

Scope

This Standard shall be applied in accounting for, and in the disclosure of, government grants and in the

disclosure of other forms of government assistance.

This Standard does not deal with:

(a) the special problems arising in accounting for government grants in financial statements reflecting

the effects of changing prices or in supplementary information of a similar nature;

(b) government assistance that is provided for an entity in the form of benefits that are available in

determining taxable income or are determined or limited on the basis of income tax liability (such

as income tax holidays, investment tax credits, accelerated depreciation allowances and reduced

income tax rates);

(d) government grants covered by IAS 41 Agriculture.

International Accounting Standard 21

The Effects of Changes in Foreign Exchange Rates

International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (IAS 21) replaces

IAS 21 The Effects of Changes in Foreign Exchange Rates (revised in 1993), and should be applied for

annual periods beginning on or after 1 January 2005. Earlier application is encouraged. The Standard also

replaces the following

Interpretations:

• SIC-11 Foreign Exchange—Capitalisation of Losses Resulting from Severe Currency Devaluations

• SIC-19 Reporting Currency—Measurement and Presentation of Financial Statements under IAS 21 and IAS

• SIC-30 Reporting Currency—Translation from Measurement Currency to Presentation Currency.

Advanced Financial Accounting & Reporting

Scope

IN5 The Standard excludes from its scope foreign currency derivatives that are within the scope of IAS

39 Financial Instruments: Recognition and Measurement. Similarly, the material on hedge accounting has

been moved to IAS 39.

International Accounting Standard 23

Borrowing Costs

Objective

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying

asset form part of the cost of that asset. Other borrowing costs are recognised as an expense.

Scope

An entity shall apply this Standard in accounting for borrowing costs.

The Standard does not deal with the actual or imputed cost of equity, including preferred capital not

classified as a liability.

An entity is not required to apply the Standard to borrowing costs directly attributable to the

acquisition, construction or production of:

(a) a qualifying asset measured at fair value, for example a biological asset; or

(b) inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

This Standard uses the following terms with the meanings specifi ed:

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of

funds.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its

intended use or sale.

Borrowing costs may include:

(a) interest on bank overdrafts and short-term and long-term borrowings;

(b) amortisation of discounts or premiums relating to borrowings;

(d) finance charges in respect of finance leases recognised in accordance with IAS 17 Leases; and

(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded

as an adjustment to interest costs.

International Accounting Standards 24

Related Party Disclosures

Objective

The objective of this Standard is to ensure that an entity’s fi nancial statements contain the disclosures

necessary to draw attention to the possibility that its fi nancial position and profi t or loss may have been

affected by the existence of related parties and by transactions and outstanding balances with such

parties.

Framework of Accounting

Scope

This Standard shall be applied in:

(a) identifying related party relationships and transactions;

(b) identifying outstanding balances between an entity and its related parties;

(d) determining the disclosures to be made about those items.

This Standard requires disclosure of related party transactions and outstanding balances in the separate

fi nancial statements of a parent, venturer or investor presented in accordance with IAS 27 Consolidated

and Separate Financial Statements.

Related party transactions and outstanding balances with other entities in a group are disclosed in an

entity’s fi nancial statements. Intragroup related party transactions and outstanding balances are eliminated

in the preparation of consolidated fi nancial statements of the group.

International Accounting Standard 26

Accounting and Reporting by Retirement Benefi t Plans

Scope

This Standard shall be applied in the fi nancial statements of retirement benefi t plans where such fi nancial

statements are prepared.

Defi nitions

The following terms are used in this Standard with the meanings specifi ed:

Retirement benefi t plans are arrangements whereby an entity provides benefi ts for employees on or after

termination of service (either in the form of an annual income or as a lump sum) when such benefi ts, or the

contributions towards them, can be determined or estimated in advance of retirement from the provisions

of a document or from the entity’s practices.

Defi ned contribution plans are retirement benefi t plans under which amounts to be paid as retirement

benefi ts are determined by contributions to a fund together with investment earnings thereon.

Defi ned benefi t plans are retirement benefi t plans under which amounts to be paid as retirement benefi ts

are determined by reference to a formula usually based on employees’ earnings and/or years of service.

Funding is the transfer of assets to an entity (the fund) separate from the employer’s entity to meet future

obligations for the payment of retirement benefi ts.

For the purposes of this Standard the following terms are also used:

Participants are the members of a retirement benefi t plan and others who are entitled to benefi ts under

the plan.

Net assets available for benefi ts are the assets of a plan less liabilities other than the actuarial present value

of promised retirement benefi ts.

Actuarial present value of promised retirement benefi ts is the present value of the expected payments by

a retirement benefi t plan to existing and past employees, attributable to the service already rendered.

Vested benefi ts are benefi ts, the rights to which, under the conditions of a retirement benefi t plan, are not

conditional on continued employment.

Advanced Financial Accounting & Reporting

International Accounting Standard 27

Consolidated and Separate Financial Statement

Objective

The objective of IAS 27 is to enhance the relevance, reliability and comparability of the information that a

parent entity provides in its separate fi nancial statements and in its consolidated fi nancial statements for

a group of entities under its control. The Standard specifi es:

(a) the circumstances in which an entity must consolidate the financial statements of another entity

(being a subsidiary);

(b) the accounting for changes in the level of ownership interest in a subsidiary;

(d) the information that an entity must disclose to enable users of the financial statements to evaluate the

nature of the relationship between the entity and its subsidiaries.

International Accounting Standard 28

Investment in Associates

Introduction

International Accounting Standard 28 Investments in Associates replaces IAS 28 Accounting for Investments

in Associates (revised in 2000) and should be applied for annual periods beginning on or after 1 January

2005. Earlier application is encouraged. The Standard also replaces the following Interpretations:

• SIC-3 Elimination of Unrealized Profits and Losses on Transactions with Associates

• SIC-20 Equity Accounting Method—Recognition of Losses

• SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests.

Scope

The Standard does not apply to investments that would otherwise be associates or interests of ventures

in jointly controlled entities held by venture capital organizations, mutual funds, unit trusts and similar

entities when those investments are classifi ed as held for trading and accounted for in accordance with

IAS 39 Financial Instruments: Recognition and Measurement. Those investments are measured at fair value,

with changes in fair value recognized in profi t or loss in the period in which they occur.

Furthermore, the Standard provides exemptions from application of the equity method similar to those

provided for certain parents not to prepare consolidated fi nancial statements. These exemptions include

when the investor is also a parent exempt in accordance with IAS 27 Consolidated and Separate Financial

Statements from preparing consolidated fi nancial statements (paragraph 13(b)), and when the investor,

though not such a parent, can satisfy the same type of conditions that exempt such parents (paragraph

13(c)).

International Accounting Standard 29

Financial Reporting in Hyperinfl ationary Economies

This Standard shall be applied to the financial statements, including the consolidated financial

statements, of any entity whose functional currency is the currency of a hyperinflationary economy.

Framework of Accounting

International Accounting Standard 31

Interests in Joint Ventures

Introduction

IN1 International Accounting Standard 31 Interests in Joint Ventures (IAS 31) replaces IAS 31 Financial

Reporting of Interests in Joint Ventures (revised in 2000), and should be applied for annual periods

beginning on or after 1 January 2005. Earlier application is encouraged.

Scope

The Standard does not apply to investments that would otherwise be interests of venturers in jointly

controlled entities held by venture capital organisations, mutual funds, unit trusts and similar entities

when those investments are classifi ed as held for trading and accounted for in accordance with IAS 39

Financial Instruments: Recognition and Measurement. Those investments are measured at fair value, with

changes in fair value being recognised in profi t or loss in the period in which they occur. Furthermore, the

Standard provides exemptions from application of

proportionate consolidation or the equity method similar to those provided for certain parents not to

prepare consolidated fi nancial statements. These exemptions include when the investor is also a parent

exempt in accordance with IAS 27 Consolidated and Separate Financial Statements from preparing consolidated

fi nancial statements [paragraph 2(b)], and when the investor, though not such a parent, can satisfy the

same type of conditions that exempt such parents [paragraph 2(c)].

International Accounting Standard 32

Financial Instruments: Presentation

Objective

The objective of this Standard is to establish principles for presenting fi nancial instruments as liabilities or

equity and for offsetting fi nancial assets and fi nancial liabilities. It applies to the classifi cation of fi nancial

instruments, from the perspective of the issuer, into fi nancial assets, fi nancial liabilities and equity

instruments; the classifi cation of related interest, dividends, losses and gains; and the circumstances in

which fi nancial assets and fi nancial liabilities should be offset.

The principles in this Standard complement the principles for recognising and measuring fi nancial assets

and fi nancial liabilities in IAS 39 Financial Instruments: Recognition and Measurement, and for disclosing

information about them in IFRS 7 Financial Instruments: Disclosures.

Scope

This Standard shall be applied by all entities to all types of financial instruments except:

(a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with

IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests

in Joint Ventures. However, in some cases, IAS 27, IAS 28 or IAS 31 permits an entity to account for

an interest in a subsidiary, associate or joint venture using IAS 39; in those cases, entities shall apply

the disclosure requirements in IAS 27, IAS 28 or IAS 31 in addition to those in this Standard. Entities

shall also apply this Standard to all derivatives linked to interests in subsidiaries, associates or joint

ventures.

(b) employers’ rights and obligations under employee benefit plans, to which IAS 19 Employee Benefits

applies.

Advanced Financial Accounting & Reporting

(d) insurance contracts as defined in IFRS 4 Insurance Contracts. However, this Standard applies to

derivatives that are embedded in insurance contracts if IAS 39 requires the entity to account for them

separately. Moreover, an issuer shall apply this Standard to financial guarantee contracts if the issuer

applies IAS 39 in recognising and measuring the contracts, but shall apply IFRS 4 if the issuer elects,

in accordance with paragraph 4(d) of IFRS 4, to apply IFRS 4 in recognising and measuring them.

(e) financial instruments that are within the scope of IFRS 4 because they contain a discretionary

participation feature. The issuer of these instruments is exempt from applying to these features

paragraphs 15–32 and AG25–AG35 of this Standard regarding the distinction between financial

liabilities and equity instruments. However, these instruments are subject to all other requirements

of this Standard. Furthermore, this Standard applies to derivatives that are embedded in these

instruments (see IAS 39).

(f) financial instruments, contracts and obligations under share-based payment transactions to which

IFRS 2 Share-based Payment applies, except for

(i) contracts within the scope of paragraphs 8–10 of this Standard, to which this Standard applies,

(ii) paragraphs 33 and 34 of this Standard, which shall be applied to treasury shares purchased, sold,

issued or cancelled in connection with employee share option plans, employee share purchase

plans,

and all other share-based payment arrangements.

This Standard shall be applied to those contracts to buy or sell a non-fi nancial item that can be settled net

in cash or another fi nancial instrument, or by exchanging fi nancial instruments, as if the contracts were

fi nancial instruments, with the exception of contracts that were entered into and continue to be held for

the purpose of the receipt or delivery of a non-fi nancial item in accordance with the entity’s expected

purchase, sale or usage requirements.

There are various ways in which a contract to buy or sell a non-financial item can be settled net in

cash or another financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument

or by exchanging financial instruments;

(b) when the ability to settle net in cash or another financial instrument, or by exchanging financial

instruments, is not explicit in the terms of the contract, but the entity has a practice of settling

similar contracts net in cash or another financial instrument, or by exchanging financial instruments

(whether with the counterparty, by entering into offsetting contracts or by selling the contract before

its exercise or lapse);

within a short period after delivery for the purpose of generating a profit from short-term fluctuations

in price or dealer’s margin; and

(d) when the non-financial item that is the subject of the contract is readily convertible to cash. A contract

to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the nonfinancial

item in accordance with the entity’s expected purchase, sale or usage requirements, and

accordingly, is within the scope of this Standard.

Framework of Accounting

International Accounting Standard 33

Earnings per Share

Objective

The objective of this Standard is to prescribe principles for the determination and presentation of earnings

per share, so as to improve performance comparisons between different entities in the same reporting

period and between different reporting periods for the same entity. Even though earnings per share data

have limitations because of the different accounting policies that may be used for determining ‘earnings’,

a consistently determined denominator enhances fi nancial reporting. The focus of this Standard is on the

denominator of the earnings per share calculation.

Scope

This Standard shall apply to

(a) the separate or individual financial statements of an entity:

(i) whose ordinary shares or potential ordinary shares are traded in a public market (a domestic

or foreign stock exchange or an over-the-counter market, including local and regional

markets) or

(ii) that files, or is in the process of filing, its financial statements with a securities commission

or other regulatory organisation for the purpose of issuing ordinary shares in a public

market; and

(b) the consolidated financial statements of a group with a parent:

(i) whose ordinary shares or potential ordinary shares are traded in a public market (a domestic

or foreign stock exchange or an over-the-counter market, including local and regional

markets) or

(ii) that files, or is in the process of filing, its financial statements with a securities commission or

other regulatory organisation for the purpose of issuing ordinary shares in a public market.

An entity that discloses earnings per share shall calculate and disclose earnings per share in accordance

with this Standard.

When an entity presents both consolidated fi nancial statements and separate fi nancial statements prepared

in accordance with IAS 27 Consolidated and Separate Financial Statements, the disclosures required by this

Standard need be presented only on the basis of the consolidated information. An entity that chooses to

disclose earnings per share based on its separate fi nancial statements shall present such earnings per share

information only in its statement of comprehensive income. An entity shall not present such earnings per

share information in the consolidated fi nancial statements.

If an entity presents the components of profi t or loss in a separate income statement as described in

paragraph 81 of IAS 1 Presentation of Financial Statements (as revised in 2007), it presents earnings per share

only in that separate statement.

Advanced Financial Accounting & Reporting

International Accounting Standard 34

Interim Financial Reporting

Objective

The objective of this Standard is to prescribe the minimum content of an interim fi nancial report and to

prescribe the principles for recognition and measurement in complete or condensed fi nancial statements

for an interim period. Timely and reliable interim fi nancial reporting improves the ability of investors,

creditors, and others to understand an entity’s capacity to generate earnings and cash fl ows and its

fi nancial condition and liquidity.

Scope

This Standard does not mandate which entities should be required to publish interim fi nancial reports, how

frequently, or how soon after the end of an interim period. However, governments, securities regulators,

stock exchanges, and accountancy bodies often require entities whose debt or equity securities are

publicly traded to publish interim fi nancial reports. This Standard applies if an entity is required or elects

to publish an interim fi nancial report in accordance with International Financial Reporting Standards. The

International Accounting Standards Committee* encourages publicly traded entities to provide interim

fi nancial reports that conform to the recognition, measurement, and disclosure principles set out in this

Standard. Specifi cally, publicly traded entities are encouraged:

(a) to provide interim financial reports at least as of the end of the first half of their financial year; and

(b) to make their interim financial reports available not later than 60 days after the end of the interim

period.

Each fi nancial report, annual or interim, is evaluated on its own for conformity to International Financial

Reporting Standards. The fact that an entity may not have provided interim fi nancial reports during a

particular fi nancial year or may have provided interim fi nancial reports that do not comply with this

Standard does not prevent the entity’s annual fi nancial statements from conforming to International

Financial Reporting Standards if they otherwise do so.

If an entity’s interim fi nancial report is described as complying with International Financial Reporting

Standards, it must comply with all of the requirements of this Standard. Paragraph 19 requires certain

disclosures in that regard.

International Accounting Standard 36

Impairment of Assets

Introduction

International Accounting Standard 36 Impairment of Assets (IAS 36) replaces IAS 36 Impairment of Assets

(issued in 1998), and should be applied:

(a) on acquisition to goodwill and intangible assets acquired in business combinations for which the

agreement date is on or after 31 March 2004.

(b) to all other assets, for annual periods beginning on or after 31 March 2004. Earlier application is

encouraged.

Framework of Accounting

Objective

The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets

are carried at no more than their recoverable amount. An asset is carried at more than its recoverable

amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If

this is the case, the asset is described as impaired and the Standard requires the entity to recognise an

impairment loss. The Standard also specifi es when an entity should reverse an impairment loss and

prescribes disclosures.

Scope

This Standard shall be applied in accounting for the impairment of all assets,

other than:

(a) inventories (see IAS 2 Inventories);

(b) assets arising from construction contracts (see IAS 11 Construction Contracts);

(d) assets arising from employee benefits (see IAS 19 Employee Benefits);

(e) financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and

Measurement;

(f) investment property that is measured at fair value (see IAS 40 Investment Property);

(g) biological assets related to agricultural activity that are measured at fair value less estimated pointof-

sale costs (see IAS 41 Agriculture);

(h) deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under

insurance contracts within the scope of IFRS 4 Insurance Contracts; and

(i) non-current assets (or disposal groups) classified as held for sale in accordance with IFRS 5 Noncurrent

Assets Held for Sale and Discontinued Operations.

International Accounting Standard 37

Provisions, Contingent Liabilities and Contingent Assets

Objective

The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases

are applied to provisions, contingent liabilities and contingent assets and that suffi cient information is

disclosed in the notes to enable users to understand their nature, timing and amount.

Scope

This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and

contingent assets, except:

(a) those resulting from executory contracts, except where the contract is onerous; and

Advanced Financial Accounting & Reporting

(b) [deleted]

International Accounting Standard 38

Intangible Assets

Objective

The objective of this Standard is to prescribe the accounting treatment for intangible assets that are not

dealt with specifi cally in another Standard. This Standard requires an entity to recognise an intangible

asset if, and only if, specifi ed criteria are met. The Standard also specifi es how to measure the carrying

amount of intangible assets and requires specifi ed disclosures about intangible assets.

Scope

This Standard shall be applied in accounting for intangible assets, except:

(a) intangible assets that are within the scope of another Standard;

(b) financial assets, as defined in IAS 32 Financial Instruments: Presentation;

Evaluation of Mineral Resources); and

(d) expenditure on the development and extraction of, minerals, oil, natural gas and similar nonregenerative

resources.

International Accounting Standard 39

Financial Instruments: Recognition and Measurement

Objective

The objective of this Standard is to establish principles for recognising and measuring fi nancial assets,

fi nancial liabilities and some contracts to buy or sell non-fi nancial items. Requirements for presenting

information about fi nancial instruments are in IAS 32 Financial Instruments: Presentation. Requirements for

disclosing information about fi nancial instruments are in IFRS 7 Financial Instruments: Disclosures.

Scope

This Standard shall be applied by all entities to all types of fi nancial instruments

International Accounting Standard 40

Investment Property

Objective

The objective of this Standard is to prescribe the accounting treatment for investment property and related

disclosure requirements.

Scope

This Standard shall be applied in the recognition, measurement and disclosure of investment property.

Framework of Accounting

International Accounting Standard 41

Agriculture

Objective

The objective of this Standard is to prescribe the accounting treatment and disclosures related to agricultural

activity.

Scope

This Standard shall be applied to account for the following when they relate to

agricultural activity:

(a) biological assets;

(b) agricultural produce at the point of harvest; and

Advanced Financial Accounting & Reporting

1.5 International Financial Reporting Standards

IFRS 1: FIRST TIME ADOPTION OF IFRS

• IFRS-1 requires an entity to comply with each IFRS effective at the reporting date for its first

IFRS financial statements. In particular, the IFRS requires an entity to do the following in the opening

IFRS balance sheet that it prepares as a starting point for its accounting under IFRSs:

• Recognise all assets and liabilities whose recognition is required by IFRSs;

• Do not recognise items as assets or liabilities if IFRSs do not permit such recognition;

• Reclassify items that it recognised under previous GAAP as one type of asset, liability or component

of equity, which are different type of asset, liability or component of equity under IFRSs; and

• Apply IFRSs in measuring all recognised assets and liabilities.

Who is fi rst time adopter?

• An entity’s first IFRS financial statements are the first annual financial statements in which the entity

adopts IFRSs, by an explicit and unreserved statement in those financial statements of compliance

with IFRSs.

Opening IFRS Balance Sheet & Comparative Balance Sheet

• An entity has to prepare an opening IFRS Balance Sheet at the date of transition to IFRSs.

• This should be the starting point for its accounting under IFRSs.

• It is not required to present that opening balance sheet in its first IFRS based financial statements.

• However, to comply with IAS -1 “Presentation of Financial Statements” , an entity’s IFRS based

financial statements should include at least one year of comparative information under IASB GAAP

[ Para 36 , IFRS-1].

Example:

Company B proposes to prepare and present IFRS for the calendar year 2011, i.e. Balance Sheet Date

31.12.2011. How should the company carry out transition?

Steps to be taken

• Prepare opening IFRS Balance Sheet as on 1.1.2011 – this is termed as transition date; the beginning of

the earliest period for which an entity presents full comparative information under IFRSs in its first

IFRS financial statements.

• The company has to present comparative information for one year, such comparatives should be as

per IASB GAAP – so it has to restate the accounts of 2010 as per IFRS.

• Prepare and present first IFRS based Financial Statements for 2011 ; it is the first annual financial

statements in which an entity adopts IFRSs by an explicit and unreserved statement.

• Then effectively the company has apply IFRS on and from 1.1.2010.

• Accounting policies: Select its accounting policies based on IFRSs in force at 31st Dec, 2011.

Framework of Accounting

Paras 7-9 of IFRS- 1 requires adoption of current version of IFRSs which would enhance comparability

because information in a fi rst time adopter’s fi rst fi nancial statements is prepared on a consistent basis

over time and would provide comparative information prepared using latest version of the IFRSs.

Moreover, the entity will get exemptions from applying certain standards as given in Paras 13-34B , 36-

36C and 37 of IFRS-1.

Actions at a Glance

• Recognise all assets and liabilities whose recognition is required by IFRSs

• Do not recognise items as assets or liabilities which IFRSs do not permit

• Reclassify items that it recognised under previous GAAP as one type of asset, liability or component

of equity, but are a different type of asset, liability or component of equity under IFRSs

• Carry out measurement of all assets and liabilities so recognized / re-classified in accordance with

IFRSs

• Change in accounting policies

• Applying exemptions: The first time adopter may elect for exemptions granted in Paragraphs 13-25H

and 36A-36C of IFRS-1.

Prohibition of retrospective application of some aspects of other IFRSs

The fi rst time adopter should follow the prohibition of applying retrospective application relating to:

i. Derecognizing of financial assets and financial liabilities ,

ii. Hedge accounting ,

iii. Estimates, and

iv. Assets classified as held for sale and discontinued operations. [ Paragraphs 26-34B of IFRS-1]

IFRS-2 SHARE BASED PAYMENTS

• IFRS-2 Share Based Payment was issued by the International Accounting Standards Board in February

2004. The Standard has been effective since 2005.

• IFRS 2 requires an entity to recognise share-based payment transactions in its financial statements,

including transactions with employees or other parties to be settled in cash, other assets, or equity

instruments of the entity.

Types of Share Based Transactions

These are of three types –

1. Equity-settled transactions for goods or services acquired by an entity

2 Cash settled but price or value of the goods or services is based on equity instruments of the entity

and.

3. Transactions for goods or services acquired by the entity in which either the entity can settle or

supplier can claim settlement by equity instruments of the entity.

Advanced Financial Accounting & Reporting

Recognition of Share Based Payment

The following are recognition criteria under Paras 7-9 of IFRS-2 :

(i) The goods or services received or acquired in a share-based payment transaction are recognised when

the goods are obtained or as the services are received. The entity shall recognise a corresponding

increase in equity is recognised if the goods or services were received in an equity-settled

transaction.

(ii) The goods or services received or acquired in a share-based payment transaction are recognised when

the goods are obtained or as the services are received. The entity shall recognise a corresponding

increase in liability if the goods or services were acquired in a cash-settled transaction. For example,

in case of employee stock option, it is difficult to assess the fair value of the service rendered, and

therefore, the transaction should be measured at fair value of the equity.

(iii) The goods or services received in a share-based payment transaction may qualify for recognition as

an asset. If they are not so qualified then they are recognised as expense.

For example, inventories (which forms part of operating activities acquired through a share based

payment, the entity should pass the following journal entries :

Purchases A/c Dr.

To Equity Share Capital A/c ( face value component)

To Securities Premium A/c ( premium component)

Timing of Recognition

• The term ‘service acquired or received has’ has wider connotation in the context of ‘vesting period’

and ‘vesting condition’. If employees are granted share options conditional upon the achievement

of a performance condition as well as length of service , the length of the vesting period would vary

depending on when that performance condition is satisfied and it would available only to the eligible

category of employees .

Example

• An entity plans to grant 100 equity shares per employee of Class-I , 50 equity shares of per employee

of Class –II and 30 equity shares per employee of Class –III if PAT of company exceeds $ 1000 million

on a cumulative basis.

• This benefit will be available only such employees who will continue till the end of the financial year

in which the target performance achieved.

• The entity would estimate the length the vesting period in terms of estimated time required to achieve

the performance, say 3 years , and percentage of employees under different class who will continue

till the end 3rd financial year from the grant date.

Assume the following % of employees will continue:

Class –I : 90% of 100 employees,

Class –II : 80% of 200 employees and

Class –III : 70% of 800 employees.

Framework of Accounting

The fair value per equity share as on the grant date is RO. 100.

Then initial value of the share based payment works out to be –

RO. 33,80,000 [ 100 shares × 90% × 100 employees + 50 shares × 80% × 200 employees + 30 shares × 70% ×

800 employees ] × RO.100.

This will be allocated over three years which is the expected vesting period.

• In transaction of equity settled share based payment, if the counterparty is not required to complete

a specified period of service to be eligible to unconditionally entitled to the grant then it is presumed

that the required service has been completed. So the transaction should be recognised in full on the

grant date [ Para 14, IFRS-2].

• There are generally situations in employee stock option that the eligible employees should complete

specified service period.

• In such a case the transaction should be recognised over the vesting period. If the employee is

granted share options conditional upon performance condition ( other than market condition), then

the options vest during the expected fulfilment period .

• Market conditions are adjusted in the fair value of option. [ Para 15, IFRS-2].

IFRS 3: BUSINESS COMBINATIONS

• A Business is integrated set of activities, and assets conducted and managed for the purpose of

providing (a) a return to investors and (b) lower costs or other economic benefits to policyholders or

participants. It is generally consists of inputs, processes, and resulting outputs that are or will be used

to generate revenue. A business can be part of a whole entity / company. But a standalone asset may

or not be a business. Paragraphs B 7-B12 of IFRS 3 explain various identification criteria of business.

• A Business Combination is an act of bringing together of separate entities or businesses into one

reporting unit. The result of business combination is one entity (the acquirer) obtains control of one

or more businesses. If an entity obtains control over other entities which are not businesses, the act is

not a business combination.

Recognition of assets and liabilities

“As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifi able assets

acquired, the liabilities assumed and any non-controlling interest in the acquiree” [ Para 10, IFRS 3].

Check List

• Identify assets and liabilities within the Framework for Preparation and Presentation Financial

Statements and;

• Check the liabilities which do not arise out of business combination ;

• Recognise assets ( like identifiable intangibles ) which were not recognised by the acquiree since

these were internally generated intangibles ;

• Do not recognise any liability which constitute remunerations to the past owners of the acquiree or

its employees for future services or which constitute reimbursement of the acquirer’s acquisition

costs;

Advanced Financial Accounting & Reporting

• Identification of assets or liabilities which are assumed because of pre-existing relationship – the

acquirer takes over the sundry debtors of the acquiree which was due by the acquirer for goods

purchased or services received. The acquirer takes over all assets and liabilities of the acquiree

excluding cash. This example, debtors of the acquiree should excluded from the list of assets acquired

as it was a pre-existing relationship.

• Consider exception of recognition principle for contingent liabilities stated in Paras 22& 23 , IFRS 3;

• Effect of deferred tax [ Paras 24-25, IFRS 3] ;

• Employee benefits [ Para 26, IFRS 3];

• Indemnification assets [ Paras 27-28, IFRS 3];

• Operating lease [ Paras B28-30 , Appendix B, IFRS 3];

• Reaquired Rights [Paras B35-36 , Appendix B, IFRS 3];

• Share based awards [ Para 30, IFRS 3]

• Assets held for sale [ Para 31, IFRS 3]

IFRS 4: INSURANCE CONTRACTS

Objective

The objective of this IFRS is to specify the fi nancial reporting for insurance contracts by any entity that

issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of

its project on insurance contracts.

In particular, this IFRS requires:

(a) limited improvements to accounting by insurers for insurance contracts.

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from

insurance contracts and helps users of those financial statements understand the amount, timing and

uncertainty of future cash flows from insurance contracts.

Scope

An entity shall apply this IFRS to:

(a) Insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it

holds.

(b) Financial instruments that it issues with a discretionary participation feature (see paragraph 35).

IFRS 7 Financial Instruments: Disclosures requires disclosure about financial instruments, including

financial instruments that contain such features.

This IFRS does not address other aspects of accounting by insurers, such as accounting for fi nancial assets

held by insurers and fi nancial liabilities issued by insurers (see IAS 32 Financial Instruments: Presentation,

IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7), except in the transitional

provisions in paragraph 45.

Framework of Accounting

An entity shall not apply this IFRS to:

(a) product warranties issued directly by a manufacturer, dealer or retailer (see IAS 18 Revenue and IAS

37 Provisions, Contingent Liabilities and Contingent Assets).

(b) employers’ assets and liabilities under employee benefit plans (see IAS 19 Employee Benefits and IFRS

2 Share-based Payment) and retirement benefit obligations reported by defined benefit retirement

plans (see IAS 26 Accounting and Reporting by Retirement Benefit Plans).

non-financial item (for example, some licence fees, royalties, contingent lease payments and similar

items), as well as a lessee’s residual value guarantee embedded in a finance lease (see IAS 17 Leases,

IAS 18 Revenue and IAS 38 Intangible Assets).

(d) financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such

contracts as insurance contracts and has used accounting applicable to insurance contracts, in which

case the issuer may elect to apply either IAS 39, IAS 32 and IFRS 7 or this Standard to such financial

guarantee contracts. The issuer may make that election contract by contract, but the election for each

contract is irrevocable.

(e) Contingent consideration payable or receivable in a business combination (see IFRS 3 Business

Combinations).

(f) Direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the

policyholder). However, a cedant shall apply this IFRS to reinsurance contracts that it holds.

For ease of reference, this IFRS describes any entity that issues an insurance contract as an insurer, whether

or not the issuer is regarded as an insurer for legal or supervisory purposes.

A reinsurance contract is a type of insurance contract. Accordingly, all references in this IFRS to insurance

contracts also apply to reinsurance contracts.

IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Objective

The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and

disclosure of discontinued operations. In particular, the IFRS requires:

(a) Assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying

amount and fair value less costs to sell, and depreciation on such assets to cease; and

(b) Assets that meet the criteria to be classified as held for sale to be presented separately in the statement

of financial position and the results of discontinued operations to be presented separately in the

statement of comprehensive income.

Disposal group

• It is a group of assets (and directly associated liabilities) which are to be disposed of through a single

transaction.

• The group includes goodwill acquired in business combination if the group is a cash generating unit

to which goodwill has been allocated in accordance with the requirements of Paras 80-87 of IAS-36

Advanced Financial Accounting & Reporting

Impairment of Assets.

• A cash generating unit is the smallest identifiable group of assets that generates cash inflow and that

such cash inflow is largely independent of other assets or group assets of the entity.

Discontinued Operations

A component of entity which is either disposed of or classifi ed as held for sale ; and

• represents a major separate line of business or geographical area of operations or

• is part of single co-ordinated plan to dispose of a major separate line of business or geographical area

of operations, or

• is a subsidiary acquired exclusively with a view to resale.

Classifi cation criteria

• management is committed to a plan to sell

• the asset is available for immediate sale

• an active programme to locate a buyer is initiated

• the sale is highly probable, within one year of classification as held for sale (subject to exceptions

stated in Para 9, IFRS-5)

• the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

• actions required to complete the plan indicate that it is unlikely that plan will be significantly changed

or withdrawn.

The criteria ‘ sale is highly probable, within one year of classifi cation as held for sale’ needs is not evidenced

when the management is indecisive whether the particular asset will be sold or leased out.

Basic principles

• The basic principle of classifying ‘ non-current assets held for sale and disposal groups’ is that the

carrying value is expected to be realised through a sale transaction rather than through continuing

use.

• Assets should be available for immediate sale in their present conditions subject to only the terms

and conditions which are usual and customary for sales of such assets. Sale must highly probable.

Measurement & Presentation

• Under this standard assets that meet the criteria to be classified as ‘ held for sale’ should be measured

at the lower of carrying amount and fair value less cost to sell , and it will not be required to charge

depreciation on such assets. These assets should separately presented on the face of the balance

sheet. Result of ‘discontinued operations’ should presented separately in the Income Statement.

Classifi cation criteria met after the balance sheet date

• If the classification criteria for an asset or disposal group are met after the balance sheet, the entity

should not classify such asset or disposal group as held for sale.

Framework of Accounting

• If these criteria are met after the balance sheet date but before the authorization of financial statements,

information stated Para 41(a) , (b) & (d) of IFRS-5 should disclosed in notes. [ Para 41(a) : description

of non-current assets ; (b) description of the circumstance of sale, expected manner and timing of sale

and (d) reportable segment to which such assets is presented in accordance with IFRS-8].

Nature of disposal Should the transaction be classifi ed as Held for

Sale ?

Sale of 51% of a 100% owned subsidiary, with the

remaining 49% becoming an equity accounted

associate.

Yes, as the group lost the control

Sale of 44% of a 100% subsidiary. The group

continues to control and consolidate the

subsidiary.

No, the group continues to control the same assets

as previously but has sold an economic interest in

those assets

Sale of 75% of a 90% owned subsidiary. The

remaining 15% is accounted for as an AFS.

Yes, since it will be recovered principally through

a sale transaction

Sale of 30% of a 35% interest in an associate. The

remaining interest of 5% is accounted for as an

AFS.

Yes, since it will be recovered principally through

a sale transaction

Sale of 5% of a 35% owned associated. The

remaining interest of 30% continues to be classifi ed

as an associate and equity accounting is followed.

No, since it will not be recovered principally

through a sale transaction

IFRS 6: EXPLORATION FOR AND EVALUATION OF MINERAL ASSETS

The objective of this IFRS is to specify the fi nancial reporting for the exploration for and evaluation of

mineral resources.

In particular, the IFRS requires:

(a) limited improvements to existing accounting practices for exploration and evaluation expenditures.

(b) entities that recognise exploration and evaluation assets to assess such assets for impairment in

accordance with this IFRS and measure any impairment in accordance with IAS 36 Impairment of

Assets.

the exploration for and evaluation of mineral resources and help users of those financial statements

understand the amount, timing and certainty of future cash flows from any exploration and evaluation

assets recognised.

Scope

An entity shall apply the IFRS to exploration and evaluation expenditures that it incurs.

The IFRS does not address other aspects of accounting by entities engaged in the exploration for and

evaluation of mineral resources.

An entity shall not apply the IFRS to expenditures incurred:

Advanced Financial Accounting & Reporting

(a) before the exploration for and evaluation of mineral resources, such as expenditures incurred before

the entity has obtained the legal rights to explore a specific area.

(b) after the technical feasibility and commercial viability of extracting a mineral resource are

demonstrable.

IFRS 7: FINANCIAL INSTRUMENTS-DISCLOSURES

The objective of this IFRS is to require entities to provide disclosures in their fi nancial statements that

enable users to evaluate:

(a) the significance of financial instruments for the entity’s financial position and performance; and

(b) the nature and extent of risks arising from financial instruments to which the entity is exposed during

the period and at the end of the reporting period, and how the entity manages those risks.

The principles in this IFRS complement the principles for recognising, measuring and presenting

fi nancial assets and fi nancial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 Financial

Instruments: Recognition and Measurement.

This IFRS shall be applied by all entities to all types of fi nancial instruments, except:

(a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with

IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests

in Joint Ventures.

However, in some cases, IAS 27, IAS 28 or IAS 31 permits an entity to account for an interest in a

subsidiary, associate or joint venture using IAS 39; in those cases, entities shall apply the disclosure

requirements in IAS 27, IAS 28 or IAS 31 in addition to those in this IFRS. Entities shall also apply

this IFRS to all derivatives linked to interests in subsidiaries, associates or joint ventures unless the

derivative meets the definition of an equity instrument in IAS 32.

(b) employers’ rights and obligations arising from employee benefit plans, to which IAS 19 Employee

Benefits applies.

(d) insurance contracts as defined in IFRS 4 Insurance Contracts. However, this IFRS applies to derivatives

that are embedded in insurance contracts if IAS 39 requires the entity to account for them separately.

Moreover, an issuer shall apply this IFRS to financial guarantee contracts if the issuer applies IAS 39

in recognising and measuring the contracts, but shall apply IFRS 4 if the issuer elects, in accordance

with paragraph 4(d) of IFRS 4, to apply IFRS 4 in recognising and measuring them.

(e) financial instruments, contracts and obligations under share-based payment transactions to which

IFRS 2 Share-based Payment applies, except that this IFRS applies to contracts within the scope of

paragraphs 5–7 of IAS 39.

This IFRS applies to recognised and unrecognised fi nancial instruments. Recognised fi nancial instruments

include fi nancial assets and fi nancial liabilities that are within the scope of IAS 39. Unrecognised fi nancial

instruments include some fi nancial instruments that, although outside the scope of IAS 39, are within the

scope of this IFRS (such as some loan commitments).

Framework of Accounting

This IFRS applies to contracts to buy or sell a non-fi nancial item that are within the scope of IAS 39 (see

paragraphs 5–7 of IAS 39).

IFRS 8: OPERATING SEGMENT

The IFRS specifi es how an entity should report information about its operating segments in annual fi nancial

statements and, as a consequential amendment to IAS 34 Interim Financial Reporting, requires an entity

to report selected information about its operating segments in interim fi nancial reports. It also sets out

requirements for related disclosures about products and services, geographical areas and major customers.

The IFRS requires an entity to report fi nancial and descriptive information about its reportable segments.

Reportable segments are operating segments or aggregations of operating segments that meet specifi ed

criteria. Operating segments are components of an entity about which separate fi nancial information is

available that is evaluated regularly by the chief operating decision maker in deciding how to allocate

resources and in assessing performance. Generally, fi nancial information is required to be reported on

the same basis as is used internally for evaluating operating segment performance and deciding how to

allocate re sources to operating segments.

Identifi cation of segments

The requirements of the IFRS are based on the information about the components of the entity that

management uses to make decisions about operating matters.

The IFRS requires identifi cation of operating segments on the basis of internal reports that are regularly

reviewed by the entity’s chief operating decision maker in order to allocate resources to the segment

and assess its performance. IAS 14 required identifi cation of two sets of segments—one based on related

products and services, and the other on geographical areas. IAS 14 regarded one set as primary segments

and the other as secondary segments.

A component of an entity that sells primarily or exclusively to other operating segments of the entity is

included in the IFRS’s defi nition of an operating segment if the entity is managed that way. IAS 14 limited

reportable segments to those that earn a majority of their revenue from sales to external customers and

therefore did not require the different stages of vertically integrated operations to be identifi ed as separate

segments.

IFRS 9: FINANCIAL INSTRUMENTS: Classifi cation and Measurement

The IASB’s overarching intent was to reduce the complexity inherent in IAS 39. To achieve that, IFRS 9

uses a single approach to determine whether a fi nancial asset is measured at amortized cost or fair value,

rather than following the many different rules contained in IAS 39.

Applicability:

An entity shall apply this IFRS for annual periods beginning on or after 1 January, 2013.

Features:

• Debt instruments are subject to “Business Models” and “Characteristics of the financial asset” test to

determine if they should be measured at amortized cost and fair value.

• Debt instruments must meet both tests both tests to be measured at amortized cost

• All equity investments are measured at fair value either through profit or loss or equity.

Advanced Financial Accounting & Reporting

1.6 A COMPARISON IGAAP - US GAAP – IFRS

True & Fair View: Under IFRS and IGAAP framework, there is an assumption that adoption of IFRS /

IGAAP leads to a true and fair presentation, there is no such assumption under US GAAP.

Prudence Vs Rules: US GAAP essentially takes the cook book approach to set detailed accounting rules

as compared to IFRS approach of setting a broad accounting principles and guidelines. Accounting

principles in UG on a particular subject is scattered across various pronouncements whereas in IFRS it is

concentrated in one or few accounting standards.

Comparative Position: Under IGAAP and IFRS, comparative fi nancial fi gures are to be provided for one

previous years, whereas under USGAAP (SEC requirement for listed companies ) comparatives are to be

provided for two previous years except for Balance Sheet.

Over-riding of Standards – IFRS permits that a company may withhold application of IFRS in extremely

rare situation, where it is felt that application of IFRS would defeat the very objective of Financial reporting.

Disclosure must be made for reason for override. No such override is generally permitted under IGAAP

and US GAAP.

Reporting Elements - IFRS prescribes the minimum structure and content of fi nancial statement including

Statement of Changes in equity (in addition to Balance sheet, Income statement, Cash fl ow statement ,

notes comprising signifi cant accounting Policy and other explanatory notes). Under US GAAP in addition

to statement of changes in Equity, Statement of Comprehensive Income is required.

Both of these statements are NOT required under IGAAP.

FINANCIAL STATEMENTS

Indian GAAP: Balance sheet, Profi t and loss account and Cash fl ows statement* (*only in case of listed

companies). Comparative fi nancial statements of previous period necessary.

US GAAP: Balance sheet, Income statement, Statement of stockholders’ equity and statement of cash

fl ows. Balance sheet for two years and Income statement, Statement of stockholders’ equity and Cash

fl ows statement for three years* (*two years for non-listed companies).

IFRS: Balance sheet, Income statement, Statement of changes in equity, cash fl ows statement and accounting

policies and notes. Comparative information for previous period necessary.

BALANCE SHEET

Basis of

Difference

IFRS USGAAP IGAAP

Format IFRS does not prescribe

any format, but stipulates

minimum line items like

PPE, Investment property,

Intangible assets, Financial

assets, Biological assets,

inventory, receivables, etc.

US GAAP also does not

prescribe any format , but

Rule S-X of SEC stipulates

for listed companies

minimum line items to be

disclosed either on face of

Balance sheet or Notes to

Accounts.

IGAAP provides two

format of Balance Sheet-

Horizontal and Vertical

format ( Part I of schedule

VI to the Companies Act,

1956).

Framework of Accounting

Basis of

Difference

IFRS USGAAP IGAAP

Order Under IFRS, lineitems are

presented in increasing

order of liquidity.

Under US GAAP, items

in assets and liabilities are

presented in decreasing

order of liquidity.

In IGAAP, line items are

presented in increasing

order of liquidity.

Consolidation Consolidation of Financial

statements of subsidiaries

is not compulsory until it is

required under some other

law or regulation

Under US GAAP

consolidation of results of

Subsidiaries and Variable

interest entity (FIN 46R) is

compulsory

It is not mandatory for

companies to prepare CFS

under AS 21. However,

listed enterprises are

mandatorily required by

listing agreement of SEBI

to prepare and present

CFS.

Current/Non-

Current

An organisation has an

option to adopt Current or

Non current classifi cation

of assets and liabilities

Bifurcation into current

& non-current items is

cumpulsorily required.

No such requirement

Income Statement

Basis of

Difference

IFRS USGAAP IGAAP

Format IFRS does not prescribe any

standard format for income

statement but prescribes

minimum disclosure

includes revenue, fi nance

costs, share of post tax

results of JV and associates

using equity method.

There is no prescribed

format, SEC guidelines Rule

S-X prescribe minimum line

items to be shown on the

face of income statement&

suggest 2 alternatives

a) a single step format

where expenses are

classified by function

and

b) a Multiple step format

where Cost of sales is

deducted from sales

Under Indian GAAP no

format is prescribed , but

minimum line items have

been specifi ed in Part II of

schedule VI to Companies

Act, 1956 including

Aggregate Turnover,

Gross Service revenue for

Commission paid to Sole

selling agent, Brokerage

and discount on sales etc.

Prior Period

Items

A prior period item/

error should be corrected

by retrospective effect by

restatement of opening

balance of assets, liabilities

or equities

Mandates retrospective

application of error and

requires restatement of

comparative opening

balance with suitable

footnote disclosure.

Requires separate disclosure

of prior period in the current

fi nancial statement & no

restatement of retained

earnings are required.

Advanced Financial Accounting & Reporting

Basis of

Difference

IFRS USGAAP IGAAP

Discounting IFRS provides that

where the infl ow of

cash is signifi cantly

deferred without interest,

discounting is needed.

US GAAP also permits

discounting in certain cases

for instance discounting

is done in case of loans,

debentures, bonds and

upfront fees

There is no concept of

discounting under IGAAP.

Change in

accounting

policy

IFRS requires retroactive

application for the earliest

period practical and

adjustment of opening

retained earning.

Requires prospective

application of change in

accounting policy and

proforma disclosure of

effect on income before

extraordinary items on the

face of income statement as

separate section. Only in

specifi c case retrospective

is applicable

Under IGAAP, effect for

change in accounting

policy is given with

prospective effect , if the

same is material.

Bifurcation of

Cost

There is no specifi c

provision in this regard

Total cost is required to be

shown separately under:

a) Cost of Sales

b) Sellingand

Administration

c) R & D

There is no specifi c

provision in this regard.

There are certain disclosure

requirements under varied

AS which should be

complied.

Extra ordinary

Events

Disclosure is prohibited Nature should be both:

a) Infrequent

b) Unusual

Disclosed separately on the

face of Income Statement

net of Taxes after results

from operations

Distinct from the ordinary

activities of the enterprise

and, therefore, are not

expected to recur frequently

or regularly. The nature

and the amount of each

extraordinary item should

be separately disclosed in

the statement of P & L in a

manner that its impact on

current profi t or loss can be

perceived.

Framework of Accounting

CASH FLOW STATEMENT

Basis of

Difference

IFRS USGAAP IGAAP

Exemptions No exemptions Limited exemptions for

certain investment entities

Unlisted enterprises,

enterprises with a turnover

less than Rs.500 million

and those with borrowings

less than Rs.100 million

Direct/Indirect

Method

Both allowed Both allowed Both allowed. Listed

companies- Indirect

method Insurance

companies- Direct Method

Periods to be

presented

2 years 3 years 2 years

Interest paid Operating and fi nancing

activity

Operating activity (to

be disclosed by way of a

note)

Financing. In case of

a fi nancial enterprise,

operating activities

Interest received Operating or investing

activity

Operating activity Investing. In the case of

a fi nancial enterprise,

operating activity.

Dividends paid Operating or fi nancing Financing Financing

Tax payments Operating Operating(to be disclosed

by way of a note)

Operating

Dividends

received

Operating or investing Operating Investing. In the case of

a fi nancial enterprise,

operating activity.

SHAREHOLDERS’ EQUITY

Repurchase of own shares:

IGAAP

Entity may purchase its own shares provided it is in consonance with the complex legal requirements

stipulated in the Companies Act and SEBI guidelines.

The excess of cost over par value may be adjusted against free reserves and securities premium.

Also, such shares are required to be cancelled, i.e. cannot be kept in treasury.

US GAAP

Repurchased for retiring stock, excess of cost over par value may be Charged entirely to retained earnings;

or allocated between retained earnings and additional paid-in-capital (APIC); or charged entirely to

APIC.

Advanced Financial Accounting & Reporting

When stock repurchased for purposes other than retiring stock, the cost of acquired stock may be shown

separately as a deduction from equity; or treated the same as retired stock.

IFRS

Similar to US GAAP. Repurchased stock is shown as a deduction from equity.

Statement of Changes in Shareholders’ Equity

Common

Stock

Additional

Paid in

Capital

Retained

Earnings

Treasury

Stock(i.e.

Buy Back)

Cumulative

Translation

adjustment

Accumulated

other

comprehensive

income

Total

Balance at the

beginning of

the year

Net income

Other

comprehensive

income

Dividend paid

Cumulative

translation

adjustment

Stock options

Balance as at

the end of

the year

Statement of changes in shareholders equity:

Indian GAAP – 2 years

Not Applicable. Share capital and reserves are disclosed by way of a schedule.

IFRS – 2 years

Primary statement Shows capital transactions with owners, movement in accumulated profi ts and

reconciliation of equity. Other Comprehensive Income may be shown as a part of it.

US GAAP – 3 years

May be shown as a part of notes to accounts shows capital transactions with owners, movement in

accumulated profi ts and reconciliation of equity.Other Comprehensive Income may be shown as a part

of it.

Dividend on equity shares

IGAAP

Presented as a appropriation of profi ts.

Dividends are accounted in the year when Proposed.

Framework of Accounting

US GAAP

Presented as a deduction in the statement of changes in shareholders’ equity Cash Dividends are accounted

in the year when Declared. Only in case of Stock dividend adjustments is done in accounts..

IFRS

Presented as a deduction in the statement of changes in shareholders’ equity dividends are accounted in

the year when Declared.

INVESTMENTS

IGAAP : AS 13

Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals,

for capital appreciation, or for other benefi ts to the investing enterprise. Assets held as stock-in-trade are

not ‘investments’.

(A) Current Investments – Lower of Cost or Fair Value

(B) Long term Investments. – At cost. If Permanent decline then reduce the carrying value to declined

FMV.

All changes in carrying value is taken to P&L

Reclassifi cation – Long term to Current – at lower of cost and carrying amount.

Reclassifi cation – Current to Long term – at lower of cost and Fair Value.

INVESTMENTS: US GAAP

(A) Held to Maturity – At Cost. (with discount or premium amortized over the effective yield basis).

Most Restrictive category. securities can be so classified if there is positive intent and ability to hold

(maintain the securities) till maturity.

(B) Available for Sale. – At FMV. Unrealized gain / loss due to Fair value are accounted under OCI. In

case of Permanent decline, the reduction is taken to income statement.

Investment in unlisted securities is valued at cost .There are very stringent limitations on reclassifi cation of

Investments.

IF “HTM” securities are sold, use of this category is prohibited Provision for diminution (in value of the longterm

investment) created in earlier years cannot be reversed, whereas in Indian GAAP it can be reversed.

INVESTMENTS: IFRS

(A) Held to Maturity – At Cost. (with discount or premium amortized over the effective yield basis).

Most Restrictive category. securities can be so classified if there is positive intent and ability to hold

Advanced Financial Accounting & Reporting

(maintain the securities) till maturity.

(B) Available for Sale. – At FMV. Unrealized gain / loss due to Fair value are accounted under OCI. In

case of Permanent decline, the reduction is taken to income statement.

Investment in unlisted securities can be valued at FMV.

There are very stringent limitations on reclassification of Investments.

IF “HTM” securities are sold, use of this category is prohibited for next two years.

CONSOLIDATION - SUBSIDIARIES

Indian GAAP

Based on controlling interest, control directly or indirectly through subsidiary (ies), by the virtue of holding

the majority of voting shares or control over the board of directors.

IFRS

Based on voting control or power to govern.

The existence of currently exercisable potential voting rights is also taken into consideration. SPEs also need

to be consolidated.

US GAAP

Controlling interest through majority ownership of voting shares or by contract.

Consolidate variable interest entities (VIEs) in which a parent does not have voting control but absorbs

the majority of losses or returns.

CONSOLIDATION : VARIABLE INTEREST ENTITIES(VIE)

US GAAP – FIN 46(R)

VIE is an entity which satisfi es any of the following conditions:

• The equity investment at risk is not sufficient to permit that entity to finance its activities without

additional subordinated financial support.

• Equity investors lack either (a) voting control, or (b) an obligation to absorb expected losses, or (c)

the right to receive expected residual returns.

• Equity investors have voting rights that are not proportionate to their economic interest, and activities

of the entity involve or are conducted on behalf of an investor with disproportionately small voting

interest.

A VIE is a thinly capitalized and is not self supportive entity.

The primary benefi ciary (i.e one absorbing more than half of expected losses or receiving more than half

of expected residual returns) needs to consolidate the VIE.

Framework of Accounting

Exclusions from Consolidation – Subsidiaries – IFRS

Under IFRS, a parent may avoid consolidation if the parent is a wholly owned subsidiary or a partially

owned subsidiary of another entity and its other owners, including those not entitled to vote, have been

informed about and do not object to the parent not preparing consolidated fi nancial statements the parent

is neither listed nor it is in the process of listing the ultimate or any intermediate parent of the parent

produces IFRS compliant consolidated fi nancial statements.

Recent Changes

Temporary control (unless the intended period of holding is less than12 months) is not a justifi cation for

non consolidation.

Severe long term restrictions to transfer funds to the parent are not a justifi cation for non-consolidation.

IMPAIRMENT OF ASSETS

Difference Criterion IFRS and IGAAP US GAAP

Timing of impairment review Annually Whenever events or changes in

circumstances indicate that the

carrying amount may not be

recovered

Asset is impaired if Recoverable amount < Carrying

amount

Fair value < Carrying amount

Recoverable amount/Fair Value Recoverable amount is higher of

Net Selling Price

Value in use

Fair Value is the amount at

which an asset or liability could

be bought or settled in a current

transaction between willing

parties

Cash fl ows for calculating value

in use/fair value

Use discounted cash fl ows for

calculating the value in use

Use discounted cash fl ows for

calculating the fair value

Reversal of impairment loss Whenever there is a change in

the economic conditions

Prohibited

BUSINESS COMBINATION

Indian GAAP:

If the combination satisfi es the specifi ed conditions, it is an amalgamation in the form of a merger (Pooling

of Interest Method), else an amalgamation in the nature or purchase.

Pooling of Interest Method and Purchase Method allowed

US GAAP:

Acquisition of net assets that constitute a business or controlling equity interests of entities.

Prohibits Pooling of Interest.

Advanced Financial Accounting & Reporting

IFRS:

Bringing together of separate entities or operations into one reporting entity.

Prohibits Pooling of Interest.

Issues IFRS USGAAP IGAAP

Date of acquisition When control is

transferred

When assets received or

equity issued

Date specifi ed by the

court or the purchase

agreement

Valuation of assets and

liabilities

Fair value Fair value In pooling of interests

method-book value

In purchase methodbook

value or fair value

Treatment of goodwill Capitalize and test for

impairment

Capitalize and test for

impairment

Estimate the useful

life and amortize

accordingly

Negative goodwill Recognized in the

income statement

Reduce fair value of

non-monetary assets

Disclose as capital

reserve

Reverse acquisition Acquisition accounting

is based on substance.

Accordingly legal

acquirer is treated as

acquiree and legal

acquiree is treated as

acquirer

Similar to IFRS Acquisition accounting

is based on form.

Legal Acquirer is treated

as acquirer and legal

acquiree is treated as

acquiree for legal as well

as accounting purpose.

INTERNALLY GENERATED INTANGIBLE ASSETS

Issues IFRS USGAAP IGAAP

Research Cost Charge off Charge off Charge off

Development Cost Capitalize if criterion is

met

Charge off Capitalize if criterion is

met

Preparation

of Company

Accounts

under Various

Circumstances

STUDY NOTE - 2

This Study Note includes:

• Merger and Acquisitions

• Accounting for Merger and Acquisitions

• External Reconstruction

Preparation of Company Accounts under Various Circumstances

2.1 Merger and Acquisitions

2.1.1 Introduction

In today’s global business environment, companies may have to grow to survive, and one of the best ways

to grow is by merging with another company or acquiring other companies. A merger occurs when one

fi rm assumes all the assets and all the liabilities of another. The acquiring fi rm retains its identity, while

the acquired fi rm ceases to exist.

The United Kingdom Financial Reporting Standard 6 defi nes the term ‘merger’ as: “Merger is a business

combination which results in the creation of a new reporting entity formed from the combining parties,

in which the shareholders come together in a substantially equal partnership for the mutual sharing of

risks and benefi ts of the combined entity; and in which no party to the combination, in substance, obtains

control over any other.”

A majority vote of shareholders is generally required to approve a merger. A merger is just one type of

acquisition. One company can acquire another in several other ways, including purchasing some or all of

the company’s assets or buying up its outstanding shares of stock.

In general, mergers and other types of acquisitions are performed in the hopes of realizing an economic

gain. For such a transaction to be justifi ed, the two fi rms involved must be worth more together than they

were apart. Some of the potential advantages of mergers and acquisitions include achieving economies

of scale, combining complementary resources, garnering tax advantages, and eliminating ineffi ciencies.

Other reasons for considering growth through acquisitions include obtaining proprietary rights to

products or services, increasing market power by purchasing competitors, shoring up weaknesses in key

business areas, penetrating new geographic regions, or providing managers with new opportunities for

career growth and advancement. Since mergers and acquisitions are so complex, however, it can be very

diffi cult to evaluate the transaction, defi ne the associated costs and benefi ts, and handle the resulting tax

and legal issues.

2.1.2 What is Merger?

Merger or amalgamation contemplates joining two or more companies to form a new company, an

and “amalgamation” are used synonymously.

Co. A + Co. B – New Co. C

Figure 1

Co. A and Co. B = Transferor/Amalgamating Company

New Co. C = Transferee/Amalgamated Company

Co. A + Co. B + Co.C – Existing Co.As

Figure 2

Co. B and Co. C = Transferor/Amalgamating Company

Co. A = Transferee/Amalgamated Company

In other words, merger involves consolidation of business of Company A and Company B into a

new Company C on a going concern basis as shown in Figure 1 above or transfer of business of

altogether a new entity or absorbing of one or more companies by an existing company. The term “merger”

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Company B and Company C to Company A on a going concern basis as shown in Figure 2 above.

The transaction involves arrangement with the shareholdeRs.

The consideration for transfer of business may be discharged either through issue of shares (equity or

preference) or other instruments of the transferee company or by cash.

2.1.3 Varieties of Mergers

From the perspective of business structures, there are a whole host of different mergeRs. Here are a few

types, distinguished by the relationship between the two companies that are merging:

• Horizontal merger Two companies that are in direct competition in the same product lines and

markets.

• Vertical merger A customer and company or a supplier and company. Think of a cone supplier

to an ice cream maker.

• Market-extension merger: Two companies that sell the same products in different markets.

• Product-extension merger: Two companies selling different but related products in the same

market.

• Conglomeration: Two companies that have no common business areas.

From the perspective of how the merge is financed, there are two types of mergers: purchase

mergers and consolidation mergeRs. Each has certain implications for the companies involved

and for investors:

o Purchase Mergers - As the name suggests, this kind of merger occurs when one company

purchases another one. The purchase is made by cash or through the issue of some kind of

debt instrument, and the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with

a tax benefi t. Acquired assets can be ‘‘written-up’’ to the actual purchase price, and the

difference between book value and purchase price of the assets can depreciate annually,

reducing taxes payable by the acquiring company (we discuss this further in part four of

this tutorial).

o Consolidation Mergers - With this merger, a brand new company is formed and both

companies are bought and combined under the new entity. The tax terms are the same as

those of a purchase merger.

2.1.4 Acquisitions

As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different

in name only. Like mergers, acquisitions are actions through which companies seek economies of

scale, efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm

purchasing another – there is no exchanging of stock or consolidating as a new company. Acquisitions are

often congenial, with all parties feeling satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discussed above, a company can buy another

company with cash, with stock, or a combination of the two. Another possibility, which is common

Preparation of Company Accounts under Various Circumstances

in smaller deals, is for one company to acquire all the assets of another company. Company X buys

all of Company Y’s assets for cash, which means that Company Y will have only cash (and debt, if

they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate

or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publiclylisted

in a relatively short time period. A reverse merger occurs when a private company that has

strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one

with no business and limited assets. The private company reverse merges into the public company,

and together they become an entirely new public corporation with tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal: they

are all meant to create synergy that makes the value of the combined companies greater than the

sum of the two parts. The success of a merger or acquisition depends on how well this synergy is

achieved.

2.1.5 Types of Acquisitions

In general, acquisitions can be horizontal, vertical, or conglomerate. A horizontal acquisition takes place

between two fi rms in the same line of business. For example, one tool and die company might purchase

another. In contrast, a vertical merger entails expanding forward or backward in the chain of distribution,

toward the source of raw materials or toward the ultimate consumer. For example, an auto parts

manufacturer might purchase a retail auto parts store. A conglomerate is formed through the combination

of unrelated businesses.

Another type of combination of two companies is a consolidation. In a consolidation, an entirely new fi rm

is created, and the two previous entities cease to exist. Consolidated fi nancial statements are prepared

under the assumption that two or more corporate entities are in actuality only one. The consolidated

statements are prepared by combining the account balances of the individual fi rms after certain adjusting

and eliminating entries are made.

Another way to acquire a fi rm is to buy the voting stock. This can be done by agreement of management or

by tender offer. In a tender offer, the acquiring fi rm makes the offer to buy stock directly to the shareholders,

thereby bypassing management. In contrast to a merger, a stock acquisition requires no stockholder

voting. Shareholders wishing to keep their stock can simply do so. Also, a minority of shareholders may

hold out in a tender offer.

A bidding fi rm can also buy another simply by purchasing all its assets. This involves a costly legal

transfer of title and must be approved by the shareholders of the selling fi rm. A takeover is the transfer of

control from one group to another. Normally, the acquiring fi rm (the bidder) makes an offer for the target

fi rm. In a proxy contest, a group of dissident shareholders will seek to obtain enough votes to gain control

of the board of directoRs.

2.1.6 Distinction Between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms

‘‘merger’’ and “acquisition” mean slightly different things.

When a company takes over another one and clearly becomes the new owner, the purchase is called an

acquisition. From a legal point of view, the target company ceases to exist and the buyer “swallows” the

business, and stock of the buyer continues to be traded.

Advanced Financial Accounting & Reporting

In the pure sense of the term, a merger happens when two fi rms, often about the same size, agree to go

forward as a new single company rather than remain separately owned and operated. This kind of action

is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered, and new

company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when

the two fi rms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don’t happen very often. Often, one company will buy

another and, as part of the deal’s terms, simply allow the acquired fi rm to proclaim that the action is a merger

of equals, even if it’s technically an acquisition. Being bought out often carries negative connotations. By

using the term “merger,” dealmakers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together in business is

in the best interests of both their companies. But when the deal is unfriendly–that is, when the target

company does not want to be purchased–it is always regarded as an acquisition.

So, whether a purchase is considered a merger or an acquisition really depends on whether the purchase

is friendly or hostile and how it is announced. In other words, the real difference lies in how the

purchase is communicated to and received by the target company’s board of directors, employees and

shareholdeRs.

Synergy is the magic force that allows for enhanced cost effi ciencies of the new business. Synergy takes

the form of revenue enhancement and cost savings. By merging, the companies hope to benefi t from the

following:

• Staff reductions – As every employee knows, mergers tend to mean job losses. Consider all the

money saved from reducing the number of staff members from accounting, marketing and other

departments. Job cuts will also include the former CEO, who typically leaves with a compensation

package.

• Economies of scale yes, size matters. Whether it’s purchasing stationery or a new corporate IT system,

a bigger company placing the orders can save more on costs. Mergers also translate into improved

purchasing power to buy equipment or office supplies – when placing larger orders, companies have

a greater ability to negotiate price with their supplieRs.

• Acquiring new technology – To stay competitive, companies need to stay on top of technological

developments and their business applications. By buying a smaller company with unique technologies,

a large company can keep or develop a competitive edge.

• Improved market reach and industry visibility – Companies buy companies to reach new markets

and grow revenues and earnings. A merge may expand two companies' marketing and distribution,

giving them new sales opportunities. A merger can also improve a company's standing in the

investment community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done – it is not automatically realized once two companies

merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes it

works in reverse. In many cases, one and one add up to less than two.

Preparation of Company Accounts under Various Circumstances

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the dealmake Rs.

Where there is no value to be created, the CEO and investment bankers – who have much to gain from a

successful M&A deal – will try to build up the image of enhanced value. The market, however, eventually

sees through this and penalizes the company by assigning it a discounted share price. We talk more about

why M&A may fail in a later section of this tutorial.

Conclusion & Resources

One size does not fi t all. Many companies fi nd that the best route forward is expanding ownership

boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary

or business segment offers more advantages. At least in theory, mergers create synergies and economies

of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will

deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned

management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile,

investors benefi t from the improved information fl ow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in

M&A. The most benefi cial form of equity structure involves a complete analysis of the costs and benefi ts

associated with the deals.

2.2 Accounting For Mergers And Acquisitions

The two principal accounting methods used in mergers and acquisitions are the pooling of interests

method and the purchase method. The main difference between them is the value that the combined

fi rm’s balance sheet places on the assets of the acquired fi rm, as well as the depreciation allowances and

charges against income following the merger.

The pooling of interests method assumes that the transaction is simply an exchange of equity securities.

Therefore, the capital stock account of the target fi rm is eliminated, and the acquirer issues new stock

to replace it. The two fi rms’ assets and liabilities are combined at their historical book values as of the

acquisition date. The end result of a pooling of interests transaction is that the total assets of the combined

fi rm are equal to the sum of the assets of the individual fi rms. No goodwill is generated, and there are no

charges against earnings. A tax-free acquisition would normally be reported as a pooling of interests.

Under the purchase method, assets and liabilities are shown on the merged fi rm’s books at their market

(not book) values as of the acquisition date. This method is based on the idea that the resulting values

should refl ect the market values established during the bargaining process. The total liabilities of the

combined fi rm equal the sum of the two fi rms’ individual liabilities. The equity of the acquiring fi rm is

increased by the amount of the purchase price.

Accounting for the excess of cost over the aggregate of the fair market values of the identifi able net assets

acquired applies only in purchase accounting. The excess is called goodwill, an asset which is charged

against income and amortized over a period that cannot exceed 40 yeaRs. Although the amortization

“expense” is deducted from reported income, it cannot be deducted for tax purposes.

Purchase accounting usually results in increased depreciation charges because the book value of most

assets is usually less than fair value because of infl ation. For tax purposes, however, depreciation does not

Advanced Financial Accounting & Reporting

increase because the tax basis of the assets remains the same. Since depreciation under pooling accounting

is based on the old book values of the assets, accounting income is usually higher under the pooling

method. The accounting treatment has no cash fl ow consequences. Thus, value should be unaffected by

accounting procedure. However, some fi rms may dislike the purchase method because of the goodwill

created. The reason for this is that goodwill is amortized over a period of yeaRs.

Accounting Standard (AS-14) as prescribed by the Institute of Chartered Accountants of India deals

with accounting for amalgamation and treatment for resulting goodwill or reserves. AS-14 classifi es

amalgamation into two types, viz.:

Amalgamation in nature of merger; and

Amalgamation in nature of purchase.

Amalgamation in nature of merger is an amalgamation, which satisfi es all the following conditions:

i. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee

company;

ii. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company

(other than transferee company and its nominees) become equity shareholders of the transferee

company after amalgamation;

iii. The consideration is to be discharged by way of issue of equity shares in the transferee company to

the shareholders of the transferor company on the amalgamation;

iv. The business of the transferor company is to be carried on by the transferee company;

v. No adjustments are intended to be made to the book values of the assets and liabilities of the transferor

company.

If any one or more of the aforesaid conditions are not satisfi ed then the amalgamation is in nature of

purchase.

Amalgamation in the nature of merger is to be accounted as per the Pooling of Interest Method and

in case of amalgamation in the nature of purchase accounting needs to be done as per the Purchase

Method.

2.2.1 Methods of Accounting:

Pooling of Interest Method ( In the nature of merger)

i. The assets, liabilities and reserves of the transferor company are to be recorded at their existing

carrying amounts and in the same form as it was appearing in the books of the transferor

company.

ii. The identity of the reserves of the transferor company is to be kept intact in the balance sheet of

the transferee company.

iii. Difference between the amounts of share capital issued plus any other additional consideration

paid by the transferee company and the amount of the share capital of the transferor company

should be adjusted in Reserves.

Preparation of Company Accounts under Various Circumstances

Purchase Method:

i. The assets and the liabilities of the transferor company are to be recorded at their existing carrying

amounts or, alternatively, the consideration should be allocated to individual assets and liabilities on

the basis of fair values at the date of amalgamation while preparing the financial statements of the

transferee company.

ii. The identity of the reserves of the transferor company other than the statutory reserves is not

preserved. The identity of the statutory reserves is preserved in the same form and is recorded in the

books of the transferee company by a corresponding debit to the amalgamation adjustment a/c.

iii. Excess or shortfall of consideration over the value of net assets acquired should be credited/ debited

as capital reserve/goodwill, as the case may be.

iv. It is appropriate to amortize goodwill over a period of not exceeding 5 years unless a longer period

is justified.

The accounting treatment as specifi ed in AS-14 needs to be followed for accounting of reserves. In case

the scheme of amalgamation sanctioned prescribes a separate treatment to be given to the reserves of the

transferor company on amalgamation, it can be followed.

However the Institute of Chartered Accountants of India has issued a general clarifi cation wherein the

following disclosure is to be made in case the accounting treatment for reserves is different from that

specifi ed in AS-14:

i. Description of the accounting treatment given to reserves;

ii. Deviation in the Accounting Treatment and the reasons for following a treatment different from that

prescribed in the AS-14;

iii. The financial effect, if any, arising due to such deviation is to be disclosed.

iv. Other Disclosure Requirements

a. General

• Names and general nature of business of the amalgamating companies

• Effective date of amalgamation for accounting purposes

• Method of accounting used to reflect the amalgamation and Exchange Ratio

• Particulars of the scheme sanctioned by the Court

b. If Pooling of Interest Method is used

• Description and number of shares issued, together with the percentage of each company’s

equity shares exchanged.

• The amount of any difference between the consideration and the value of net identifiable

assets acquired and the treatment thereof.

Advanced Financial Accounting & Reporting

c. If Purchase Method is used

• Consideration for the amalgamation and description of consideration paid/payable

• The amount of difference between the consideration and the value of net identifiable assets

acquired and the treatment thereof including the period of amortization of any goodwill

arising on amalgamation

ENTRIES IN BOOKS OF VENDOR COMPANY

1. Transfer to Realisation A/c.

Particulars Debit Credit

Rs. Rs.

a. Assets taken over by purchasing Company at Book values.

Realisation A/c Dr. XXX

To Liquidator of A Ltd. A/c XXX

b. Liabilities taken over by Purchasing Company

at Balance Sheet value.

Liabilities A/c Dr XXX

To Realisation A/c XXX

2. Purchase Consideration

Purchase consideration represents consideration paid by transferee company to shareholders (equity and

preference) in any form viz., cash, shares, debentures etc.

Particulars Debit Credit

Rs. Rs.

a. Due Entry for consideration

Transfer company A/c Dr. XXX

To Realisation A/c XXX

b. Receipt of Considertion

Shares/Securities of transferee company A/c Dr. XXX

Bank A/c Dr. XXX

To Transferee company A/c XXX

3. Sale of Assets not taken over (Assuming Profits)

Particulars Debit Credit

Rs. Rs.

Bank A/c (Sale proceeds) Dr. XXX

To Assets A/c (Book value) XXX

To Realisation A/c (Profi ts) XXX

Preparation of Company Accounts under Various Circumstances

4. Settlement of liabilities not taken over (Assuming at a discount)

Particulars Debit Credit

Rs. Rs.

Liabilities A/c (book value) Dr. XXX

To Bank A/c XXX

To Realisation A/c (discount) XXX

5. Realisation expenses

Particulars Debit Credit

Rs. Rs.

a. Incurred by transferor company

Realisation A/c Dr. XXX

To Bank A/c XXX

b. Incurred by transferee company

No Entry

c. Incurred by transferor company reimbursed by

transferee company

i. On incurring the expenses

Transferee company A/c Dr. XXX

To Bank XXX

ii. On reimbursement

Bank A/c Dr. XXX

To Transferee company A/c XXX

6. Amount due to the euqity Share holders

Particulars Debit Credit

Rs. Rs.

a. Transfer of share capital and reserves to

shareholders account

Equity Share Capital A/c Dr. XXX

Reserves A/c Dr. XXX

To Shareholders A/c XXX

7. Settlement to Share holders by transfer of consideration received :

Particulars Debit Credit

Rs. Rs.

Shareholders A/c Dr. XXX

To Shares/Securities of transferee company A/c XXX

To Bank A/c XXX

Advanced Financial Accounting & Reporting

Entries in books of Transferee Company

a) Three basic entries

For purchase consideration due

Business Purchase a/c

To Liquidator of Vendor Company

Dr.

For assets and liabilities taken over

Sundry Assets A/c

Goodwill A/c

To Sundry Liabilities

To Business Purchase A/c

To Capital Reserve A/c (Bal. fi g.)

Dr.

Dr. (Bal. fi g.)

For discharge of purchase consideration

Liquidator of Vendor Company A/c

To Equity Share Capital A/c

To Securities Premium A/c

To Debentures A/c

To Preference Share Capital A/c

To Cash A/c

Dr.

b) For liquidation expenses paid by purchasing company

Goodwill/Capital Reserve A/c Dr.

To Cash A/c

c) For cancellation of mutual owings

Creditor/Bills payable A/c Dr.

To Debtors/Bills receivable A/c

d) For adjustment of unrealised profit

Goodwill/Capital reserve A/c Dr.

To Stock A/c

Preparation of Company Accounts under Various Circumstances

e) For carry forward of statutory reserves

Amalgamation Adjustment A/c Dr.

To Statutory Reserve A/c

f) If both capital reserve and goodwill appears in books

Capital Reserve A/c Dr.

To Goodwill A/c

2.2.2 How To Value An Acquisition

Valuing an acquisition is similar to valuing any investment. The analyst estimates the incremental cash

fl ows, determines an appropriate risk-adjusted discount rate, and then computes the net present value

(NPV). If fi rm A is acquiring fi rm B, for example, then the acquisition makes economic sense if the value of

the combined fi rm is greater than the value of fi rm A plus the value of fi rm B. Synergy is said to exist when

the cash fl ow of the combined fi rm is greater than the sum of the cash fl ows for the two fi rms as separate

companies. The gain from the merger is the present value of this difference in cash fl ows.

2.2.3 Sources of Gains From Acquisitions

The gains from an acquisition may result from one or more of the following fi ve categories: (1) revenue

enhancement, (2) cost reductions, (3) lower taxes, (4) changing capital requirements, or (5) a lower cost of

capital. Increased revenues may come from marketing gains, strategic benefi ts, and market power. Marketing

gains arise from more effective advertising, economies of distribution, and a better mix of products. Strategic

benefi ts represent opportunities to enter new lines of business. Finally, a merger may reduce competition,

thereby increasing market power. Such mergers, of course, may run afoul of antitrust legislation.

A larger fi rm may be able to operate more effi ciently than two smaller fi rms, thereby reducing costs.

Horizontal mergers may generate economies of scale. This means that the average production cost

will fall as production volume increases. A vertical merger may allow a fi rm to decrease costs by more

closely coordinating production and distribution. Finally, economies may be achieved when fi rms have

complementary resources — for example, when one fi rm has excess production capacity and another has

insuffi cient capacity.

Tax gains in mergers may arise because of unused tax losses, unused debt capacity, surplus funds, and

the write-up of depreciable assets. The tax losses of target corporations can be used to offset the acquiring

corporation’s future income. These tax losses can be used to offset income for a maximum of 15 years or until

the tax loss is exhausted. Only tax losses for the previous three years can be used to offset future income.

Tax loss carry-forwards can motivate mergers and acquisitions. A company that has earned profi ts may

fi nd value in the tax losses of a target corporation that can be used to offset the income it plans to earn. A

merger may not, however, be structured solely for tax purposes. In addition, the acquirer must continue

to operate the pre-acquisition business of the company in a net loss position. The tax benefi ts may be less

than their “face value,” not only because of the time value of money, but also because the tax loss carryforwards

might expire without being fully utilized.

Advanced Financial Accounting & Reporting

Tax advantages can also arise in an acquisition when a target fi rm carries assets on its books with basis,

for tax purposes, below their market value. These assets could be more valuable, for tax purposes, if they

were owned by another corporation that could increase their tax basis following the acquisition. The

acquirer would then depreciate the assets based on the higher market values, in turn, gaining additional

depreciation benefi ts.

Interest payments on debt are a tax-deductible expense, whereas dividend payments from equity

ownership are not. The existence of a tax advantage for debt is an incentive to have greater use of debt,

as opposed to equity, as the means of fi nancing merger and acquisition transactions. Also, a fi rm that

borrows much less than it could may be an acquisition target because of its unused debt capacity. While

the use of fi nancial leverage produces tax benefi ts, debt also increases the likelihood of fi nancial distress

in the event that the acquiring fi rm cannot meet its interest payments on the acquisition debt.

Finally, a fi rm with surplus funds may wish to acquire another fi rm. The reason is that distributing the

money as a dividend or using it to repurchase shares will increase income taxes for shareholdeRs. With

an acquisition, no income taxes are paid by shareholders.

Acquiring fi rms may be able to more effi ciently utilize working capital and fi xed assets in the target fi rm,

thereby reducing capital requirements and enhancing profi tability. This is particularly true if the target

fi rm has redundant assets that may be divested.

The cost of debt can often be reduced when two fi rms merge. The combined fi rm will generally have

reduced variability in its cash fl ows. Therefore, there may be circumstances under which one or the other

of the fi rms would have defaulted on its debt, but the combined fi rm will not. This makes the debt safer,

and the cost of borrowing may decline as a result. This is termed the coinsurance effect.

Diversifi cation is often cited as a benefi t in mergers. Diversifi cation by itself, however, does not create any

value because stockholders can accomplish the same thing as the merger by buying stock in both fi rms.

2.2.4 Valuation Procedures

The procedure for valuing an acquisition candidate depends on the source of the estimated gains.

Different sources of synergy have different risks. Tax gains can be estimated fairly accurately and should

be discounted at the cost of debt. Cost reductions through operating effi ciencies can also be determined

with some confi dence. Such savings should be discounted at a normal weighted average cost of capital.

Gains from strategic benefi ts are diffi cult to estimate and are often highly uncertain. A discount rate

greater than the overall cost of capital would thus be appropriate.

The net present value (NPV) of the acquisition is equal to the gains less the cost of the acquisition. The cost

depends on whether cash or stock is used as payment. The cost of an acquisition when cash is used is just

the amount paid. The cost of the merger when common stock is used as the consideration (the payment)

is equal to the percentage of the new fi rm that is owned by the previous shareholders in the acquired fi rm

multiplied by the value of the new fi rm. In a cash merger the benefi ts go entirely to the acquiring fi rm,

whereas in a stock-for-stock exchange the benefi ts are shared by the acquiring and acquired fi rms.

Whether to use cash or stock depends on three considerations. First, if the acquiring fi rm’s management

believes that its stock is overvalued, then a stock acquisition may be cheaper. Second, a cash acquisition

is usually taxable, which may result in a higher price. Third, the use of stock means that the acquired fi rm

Preparation of Company Accounts under Various Circumstances

will share in any gains from merger; if the merger has a negative NPV, however, then the acquired fi rm

will share in the loss.

In valuing acquisitions, the following factors should be kept in mind. First, market values must not be

ignored. Thus, there is no need to estimate the value of a publicly traded fi rm as a separate entity. Second,

only those cash fl ows that are incremental are relevant to the analysis. Third, the discount rate used should

refl ect the risk associated with the incremental cash fl ows. Therefore, the acquiring fi rm should not use

its own cost of capital to value the cash fl ows of another fi rm. Finally, acquisition may involve signifi cant

investment banking fees and costs.

Mergers and acquisitions and corporate restructuring – or M&A for short – are a big part of the corporate

fi nance world. Everyday, Wall Street investment bankers arrange M&A transactions that bring together separate

companies to make larger ones. When they are not creating big companies from smaller ones, corporate fi nance

deals do the reverse and break up companies through spinoffs, carve-outs, or tracking stocks.

Not surprisingly, these types of actions often make the news. Deals can be worth hundreds of millions or

even billions of dollars, and they can dictate the fortunes of the companies involved for years to come. For

CEOs, leading M&A can represent the pinnacle of their careeRs.

2.3 External Reconstruction

Reconstruction means reorganization of a company’s fi nancial structure. In reconstruction of a company,

usually the assets and liabilities of the company are revalued, the losses suffered by the company are written

off by a deduction of the paid-up value of shares and/or varying of the rights attached to different classes

of shares and compounding with the creditoRs. It may be done without liquidating the company and

forming a new company in which case the process is called internal reconstruction. However, there may

be external reconstruction in which case the undertaking being carried on by the company is transferred

to a newly started company consisting substantially of the same shareholders with a view to the business

of the transferee company being continued by the transferee company. An attempt is made that the newly

started company has a sound fi nancial structure and a good set of assets and liabilities recorded in the

books of the transferee company at their fair values.

From the point of view of an accountant, external reconstruction is similar to amalgamation in the nature

of purchase; the books of the transferee company are closed and in the books of the transferee company,

the purchase of the business is recorded. But otherwise external reconstruction and amalgamation differs

as follows:

(i) In external reconstruction, only one company is involved whereas in amalgamation, there are at least

two existing companies which amalgamate.

(ii) In external reconstruction, a new company is certainly formed whereas in amalgamation a new

company may be formed or in the alternative one of the existing companies may take over the other

amalgamating company or companies and no new company may be formed.

(iii) The objective of the external reconstruction is to reorganize the financial structure of the company,

on the other hand, the objective of the amalgamation is to cut competition and reap the economies of

larger scale.

Advanced Financial Accounting & Reporting

Scheme of Reconstruction

The need for reconstruction arises when a company has accumulated losses or when a company fi nds

itself overcapitalized which means either that the value placed on assets is too much as compared to their

earning capacity or that the profi ts as a whole are insuffi cient to pay a proper dividend. Apart from clarity,

wide acceptance and justice, the reconstruction scheme must take into account the following:-

The fundamental basis of any proposals is the earning power of the company. Even the interest to debenture

holders cannot be paid unless the company’s activities are profi table. A very careful estimate should,

therefore, be made of the profi ts expected by the company in the future. Unless the profi ts are suffi cient to

meet all the expenses including adequate depreciation, interest to debenture holders and other creditors,

preference dividend, and a reasonable return to the equity shareholder, it would be useless to process

with any reconstruction scheme because, otherwise, the need for reconstruction will soon arise again.

Assuming that adequate profi ts can be expected, the reconstruction scheme should not adversely affect

the rights of preference shareholders (not to speak of creditors and debenture holders) unless it is

absolutely necessary. Suppose, the profi ts are such that after paying dividends to preference shareholders

little remains for equity shareholders: the preference shareholder may be persuaded to accept a sacrifi ce

either by reduction of capital or by reduction in the rate of dividend or both because the alternative to

such acceptance of sacrifi ce may be the liquidation of the company (in which case, due to forced sale, the

asset may not realize much and the preference shareholder may not be able to get back what they have

invested). If the company is in very bad position, even the debenture holders may be prevailed upon to

accept a reduction of their claims. But, so far as is possible, contractual and legal rights and priorities

should be maintained.

The equity shareholder will naturally have to bear the brunt of the losses and sacrifi ce. This is not as bade

as it sounds because (a) the equity shareholders realize from the very beginning that if losses occur they

have to bear them before anybody else can be called upon to do so, and (b) they must have already known

that the value of their holding is small due to absence of dividend. The market price of share is related to

dividend and not to the face or nominal value of the share. It really does not matter, therefore, whether

the nominal value of an equity share is Rs. 1 or Rs. 100 or Rs. 1,000 as long as it is not 0. (This does matter

in case of preference shareholders and debenture holders whose earnings depend on the nominal value).

In fact, a reconstruction scheme may be benefi cial to the equity shareholders by enabling the payment of a

dividend on such shares. On this ground, it would be unjust to ask the preference shareholders to accept

a sacrifi ce when the equity shareholders improve their position.

There is, however, one important right which the equity shareholders enjoy. This is control over the affairs

of the company. The equity shareholders will not easily give up this rite, and hence the reconstruction

scheme should keep this in mind. The equity shareholder may not agree to the conversion of preference

share or debenture into equity share even if the holders of preference shares or debenture are willing

to accept lower security for their holdings. The equity share holders may agree to this only if there is a

threat of the company being wound up (in which case they will lose almost all). It should also be noted

that without the consent of the parties their liability cannot be increased. For instances, fully paid shares

cannot be converted into partly paid shares without the consent of the shareholdeRs.

The requirements of the working capital must not be overlooked. Cash may require to pay certain

dissenting creditor or even to pay arrears of preference dividend. Generally, therefore, a company under

reconstruction will have to raise funds to enable it to pay off such dissenters and to carry on its work

Preparation of Company Accounts under Various Circumstances

smoothly. Which of the various parties are willing to subscribe more shares will have to be seen. The

equity shareholders will like to consolidate their position by buying more shares. Sometimes, outsiders

are willing to subscribe to the shares but they will generally prefer to do so if they are given a controlling

share.

Steps:

(1) First of all the total amounts to be written off should be ascertained. This would mean totaling up the

debit balance of the Profit and Loss account, all fictitious assets like goodwill, preliminary expenses,

discount on shares or debentures, any fall in value of assets, any increase in liabilities and arrears of

dividends on cumulative preference shares. If the value of any share can be legitimately increased

the amount of loss would then be reduced accordingly. The other way to get at the same figure

would be to add up the present value as a going concern, of all the assets and deduct there from the

amount of liabilities and also the arrears of dividend on cumulative preference shares. What is left is

“net assets”. The share capital compared with net assets will show how much amount is to be written

off.

(2) The question now arises has to who is to bear the loss. If the net assets are more than the preference

share capital, it is obvious the whole of the loss will have to be borne by the equity shareholdeRs. The

nominal value of the equity shares should be reduced by a sufficient margin to cover the loss. If the

net assets are not sufficient to cover the preference share capital (or if the net assets are just sufficient),

the preference share holder will have to accept a sacrifice, although their sacrifice will be smaller than

that of the equity share holdeRs. (Equity share holders should not be completely wiped off). If the

future earning power of the company permits, the dividend rate should be increased so that, in terms

of rupees, the dividend remains unchanged. Thus if 10.5% preference share of Rs. 100 are converted

into preference share of Rs. 75 each, rate of dividend should be raised to 14%, if possible. In both

cases, then the dividend will be Rs. 10.5 per share.

(3) Payment of arrears of dividend (question arises only in case of cumulative preference shares) in cash

immediately may present difficulties. In such a case a good method is to issue deposit certificates.

This is preferable to issuing shares because (a) it will not upset the voting power and (b) the certificate

can be redeemed as soon as opportunity arises. The rate of interest need not be heavy, but of course,

it will depend on the future earning capacity of the company.

(4) Debenture holders and other creditors are affected by the reconstruction scheme only if the total

assets in the company are insufficient to cover even the liabilities (although they are concerned is

necessary to any scheme that may be formulated). In such an eventuality, the creditors (including

debenture holders) will have to accept sacrifice unless they think that by sending the company into

liquidation we will be able to realize substantial portion of their claims. The share holders, both

preference and equity will have to accept a heavy reduction in the value of share but they cannot

be expected to agree to complete wiping of the shares, in which case they will have no interest in

keeping the company going. Generally, the sacrifice to be borne by the creditors will be as follows:

Preferential creditors Nil

(According to law)

Depending upon the value of the security Heaviest.

Advanced Financial Accounting & Reporting

In short, the whole scheme should broadly depend upon the expected earning power and upon the

position as it likely to obtain if the company is sent to liquidation.

Internal vs. External Reconstruction: Having decided who is to bear how much sacrifi ce of loss and

having settled the broad details of the scheme, and important question remains to be decided. Will the

reconstruction be internal or external? Internal reconstruction means that the scheme will be carried out

by liquidating the existing company and incorporating immediately another company (with the name

only slightly changed such as A B Ltd. , to take over the business of the outgoing company. There are

advantages in both, but generally internal reconstruction is preferred. The advantages in its favour are:-

(a) Creditors, specially bank overdraft and debenture holders, may continue whereas they may not if

the company is formally liquidated which will involve payment of claims to outsiders, If they do not

continue, the company may suffer from want of financial assistance. This is, however, only academic

since no reconstruction scheme, even internal, will be really formulated without the consent of the

bank, debenture holdeRs. Etc.

(b) The company will be able to set off its past losses against future profits for income-tax purposes.

This will materially reduce the income-tax liability depending on the losses suffered during the

preceding eight yeaRs. Losses can be carried forward for eight years provided the business is carried

on. The business will technically end when the company is liquidated. Hence, in case of external

reconstruction, losses cannot be carried forward for income tax purposes.

The arguments in favour of external reconstruction are as under:-

(a) External reconstruction may be the only way to bring about speedy reconstruction because sometimes

a few people hold up the scheme by delaying tactics by means of legal objections.

(b) It may help in raising more finance by issuing to the existing shareholders partly paid shares in the

new company. It should be remembered that in internal reconstruction fully paid up shares unless

every shareholder gives his assent in writing. This may prove cumbersome. However, if shareholders

are willing to accept partly paid shares in the new company, there is not much reason why they

should refuse to buy new shares under a scheme of internal reconstruction.

Legal position as regards external reconstruction:

Sec 494 of the Companies Act permits the liquidator of a company to transfer the whole or any part of

the company’s business or property to another company and receive from the transferee company for

distribution among the share holders of the company under liquidation. The liquidator must obtain the

sanction of the company by a special resolution. Any sale of arrangement in pursuance of this section is

binding on the members of the transferor company.

But a shareholder who has not voted for the special resolution may, within seven days of the resolution,

serve a notice on the liquidator expressing his dissent and requiring the liquidator either, (a) to abstain

from carrying the resolution into effect, or (b) to purchase his interest at a price to be determined by

agreement or by arbitration.

Preparation of Company Accounts under Various Circumstances

Illustrations :

I. Computation and Discharge of Purchase Consideration

Illustration - 1

The Oil Shell Ltd. was incorporated on 1st April 2008 for the purpose of acquiring P Ltd., Q. Ltd., and R

Ltd.

The Balance sheet of these companies as on 31st March 2009 are as follows :

(Rs.)

Particulars P Ltd. Q Ltd. R Ltd.

Assets

Tangible Fixed assets - at cost less depreciation 50,00,000 40,00,000 30,00,000

Goodwill 6,00,000

Other assets 20,00,000 28,00,000 8,50,000

Total 70,00,000 74,00,000 38,50,000

Liabilities

Issued Equity Share Capital (shares of Rs. 10 each) 40,00,000 50,00,000 25,00,000

Profi t and Loss A/c 15,00,000 11,00,000 6,00,000

10% Debentures 7,00,000 4,00,000

Sundry Creditors 8,00,000 13,00,000 3,50,000

Total 70,00,000 74,00,000 38,50,000

Average annual profi ts before debentures interest 9,00,000 12,00,000 5,00,000

(April 2008 to March 2009 inclusive)

Professional valuation of tangible assets on

31st March 2009 62,00,000 48,00,000 36,00,000

1. The directors in their negotiations agreed that : (i) the recorded goodwill of Q Ltd. is valueless ;

(ii) the “Other assets” of P Ltd. are worth Rs. 3,00,000; (iii) the valuation of 31st March 2009 in respect

of tangible Fixed assets should be accepted. (iv) these adjustments are to be made by the individual

companyt before the completion of the acquitition.

2. The acquisition agreement provided for the issue of 12% unsecured Debentures to the value of the

net assets of companies P Ltd. Q Ltd and R Ltd., and for the issuance of Rs. 100 nominal value equity

shares for the capitalized average profit of each acquired company in excess of net assets contributed.

The capitalisation rate is established at 10%.

You are required to:

i. Compute Purchase consideration.

ii. Dicscharge of Purchase consideration.

Advanced Financial Accounting & Reporting

Solution :

Computation of Purchase Consideration

WN # 1 : Consideration in the form of 12% Debentures

Particulars P Ltd. Q Ltd. R Ltd.

Rs. Rs. Rs. Rs. Rs. Rs.

a. Asset

i. Tangilbe Fixed assets

(as valuation)

62,00,000 48,00,000 36,00,000

ii. Other Assets (as per directors

negotiation)

3,00,000 65,00,000 28,00,000 76,00,000 8,50,000 44,50,000

b. Liabilities

i. Sundry Creditors 8,00,000 13,00,000 3,50,000

ii. 10% Debentures 7,00,000 (15,00,000) — (13,00,000) 4,00,000 (7,50,000)

c. NET ASSETS (a-b) 50,00,000 63,00,000 37,00,000

d. 12% Debentures to be issued. 50,00,000 63,00,000 37,00,000

WN # 2 : Consideration in the form of Equity Shares

Particulars P Ltd.

Rs.

Q Ltd.

Rs.

R Ltd.

Rs.

a. Average annual profi t before debenture interest

(given)

9,00,000 12,00,000 5,00,000

b. Debenture interest (on 10% Debentures) 70,000 — 40,000

c. Profi t after debentures interest (a-b) 8,30,000 12,00,000 4,60,000

d. Capitalisation rate 10% 10% 10%

e. Capitalised average profi t (c/d) 83,00,000 1,20,00,000 46,00,000

f. Net Assets takeover (WN # 1(c)) 50,00,000 63,00,000 37,00,000

g. Excess of capitalised average profi t over net assets take

over (e-f)

33,00,000 57,00,000 9,00,000

WN # 3 : Summary of Purchase Consideration

Particulars P Ltd.

Rs.

Q Ltd.

Rs.

R Ltd.

Rs.

a. 12% Debentures of Oil Shell Ltd. each @ Rs. 100/- [WN

# 1(d)]

50,00,000 63,00,000 37,00,000

b. Equity shares of Rs. 100 each of Oil Shell Ltd.

[WN # 2(g)]

33,00,000 57,00,000 9,00,000

c. Total Consideration 83,00,000 1,20,00,000 46,00,000

Preparation of Company Accounts under Various Circumstances

Illustration - 2

Zee Ltd. agreed to absorb Gulf Ltd. on 31st March, 2009, whose Balance sheet stood as follows :

Liabilities Rs. Assets Rs.

Share capital Fixed assets 70,00,000

80,000 shares of Rs. 100 each Investments

fully paid 80,00,000 Current assets

Reserves and surplus Loans and Advances

General Reserve 10,00,000 Stock in trade 10,00,000

Secured Loan — Sundry Debtors 20,00,000

Unsecured Loan —

Current Liabilities and Provisions

Sundry creditors 10,00,000

1,00,00,000 1,00,00,000

The consideration was agreed to be paid as follows :

a. A payment in cash of Rs. 50 per share in Gulf Ltd. and

b. The issue of shares of Rs. 100 each in Zee Ltd., on the basis of 2 Equity Shars (valued at Rs. 150) and

one 10% cumulative preference share (valued at Rs. 100) for every five shares held in Gulf Ltd.

It was agreed that Zee Ltd. will pay in cash for fractional shares equivalent at agreed value of shares in

Gulf Ltd. i.e. Rs. 650 for fi ve shares of Rs. 500 paid.

The whole of the Share capital consists of shareholdings in exact multiple of fi ve except the following

holding.

Bharati 116

Sonu 76

Hitesh 72

Jagat 28

Other individuals 8 (eight members holding one share each)

300

Prepare a statement showing the purchase consideration receivable by above shareholders in shares and

cash.

Solution :

WN # 1 : Statement of consideration paid for fraction shares

Particulars Bharti Sonu Hitesh Jagat Others Total

a. Holding of shares 116 76 72 28 8 300

b. Non-exchangeable 1 1 2 3 8 15

shares (Payable in Cash)

c. Exchangeable Shares 115 75 70 25 — 285

[(a) - (b)]

d. Above shares

i. in Equity shares (2:5) 46 30 28 10 — 14

ii. in Preference shares (1:5) 23 15 14 5 — 57

Advanced Financial Accounting & Reporting

WN # 2 : Number of shares to be issued

a. Exchangeable shares :

= Total shares – Non Exchangeable shares

= 80,000 – 15 = 79,985

b. Equity shares to be issued :

= 79,985

x 2 = 31,994 Shares (i.e. 2 shares for every 5 shares)

c. Preference shares to be issued

= 79,985

x 1 = 15,997 Shares (i.e. 1 shares for every 5 shares)

WN # 3 : Cash to be paid

Particulars Rs.

a. 79,985 shares @ Rs. 50 each 39,99,250

b. Consideration for non-exchangeable [15×100]× 650

500

(i.e. Rs. 650 for fi ve 1,950

shares of Rs. 500 paid)

c. Total 40,01,200

Statement of Purchase Consideration :

Particulars Rs.

a. In Shares :

i. 31,994 Equity shares @ Rs. 150 each 47,99,100

ii. 15,997 Preference shares @ Rs. 100 each 15,99,700 63,98,800

b. In Cash (WN # 3) 40,01,200

c. Total (a+b) 1,04,00,000

Illustration - 3

The summarized Balance Sheets of P Ltd. and R Ltd. for the year ended 31.3.2009 are as under :

P Ltd. R Ltd. P Ltd. R Ltd.

Rs. Rs. Rs. Rs.

Equity Share capital (in shares of 24,00,000 12,00,000 Fixed 55,00,000 27,00,000

Rs. 100 each) Assets

8% Preference Share capital (in 8,00,000 — Current

share of Rs. 100 each) Assets 25,00,000 23,00,000

10% Preference Share capital (in — 4,00,000

shares of Rs. 100 each)

Reserves 30,00,000 24,00,000

Current liabilities 18,00,000 10,00,000

80,00,000 50,00,000 80,00,000 50,00,000

Preparation of Company Accounts under Various Circumstances

1. The following information is provided :

P Ltd. R Ltd.

Rs. Rs.

a) Profi t before tax 10,64,000 4,80,000

b) Taxation 4,00,000 2,00,000

c) Preference dividend 64,000 40,000

d) Equity dividend 2,88,000 1,92,000

2. The Equity shares of both the companies are quoted in the market. Both the companies are carrying

on similar manufacturing operations.

3. P. Ltd. proposes to absorb R Ltd. as on 31.3.2009. The terms of absorption are as under :

a. Preference shareholders of R Ltd. will receive 8% preference shares of P. Ltd. sufficient to

increase the income of preference shareholders of R Ltd. by 10%

b. The equity shareholders of R Ltd. will receive equity shares of P Ltd. on the following basis :

i. The equity shares of R Ltd. will be valued by applying to the earnings per share of R

Ltd. 75% of price earnings ratio of P Ltd. based on the results of 2008-2009 of both the

companies.

ii. The market price of equity shares of P Ltd. is Rs. 400 per share.

iii. The number of shares to be issued to the equity shareholders of R Ltd. will be based on the

above market value.

iv. In addition to equity shares, 8% preference share of P Ltd. will be issued to the equity

shareholders of R Ltd. to make up for the loss in income arising from the above exchange

of shares based on the dividends for the year 2008-2009.

4. The assets and liabilities of R Ltd. as on 31.3.2009 are revalued by professional valuer as under :

Increased by Decreased by

Rs. Rs.

Fixed assets 1,60,000 —

Current assets — 2,00,000

Current liabilities 40,000

5. For the next two years, no increase in the rate of equity dividend is expected.

You are required to :

i) Calculate purchase consideration.

ii) Give the Balance Sheet as on 31.3.2009 after absorption.

Note : Journal entires are not required.

Advanced Financial Accounting & Reporting

Solution :

I. Purchase Consideration

A. Preference Shareholders

8% preference shares of P Ltd. suffi cient to increase income by 10%.

Particulars Rs.

Current income from Preference shares of R Ltd. 40,000

(Rs. 4,00,000 × 10%)

Add : 10% increase 4,000

Income from Preference Shares of P Ltd. 44,000

Value of 8% Preference Shares of R Ltd. to be issued [44,000×100/8] 5,50,000

B. Equity Shareholders

i. Consideration by way of Equity shares

Valuation of shares of P Ltd.

(12,000 shares × Rs. 240 [WN # 3]

Rs. 28,80,000

Share Capital Share Premium

[7,200 shares* ×Rs. 100] [7,200 shares* × Rs. 300]

Rs. 7,20,000 Rs. 21,60,000

* No. of shares to be issued = Rs. 28,80,000 ÷ Rs. 400

= 7,200 Shares

ii. Consideration by way of Preference Shares

Particulars Rs.

i. Current equity dividend from R Ltd. 1,92,000

ii. Expected Equity dividend from P Ltd. 86,400

iii. Loss in income 1,05,600

iv. Value of 8% Preference Shares to be issued (1,05,600 ÷ 8%) 13,20,000

C. Total Purchase Consideration

[5,50,000 + 28,80,000 + 13,20,000] Rs. 47,50,000

WN # 1 : Computation of EPS

Rs.

Particulars P Ltd. R Ltd

Profi t before tax (PBT) 10,64,000 4,80,000

Less : Tax (given) (4,00,000) (2,00,000)

Profi t after tax (PAT) 6,64,000 2,80,000

Less : Preference dividend (64,000) (40,000)

Profi t available to equity shareholders 6,00,000 2,40,000

Earnings per share (Profi t for Equity Shareholders ÷ No of Shares) 25 20

Preparation of Company Accounts under Various Circumstances

WN # 2 : P/E ratio of R Ltd.

P/E ratio =

Market Price

EPS

400

= Rs. 16

75% of P/E ratio = (16×0.75) = Rs. 12

WN # 3 : Value per share of P Ltd.

= EPS × P/E ratio

= Rs. 20 × Rs. 12

= Rs. 240

WN # 4 : Adjustment with Reserves

Total Purchase Consideration paid to R Ltd. 47,50,000

Less : Share Capital of R Ltd. 16,00,000

(Equity + Preference)

To be adjusted with Reserves 31,50,000

... Reserves = 30,00,000 + 24,00,000 – 31,50,000 = 22,50,000

P Ltd.

Balance Sheet as at on 31.03.2009 (after absorption)

Liabilities Amount

Rs.

Amount

Rs.

Assets Amount

Rs.

Amount

Rs.

Equity Share Capital 31,20,000 Fixed Assets 55,00,000

(@ Rs. 100 each) (+) R Ltd.

(24,000 + 7,200 (27,00,000 + 1,60,000) 28,60,000 83,60,000

Eq. Shares) Current Assets 25,00,000

8% Preference Shares (+)R Ltd.

of Rs. 100 each 26,70,000 (23,00,000 – 2,00,000) 21,00,000 46,00,000

(8,000+5,500+13,200)

= 26,700 shares)

Reserves (WN # 4) 22,50,000

Securities Premium 21,60,000

Current Liabilities 27,60,000

(18,00,000 + 10,00,000

– 40,000)

1,29,60,000 1,29,60,000

Advanced Financial Accounting & Reporting

II Basics of Amalgamation and Absorption

Illustration - 4

A Ltd. and B Ltd. amalgamated on and from 1st April 2009. A new Company C Ltd. was formed to take

over the businesses of the existing companies.

Balance Sheet as on 31.02.2003

Rs. in ’000

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Equity Shares of R. 100 each 60,000 70,000 Sundry Fixed Assets 85,000 75,000

General reserve 15,000 20,000 Investments 10,500 5,500

Profi t and Loss A/c 10,000 5,000 Stock 12,500 27,500

Investment allowance Debtors 18,000 40,000

Reserve 5,000 1,000 Cash and Bank 4,500 4,000

Export profi t reserve 500 1,000

12% Debentures 30,000 40,000

Sundry creditors 10,000 15,000

1,30,500 1,52,000 1,30,500 1,52,000

C Ltd. issued requisite number of equity shares to discharge the claims of the equity shareholders of the

transferor companies; The total shares issued as consideration is to be aggregate of paid up capital of A

Ltd. and B Ltd.

Compute the Purchase Consideration and mode of discharge thereof and draft the Balance Sheet of C Ltd.

after amalgamation on the following assumptions.

a. Amalgamation is the nature of MERGER

b. Amalgamation is the nature of PURCHASE

Solution :

i. Amalgamation in the nature of MERGER

♦ Nature of Amalgamation → MERGER

♦ Method of Accounting → POOLING OF INTEREST METHOD

ii. Computation of Purchase Consideration

Preparation of Company Accounts under Various Circumstances

Rs. in ’000)

Particulars A Ltd. B Ltd.

A. Assets

i. Sundry Fixed assets 85,000 75,000

ii. Investments 10,500 5,500

iii. Stock 12,500 27,500

iv. Debtors 18,000 40,000

v. Cash and Bank 4,500 4,000

1,30,500 1,52,000

B. Liabilities

i. 12% Debentures 30,000 40,000

ii. Sundry creditors 10,000 15,000

(40,000) (55,000)

C. NET ASSETS taken over [A-B] 90,500 97,000

Journal Entries in the Books of X Ltd. (in the case of Amalgamation in the nature of Merger)

Purchase consideration for amalgamation in the nature of merger.

Total consideration payable = Aggregate of paid-up capital of A Ltd. and B Ltd.

= Rs. 60,000 + Rs. 70,000

= Rs. 1,30,000

Total net assets taken over = Rs. 90,050 + Rs. 97,000

= Rs. 1,87,500

The total consideration payable to A Ltd. and B Ltd. is apportioned based on the net assets of the

companies.

A Ltd. : Rs. 1,30,000 x

90,500

1,87,500

= Rs. 62,750

B Ltd. : Rs. 1,30,000 x

97,000

1,87,500 = Rs. 67,250

(Rs. in ’000)

Particulars Debit Credit

I. Take over a A Ltd :

a. For Business Purchase

Business Purchase A/c Dr. 62,750

To Liquidator of A Ltd. A/c 62,750

b. For Assets and Liabilities taken over :

i. Purchase consideration paid - 62,750

ii. Less : Paid up Share capital - 60,000

iii. Excess consideration paid - 2,750

Advanced Financial Accounting & Reporting

Particulars Debit Credit

As per AS-14 consideration will be adjusted

against for reserves of A Ltd.

The General reserves of A Ltd. to be incorporated =

Rs. 15,000 - Rs. 2,750 = Rs. 12,250

Sundry Fixed Assets A/c Dr. 85,000

Investments A/c Dr. 10,500

Stock A/c Dr. 12,500

Debtors A/c Dr. 18,000

Cash and Bank A/c Dr. 4,500

To General Reserve A/c 12,250

To Profi t and Loss A/c 10,000

To Investment Allowance Reserve A/c 5,000

To Export Profi t Reserve A/c 500

To 12% Debentures A/c 30,000

To Sundry creditors A/c 10,000

To Business Purchase A/c 62,750

c. For Discharge of Purchase Consideration :

Liquidator of A Ltd. A/c Dr. 62,750

To Equity Share capital A/c 62,750

Particulars Debit Credit

II. Take over of B Ltd :

a. For Business Purchase

Business Purchase A/c Dr. 67,250

To Liquidator of B Ltd. A/c 67,250

b. For Assets and Liabilities Taken over :

i. Purchase Consideration Paid : 67,250

ii. Paid up Share capital : 70,000

iii. Short fall to Purchase Consideration : 2,750

The above short payment is to be credited to

“Capital reserve A/c” as per ICAI - Expert

Advisory Committee Opinion on AS-14

Sundry Fixed Assets A/c Dr. 75,000

Investments A/c Dr. 5,500

Stock A/c Dr. 27,500

Debtors A/c Dr. 40,000

Cash and Bank A/c Dr. 4,000

To General Reserve A/c 20,000

To Profi t and Loss A/c 5,000

To Investment Allowance Reserve A/c 1,000

Preparation of Company Accounts under Various Circumstances

Particulars Debit Credit

To Export Profi t Reserve A/c 1,000

To 12% Debentures A/c 40,000

To Sundry Creditors A/c 15,000

To Business Purchase A/c 67,250

To Capital Reserve A/c* 2,750

c. For Discharge purchase consideration :

Liquidator of B Ltd. A/c Dr. 67,250

To Equity Share capital A/c 67,250

Balance Sheet of C Ltd. as on 1.04.2009

Rs. in ’000

Liabilities Amount Assets Amount

Share Capital : Sundry Fixed assets 1,60,000

Equity Shares of (85,000 + 75,000)

Rs. 100/- each (60,000+70,000) 1,30,000 Investments (10,500 + 5,500) 16,000

Reserves and surplus : Current assets :

Capital Reserve 2,750 Stock (12,500 + 27,500) 40,000

General Reserve (12,250 + 20,000) 32,250 Debtors (18,000 + 40,000) 58,000

Profi t and Loss A/c (10,000 + 5,000) 15,000 Cash and Bank (4,500 + 4,000) 8,500

Investment Allowance Reserve

(5,000 + 1,000) 6,000

Export Profi t Reserve (500 + 1,000) 1,500

12% Debentures (Note 2) 70,000

(30,000 + 40,000)

Current liabilities and Provisions :

Sundry creditors (10,000 + 15,000) 25,000

2,82,500 2,82,500

Journal Entries in the Books of C Ltd. (in the case of Amalgamation in the nature of Purchase)

In the case of Amalgamation in the nature of purchase consideration will be paid on the bais of “Net Assets”

and hence the purchase consideration is for A - Rs. 90,500 and for B - Rs. 97,500.

Particulars Debit Credit

Rs. Rs.

I. Take over of A Ltd :

a. For Business Purchase:

Business Purchase A/c Dr. 90,500

To Liquidator of A Ltd. A/c 90,500

b. For Assets and Liabilities taken over :

Sundry Fixed Assets A/c Dr. 85,000

Advanced Financial Accounting & Reporting

Particulars Debit Credit

Investments A/c Dr. 10,500

Stock A/c Dr. 12,500

Debtors A/c Dr. 18,000

Cash and Bank A/c Dr. 4,500

To Business Purchase A/c 90,500

To 12% Debentures A/c 30,000

To Sundry Creditors A/c 10,000

c. For Discharge of Purchase Consideration :

Liquidator of A Ltd. A/c Dr. 90,500

To Equity Share capital A/c 90,500

II. Take over of B Ltd :

a. For Business Purchase

Business Purchase A/c Dr. 97,000

To Liquidator of B Ltd. A/c 97,000

b. For Assets and Liabilities taken over :

Sundry Fixed Assets A/c Dr. 75,000

Investments A/c Dr. 5,500

Stock A/c Dr. 27,500

Debtors A/c Dr. 40,000

Cash and Bank A/c Dr. 4,000

To Business Purchase A/c 97,000

To 12% Debentures A/c 40,000

To Sundry creditors A/c 15,000

c. Discharge of Purchase Consideration :

Liquidator of A Ltd. A/c Dr. 97,000

To Equity Share capital A/c 97,000

Note : Assumed that new debetures were issued in exchange of the old debentures.

Amalgamation Adjustment A/c Dr. 7,500

To Statutory Reserve A/c 7,500

Note : The “Amalgamation Adjustment A/c” should be disclosed as a part of “Miscellaneous Expenditure”

to the extent not written off or other similar category in the Balance Sheet of the TRANSFEREE

Company.

Preparation of Company Accounts under Various Circumstances

Balance Sheet of C Ltd. as on 1.4.09 after Amalgamation

Liabilities Rs. Assets Rs.

Share Capital : Sundry Fixed assets 1,60,000

Equity Shares of (85,000 + 75,000)

Rs. 100/- each (90,500+97,000) 1,87,500 Investments (10,500 + 5,500) 16,000

Reserves and Surplus : Current Asset, and Loan Advances :

Investment Allowance Reserve Current Assets :

(5,000 + 1,000) 6,000 Stock (12,500 + 27,500) 40,000

Export Profi t Reserve (500 + 1,000) 1,500 Debtors (18,000 + 40,000) 58,000

12% Debentures (30,000 + 40,000) 70,000 Cash and Bank (4,500 + 4,000) 8,500

Current liabilities and Provisions : Miscellaneous Expenditure to

Sundry creditors (10,000 + 15,000) 25,000 the extent not written off :

Amalgamation 7,500

Adjustment A/c

2,90,000 2,90,000

Illustration - 5

A Ltd. and B Ltd. were amalgamation on and from 1st April, 2009. A new company X Ltd. was formed to

take over the business of the existing companies. The Balance sheet of A Ltd and B Ltd as on 31st March,

2009 are given below :

(Rs. in lakhs)

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Share capital : Fixed assets :

Equity Shares of Rs. 100/- 850 725 Land and Building 460 275

each Plant and Machinery 325 210

10% Preference Share of Investments 75 50

Rs. 100 each 320 175 Current Asset and

Reserves and surplus : Loans and Advances :

Revaluation Reserve 125 80 Stock 325 269

General reserve 240 160 Sundry Debtors 305 270

Investment Allowance 50 30 Bills receivable 25 —

Reserve Cash and Bank 385 251

Profi t and Loss Account 75 52

Secured Loans :

13% Debentures (Rs.100 each) 50 28

Unsecured Loan :

Public Deposits 25 —

Current liabilities and

Provision :

Sundry creditors 145 75

Bills Payable 20 —

1,900 1,325 1,900 1,325

Advanced Financial Accounting & Reporting

Other Information :

i. 13% debentures of A Ltd and B Ltd are discharged by X Ltd. by issuing such number of its 15% debentures

of Rs. 100 each so as to maintain the same amount to interest.

ii. Preference shareholders of the two companies are issued equivalent number of 15% preference shares

of X Ltd. at a price of Rs. 125 per share (face value Rs. 100)

iii. X Ltd. will issue 4 equity shares for each equity share of A Ltd. and 3 equity shares for each equity

share of B Ltd. The shares are to be issued @ Rs. 35 each, having a face value of Rs. 10 per share.

iv. Investment allowance reserve is to be maintained for two more years.

Prepare the Balance sheet of X Ltd. as on 1st April, 2009 after the amalgamation.

Solution :

Method 1: Amalgamation in the Nature of Merger

WN # 1 : Calculation of Purchase Consideration

Particulars A Ltd. B Ltd.

a. Equity Shares :

i. No. of Shares outstanding 8.50 7.25

ii. Exchange Ratio 4:1 3:1

iii. No. of Shares to be issued 34 21.75

iv. Issue price per share (Rs.) 35 35

v. Purchase Consideration 1190 761.25

• Share capital 340 217.50

• Securities Premium 850 543.75

b. Preference Shares :

i. No. of Shares outstanding 3.2 1.75

ii. Exchange Ratio 1:1 1:1

iii. No. of Shares to be issued 3.2 1.75

iv. Issue price per share (Rs.) 125 125

v. Purchase Consideration 400 218.75

• Share capital 320 175.00

• Securities Premium 80 43.75

c. Total Considertion {a(iv) + b(iv)} 1590 980.00

Rs. 2,570 Lakhs

Preparation of Company Accounts under Various Circumstances

WN # 2 : Computation of Debenture to be issued

Particulars A Ltd. B Ltd.

a. Value of 13% Debentures takes over 50,00,000 28,00,000

b. 13% Interest on above value 6,50,000 3,64,000

c. 15% Debentures to be issued to keep same 43,33,333.33 24,26,666.66

interest amount

6,50,000 x

100

15 3,64,000 x

100

d. Total amont of debenture issued Rs. 67,60,000

Note : Normally fractions of Debentures is settled in Cash.

Balance Sheet of A Ltd. as at 31st March 2009 (after amalgamation)

(Rs. in Lakhs)

Liabilities Amount Assets Amount

Share Capital : Fixed Assets :

Equity Share capital : Land and Building

Authorized, issued and (460 + 275) 735.00

Subscribed Plant and Machinery

Capital (340 Lakhs + 217.50 557.50 (325 + 210) 535.00

Lakhs) of Rs. 10 each - Investment (75+50)

[out of the above all the Current Asset and 125.00

shares were issued for Loans and Advances :

consideration other than cash] Stock (325+269) 594.00

15% Preference Share capital Debtors (305+270) 575.00

or Rs. 100 each (320000+175000) 495.00 Bills Receivable (25+ –) 25.00

[of the above all the shares were Cash and Bank 636.00

issued for consideration other (385+251)

than cash]

Reserves and surplus

Share Premium 1,517.50

[850+543.75+80+43.75]

Profi t and Loss (WN # 3) 37.40

Revaluation Reserve 205.00

Investment allowance reserve 80.00

Secured Loans :

15% Debentures 67.60

(Rs. 100 each) (WN # 2)

Unsecured Liabilities :

Public deposits 25.00

Current liabilities and Provisions :

Sundry Creditors (145+75) 220.00

Bills Payable 20.00

3,225.00 3,225.00

Advanced Financial Accounting & Reporting

WN # 3 : Calculation of reserves to be incorporated in Balance Sheet.

Particulars A Ltd. B Ltd.

a. Aggregated Purchase Consideration 2,570

b. Aggregate paid-up capial

i. Equity Share capital 1,575

ii. Preference Share capital 495 2,070

c. Excess 500

d. The above excess to be adjusted against :

i. General reserves 400

ii. P and L Account 100 500

e. Balance of Reserves available

i. Profi t and Loss A/c 27

ii. Investment allowance reserve 80

iii. Revaluation reserve 205 312

f. Settlement to debenture holders

i. Debenure capital of transferee companies 78.00

ii. Less : Amount of A Ltd.’s debenture issued (67.60)

iii. Profi t to be credited to Profi t and Loss A/c 10.40

g. Balance of reserves to be incorporated

i. P and L Account 37.40

ii. Investment allowance reserve 80.00

iii. Revaluation reserve 205.00

Method 2 : Amalgamation in Nature of Purchase

Balance Sheet of A Ltd. as on 31.03.09 (after amalgamation)

Liabilities Rs. in Assets Rs. in

Lakhs Lakhs

Share capital : Fixed assets : (WN1)

Equity Share capital of Rs. 100 each (of Land and Building 735.00

the above all he shares were issued for Plant and Machinery 535.00

consideration other than cash) 557.50 Investments 125.00

15% Preference Share capital of Rs. 100 Current assets and

each (of the above all the share were issued Loans and Advances

for consideration other than for cash) 495.00 Stock 594.00

Reserves and surplus : Debtors 575.00

Securities Premium (WN#1) 1517.50 Bills Receivable 25.00

Capital reserve (312+10.40) 322.40 Cash and Bank 636.00

Investment allowance 80.00 Misc. Exp. to be

Secured Loans extent not written off

15% Debentures of Rs. 100 each 67.60 Amalgamation

Unsecured Liabilities Adjustment amount 80.00

Public deposits 25.00

Current liabilities and Provisions :

Creditors 220.00

Bills Payable 20.00

3,305.00 3,305.00

Preparation of Company Accounts under Various Circumstances

Illustration - 6

A Limited and B Limited were amalgamated on and from 1st April, 2009. A new company D Limited was

formed to takeover the business of the existing companies. The Balance Sheet of A Limited and B Limited

and as on 31st March, 2009 are given below :

(Rs. in lakhs)

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Share capital : Fixed assets 1,200 1,000

Equity Shares of Rs. 1,000 800 Current assets,

100 each Loans and Advances 880 565

15% Preference Share 400 300

Capital of Rs. 100 each

Reserve and Surplus :

Revaluation Reserve 100 80

General Reserve 200 150

P & L Account 80 60

Secured Loan :

12% Debentures of

Rs. 100 each 96 80

Current Liabilities

and Provisions 204 95

2,080 1,565 2,080 1,565

Other Information :

1. 12% Debenture holders of A Ltd. and B Ltd. are discharged by D Limited by issuing adequate number of

16% Debentures of Rs. 100 each to ensure that they continue to receive the same amount of interest.

2. Preference shareholders of A Ltd. and B Ltd. have received same number of 15% Preference share of

Rs. 100 each of D Limited.

3. D Ltd. has issued 1.5 equity shares for each equity share of A Ltd. and 1 equity share each equity share

of B Ltd. The face value of shares issued by D Ltd. is Rs. 100 each.

Required :

Prepare the Balance sheet of D Ltd. as on 1st April, 2009 after the amalgamation has been carried out using

pooling of interest method.

Advanced Financial Accounting & Reporting

Solution :

WN # 1 : Calculation of purchase consideration :

Purchase consideration A Ltd. B Ltd.

i. No. of equity shares 10,00,000 8,00,000

Exchange Ratio 1:1.5 1:1

No. of equity shares to be issued 15,00,000 8,00,000

Equity Shares capital Rs. 15,000 Lakhs Rs. 800 Lakhs

ii. No. of preference shares 4,00,000 3,00,000

Exchange Ratio 1:1 1:1

No. of preference share to be issued 4,00,000 3,00,000

Preference Share Capital Rs. 400 Lakhs Rs. 300 Lakhs

Journal Entries in the books of D Ltd.

• Nature of Amalgamation - Merger

• Method of Accounting - Pooling of Interest

Particulars A Ltd. B Ltd.

Debit Credit Debit Credit

Rs. Rs. Rs. Rs.

a. For Business Purchase

Business Purchase A/c Dr. 1,900 1,100

To Liquidator of Selling Co. A/c 1,900 1,100

b. Incorporation of Assets and Liabilities

taken over :

Fixed Assets A/c Dr. 1,200 1,000

Current Assets A/c Dr. 880 565

Profi t and Loss A/c Dr. 120

To Current Liabilities A/c 204 95

To 12% Debentures A/c 96 80

To Revaluation Reserve A/c — 80

To General Reserve A/c WN # 2 — 150

To Pofi t and Loss A/c — 60

To Business Purchase A/c 1,900 1,100

c. Discharge of Purchase Consideration

Liquidator of Selling Co. A/c Dr. 1,900 1,100

To Equity Share Capital A/c 1,500 800

To Preference Share Capital A/c 400 300

d. Discharge of Debentures :

12% Debentures A/c Dr. 96 80

To 16% Debentures A/c 72 60

To Profi t & Loss A/c (WN # 3) 74 20

Preparation of Company Accounts under Various Circumstances

WN # 2 : Reserves to be incorporated on the Amalgamation :

(in Lakhs)

Particulars A Ltd. B Ltd.

Rs. Rs.

(i) Purchase consideration payable 1,900 1,100

(ii) Total paid up Share capital

(a) Equity Share capital 1,000

(b) Preference Share capital 400 1,400 1,100

(iii) Excess purchase consideration 500 Nil

(iv) Adjustment against reserves of transferee company :

(a) General reserve (200)

(b) Profi t & Loss A/c Balance (80)

(d) Profi t & Loss A/c debit balance (120)

(v) Reserves of transferor company to be incorporated

(a) Revaluation Reserve — 80

(b) General Reserve — 150

WN # 3 : Settlement of Debentures :

(in Lakhs)

Particulars A Ltd. B Ltd.

Rs. Rs.

(i) Value of 12% Debentures 96 80

(ii) Interest Payable 11.52 9.6

(iii) 16% Debentures to be issued 72 60

11.52

16 x 100 9.6

16 x 100

(iv) Amount to be credited to Profi t & Loss A/c (i)-(iii) 24 20

Balance Sheet D Ltd. as on 31.03.2009

Liabilities Amount Assets Amount

Share capital : Fixed assets 2,200

Equity Share capital 2,300 (1,200 + 1,000)

Preference Share capital 700 Current assets, Loans and 1,445

Reserves and Surplus : Advances (880+665)

General Reserve 150

Profi t & Loss A/c (116)

[(220)+60+20+24)

Revaluation Reserve 180

16% Debentures 132

Current Liabilities 299

3,645 3,645

Advanced Financial Accounting & Reporting

Illustration - - 7

Given below Balance Sheets of M Ltd. and N Ltd. as on 31st March, 2009.

Balance Sheets

(in 000’s)

M Ltd. NLtd.

Rs. Rs.

Share Capital 1,00,000 1,20,000

General Reserve 50,000 40,000

Export Profi t Reserve 20,000 30,000

(Statutory Reserve as per Income Tax Law)

14% Debentures 50,000 50,000

Sundry Creditors 20,000 10,000

Provisions 20,000 20,000

Proposed Dividend 25,000 30,000

2,85,000 3,00,000

Assets M Ltd. N Ltd.

Rs. Rs.

Fixed Assets 1,65,000 1,80,000

Investments 50,000 —

Stock 50,000 50,000

Debtors 15,000 65,000

Cash and Bank Balances 5,000 5,000

2,85,000 3,00,000

Shares of M Ltd. and N Ltd. are Rs. 100/- each. M Ltd. held 15% shares of N Ltd. Z Ltd. has been formed

for the purpose of amalgamation which took over M Ltd. and N Ltd. and in exchange, shares of Z Ltd.

were issued. Expenses for amalgamation were Rs. 100 thousand. You are required to prepare post amalgamation

balance sheet of Z Ltd. Show also the purchase consideration and exchange ratio. Calculate the

number of shares to be issued to the shareholders of the amalgamated company without increasing the

issued capital.

Preparation of Company Accounts under Various Circumstances

Solution :

(I) Calculation of Purchase Consideration

(Rs. in ’000’s)

Particulars M Ltd. N Ltd.

Rs. Rs.

a. Sundry Assets 2,85,000 3,00,000

b. Outside Liabilities :

i. Debentures 50,000 50,000

ii. Creditors 20,000 10,000

iii. Provisions 20,000 20,000

iv. Proposed Dividend 25,000 30,000

1,15,000 1,10,000

c. Net Assets (a-b) 1,70,000 1,90,000

d. Consideration restricted to Rs. 2,20,000 in the ratio 17:19 as 1,03,900 1,16,100

the problem required not to increase the Share capital.

(II) In the books of Z Ltd.

Section A : Amalgamation of M Ltd and N Ltd.

• Nature of Amalgamation - Merger

• Method of Amalgamation - Pooling of Interest

(Rs. in ’000)

Particulars M Ltd. N Ltd.

Debit Credit Debit Credit

1. For Business Purchase :

Business Purchase A/c Dr. 1,03,900 1,16,100

To Liquidator of M Ltd. 1,03,900 1,16,100

2. For Assets and Liabilities

Taken over:

a. Purchase consideration 1,03,900 1,16,100

b. Less: Paid up capital (1,00,000) (1,20,000)

c. Excess consideration paid (Short fall) 3,900 (3,900)

d. Above excess to be adjusted

against General Reserve of M Ltd.

e. Balance reserve to be taken from

M Ltd. to incorporate in Z Ltd.

Advanced Financial Accounting & Reporting

Particulars A Ltd. B Ltd.

Debit Credit Debit Credit

• General Reserve (50,000 - 3900) 46,100 43,900

• Export Profi t Reserve 20,000 30,000

Fixed Assets A/c Dr. 1,65,000 1,80,000

Investments A/c Dr. 50,000 —

Stock A/c Dr. 50,000 50,000

Debtors A/c Dr. 15,000 65,000

Cash and Bank Balances A/c Dr. 5,000 5,000

To Debenture holders A/c 50,000 50,000

To Creditors A/c 20,000 10,000

To Provisions A/c 20,000 20,000

To Proposed Dividend A/c 25,000 30,000

To General Reserve A/c 46,100 43,900

(WN # 1 and 2)

To Export Profi t Reserve A/c 20,000 30,000

To Business Purchase A/c 1,03,900 1,16,100

3. For Discharge of Purchase Consideration:

Liquidator of M Ltd. A/c Dr. 1,03,900 1,16,100

To Equity Share Capital A/c 1,03,900 1,16,100

(B) : Other transactions

(Rs. in ’000)

Particulars Debit Credit

1. Issue of debentures to debenture holders of M Ltd.

and N Ltd.

Debenture holders of M Ltd. Dr. 50,000

Debenture holders of N Ltd. Dr. 50,000

To 14% Debentures A/c 1,00,000

2. Expenses of amalgamation

Profi t and Loss A/c Dr. 1,000

To Bank A/c 1,000

Balance Sheet of Z Ltd. as at 31st March 2009

Liabilities Amount Assets Amount

(Rs. ’000) (Rs. ’000)

Share capital : Fixed Assets (1,65,000 + 1,80,000) 3,45,000

Authorized, Issued and Subscribed Investments (50,000 + Nil) 50,000

(of the above, all shares are issued Curent assets and Loans

for consideration other than cash to and Advances

Preparation of Company Accounts under Various Circumstances

Liabilities Amount Assets Amount

(Rs. ’000) (Rs. ’000)

M Ltd. and N Ltd. pursuant to 2,20,000 Stock (50,000 + 50,000) 1,00,000

Amalgamation approved by Cash at Bank 10,000

Honorable court) Less : Preliminary (1,000)

Reserves and surplus : Expenses 9,000

General Reserve

(43,900 + 46,100) 90,000 Debtors (15,000 + 65,000) 80,000

Less: Profi t and Loss a/c (1,000)

(Debit Balance) 89,000

Export Profi t Reserve (20,000 + 30,000) 50,000

Secured Loan

14% Debentures 1,00,000

Current liabilities to the Provisions

Creditors 30,000

Provisions 40,000

Proposed Dividend 55,000

5,84,000 5,84,000

Illustration - 8

D Ltd. and F Ltd. were amalgamated on and from 1st April, 2009. A new Company P Ltd. was formed to

takeover the business of the existing companies. The Balance Sheets of D Ltd. and F Ltd. as on 31st March,

2009 are given below :

Liabilities D Ltd. F Ltd. Assets D Ltd. F Ltd.

Share capital Fixed assets :

Equity Shar of Rs. 10 each 85,000 72,500 Land and Building 79,500 43,300

9% Preference 32,000 17,500 Investments 7,500 5,000

Shares of Rs. 100 each Current assets :

Reserve and Surplus : Stock 32,500 26,900

Revaluation Reserve 12,500 8,000 Debtors 30,500 27,000

General Reserve 24,000 16,000 Bills Receivable 2,500 —

Export Profi t Reserve 7,500 3,000 Cash and Bank 30,000 25,100

Secured Loan :

13% Debentures of 5,000 2,800

Rs. 100 each

Current liabilities

and Provisions

Bills Payable 2,000 –

Sundry creditors 14,500 7,500

1,82,500 1,27,300 1,82,500 1,27,300

Advanced Financial Accounting & Reporting

Other informations :

1. 13% Debenture holders of D Ltd. and F Ltd. are discharged by P Ltd. by issuing such number of its

15% Debentures of Rs. 100 each so as to maintain the same amount of interest.

2. Preference Shareholders of the two companies are issued equivalent number of 12% Preference Shares

of P Ltd. at a price of Rs. 12.50 per share (face value Rs.10).

3. P Ltd. will issue 2 equity shares for each equity share of D Ltd. and 2 equity shares for each equity

share of F Ltd. at Rs. 15 per share having a face value Rs. 10.

4. Export Profi t Reserve is to be maintained for two more years.

Prepare Journal Entries and prepare the Balance Sheet of P Ltd. after the amalgamation is carried out using

under Merger Method.

Solution :

WN # 1 : Calculation of Purchase Consideration

Particulars D Ltd. F Ltd.

Rs. Rs.

a. In Preference shares :

i. No. of Preference shares outstanding 3,200 1,750

ii. Exchange ratio 1:1 1:1

iii. No. of shares to be issued 3,200 1,750

iv. Issue Price Rs. 12.5 Rs. 12.5

v. Value of Shares to be issued Rs. 40,000 Rs. 21,875

b. In Equity shares :

i. No. of Preference shares outstanding 8,500 7,250

ii. Exchange ratio 2:1 2:1

iii. No. of shares to be issued 17,000 14,500

iv. Issue Price Rs. 15 Rs. 15

v. Value of Shares to be issued Rs. 2,55,000 Rs. 2,17,500

c. Total Purchase Consideration (a+b) Rs. 2,95,000 Rs. 2,39,375

In the books of P Ltd.

1. Amalgamation of D Ltd.

• Nature of Amalgamation - Merger

• Method of Accounting - Pooling of Interest

Preparation of Company Accounts under Various Circumstances

Particulars Debit Credit

a. For Busines Purchase

Business Purchase A/c Dr. 2,95,000

To Liquidator of D Ltd. 2,95,000

b. Incorporated of assets and liabilities

Consideration 2,95,000

Less: Paid up share capital (1,17,000)

Amount to be adjusted

against reserves 1,78,000

Less : General reserve (24,000)

Profi t and Loss balance (Dr.) 1,54,000

Land and Building A/c Dr. 79,500

Investments A/c Dr. 7,500

Stock A/c Dr. 32,500

Debtors A/c Dr. 30,500

Bill Receivable A/c Dr. 2,500

Profi t and Loss A/c Dr. 1,54,000

Cash and bank A/c Dr. 30,000

To Revaluation Reserve A/c 12,500

To Bills Payable A/c 2,000

To Sundry Creditors A/c 14,500

To Debenture A/c 5,000

To Business Purchase A/c 2,95,000

To Export Profi t Reserve A/c 7,500

c. For Discharge of Consideration

Liquidator of D Ltd. A/c Dr. 2,95,000

To Equity Share Capital A/c 1,70,000

To Preference Share Capital A/c 32,000

To Securities Premium A/c 93,000

*Note: Securities Premium includes both Equity & Preference shares Premium

II. Amalgamation of F Ltd.

• Nature of Amalgamation - Merger

• Method of Accounting - Pooling of Interest

Advanced Financial Accounting & Reporting

Particulars Debit Credit

Rs. Rs.

a. For Business Purchase:

Business Purchase A/c Dr. 2,39,375

To Liquidator of F Ltd. 2,39,375

b. For of Assets and Liabilities taken over:

Amount of Reserves to be incorporated.

Consideration 2,39,375

Less: Paid up Share capital (90,000)

Amount to be adjusted

against Reserves 1,49,375

Less : General Reserve (16,000)

Profi t and Loss Balance (Dr.) 1,33,375

Land and Building A/c Dr. 3,300

Investments A/c Dr. 5,000

Stock A/c Dr. 26,900

Debtors A/c Dr. 27,000

Cash and Bank A/c Dr. 25,100

Profi t and Loss A/c Dr. 1,33,375

To Revaluation Reserve A/c 80,000

To Export Profi t Reserve A/c 3,000

To 13% Debentures A/c 2,800

To Sundry Creditors A/c 7,500

To Business Purchase A/c 2,39,375

c. For Discharge of consideration

Liquidator of F Ltd. A/c Dr. 2,39,375

To Equity Share Capital A/c 1,45,000

To Preference Share Capital A/c 17,500

To Securities Premium A/c 76,875

Preparation of Company Accounts under Various Circumstances

III. Others :

Particulars Debit Credit

For Discharge of Debenture Liability

13% Debenture A/c Dr. 7,800

To 15% Debentures A/c 6,760

To Profi t and Loss A/c 1,040

WN # 2 : Discharge of Debentures :

Rs.

a. 13% Debenture Outstanding = 5,000 + 2,800 = 7,800

b. Interest Payable = 650 + 364 = 1,014

c. 15% Debenture to be issued = 4,333 + 2,427 = 6,760

650

15% + 364

15%

d. Amount to be credited to

profi t and loss account [(a)-(c)] = 667 + 373 1,040

Note :

In “Amalgamation in the nature of Merger” all the assets and liabilities are to be taken at Book values. Change

in the rate of interest will amount to violation of the above condition i.e. it is in the nature of purchase. But

as the problem specifi cally require to solve “in the nature of merger”, the problem is solved accordingly.

Balance sheet of P Ltd.as on 01.04.09

Liabilities Amount Assets Amount

Share capital: Fixed Assets:

Equity shares of Rs. 10 each 3,15,000 Land and Building 1,22,800

9% Preference Shares of Rs. 10 each 49,500 Investments 12,500

Reserve and Surplus : Current Assets :

Securities Premium : Stock 59,400

(85,000 + 72,500 + 8,000 + 4,375) 1,69,875 Debtors 57,500

Revaluation Reserve 20,500 Cash and Bank 55,100

Export Profi t Reserve 10,500 Bills Receivable 2,500

Secured Loans : Profi t / Loss 2,86,335

15% Debentures of Rs. 100 each 6,760 (1,54,000 + 1,33,375 -

Current liabilities and Provisions : 1,040)

Bills Payable 2,000

Sundry creditors 22,000

5,96,135 5,96,135

Advanced Financial Accounting & Reporting

Illustration - 9

Given below Balance Sheets of Ram Ltd and Rahim Ltd. as on 31.3.2009. Rahim Ltd. was merged with Ram

Ltd. with effect from 01.04.2009.

Balance Sheets as on 31.3.2009

(Rs.)

Liabilities Ram Rahim Assets Ram Rahim

Ltd. Ltd. Ltd. Ltd.

Share Capital : Sundry Fixed Assets 9,50,000 4,00,000

Equity Shares of Investments (Non- 2,00,000 50,000

Rs. 10 each 7,00,000 2,50,000 trade)

General Reserve 3,50,000 1,20,000 Stock 1,20,000 50,000

Profi t and Loss A/c 2,10,000 65,000 Debtors 75,000 80,000

Export Profi t Reserve 70,000 40,000 Advance Tax 80,000 20,000

12% Debentures 1,00,000 1,00,000 Cash and Bank 2,75,000 1,30,000

Sundry Creditors 40,000 45,000 balances

Provision for Taxation 1,00,000 60,000 Preliminary Expenses 10,000 —

Proposed Dividend 1,40,000 50,000

17,10,000 7,30,000 17,10,000 7,30,000

Ram Ltd. would issue 12% Debentures to discharge the claims of the debenture holders of Rahim Ltd. at

par. Non-trade investments of Ram Ltd. fetched @ 25% while those of Rahim Ltd. fetched @ 18%. Profi t

(pre-tax) by Ram Ltd and Rahim Ltd. during 2006-07, 2007-08 and 2008-09 and were as follows :

Year Ram Ltd. Rahim Ltd.

Rs. Rs.

2006-07 5,00,000 1,50,000

2007-08 6,50,000 2,10,000

2008-09 5,75,000 1,80,000

Goodwill may be calculated on the basis of capitalisation method taking 20% as the pre tax normal rate of

return. Purchase consideration is discharged by Ram Ltd. on the basis of intrinsic value per share. Both

companies decided to cancel the proposed dividend.

Required Balance Sheet of Ram Ltd. after merger.

Solution :

WN # 1: Purchase Consideration:

(i) Shares outstanding in Rahim Ltd. 25,000

(ii) Intrinsic Value per Share of Rahim Ltd. [WN # 2] Rs. 36.20

(iii) Value of Shares (a×b) Rs. 9,05,000

Preparation of Company Accounts under Various Circumstances

(iv) Intrinsic value per share of Ram Ltd. [WN # 2] Rs. 40.40

(v) No. of shares to be issued by Ram Ltd.

Rs. 905000 / Rs. 40.40 = 22400.99

Shares Cash for fractions

22400 0.99 × 40.40 = 40

(iv) Purchase consideration

(a) 22400 shares @ 40.40

Capital [Rs.10 / Share] 2,24,000

Premium [Rs. 30.40 / Share] 6,80,960 = 9,04,960

(b) Cash for fractional shares = 40

WH # 2 : Intrinsic Value per share :

(Rs.)

Ram Ltd. Rahim Ltd.

(i) Assets

(a) Goodwill 13,65,000 3,80,000

(b) Sundry Fixed assets 9,50,000 4,00,000

(d) Stock 1,20,000 50,000

(e) Debtors 75,000 80,000

(f) Advance Tax 80,000 20,000

(g) Cash and Bank Balance 2,75,000 30,65,000 1,30,000 11,10,000

(ii) Liabilities

(a) 12% Debentures 1,00,000 1,00,000

(b) Sundry creditors 40,000 45,000

(iii) Net Assets (i-ii) 28,25,000 9,05,000

(iv) No. of Outstanding Shares 70,000 25,000

(v) Intrinsic Value per share (iii)/(iv) 40.40 36.20

Advanced Financial Accounting & Reporting

W # 3 : Valuation of Goodwill

A. Capital Employed

Ram Ltd. Rahim Ltd.

(i) Assets :

(a) Sundry Fixed assets 9,50,000 4,00,000

(b) Investment (Non-trade) - -

(d) Debtors 75,000 80,000

(e) Advance tax 80,000 20,000

(f) Cash and Bank balance 2,75,000 15,00,000 1.30.000 6,80,000

(ii) Liabilities:

(a) 12% Debentures 1,00,000 1,00,000

(b) Sundry creditors 40,000 45,000

(iii) Capital Employed : (i) - (ii) 12,60,000 4,75,000

B. Average Pre-tax Profi t :

Particulars Ram Ltd. Rahim Ltd.

(i) 2006-07 5,00,000 1,50,000

(ii) 2000-08 6,50,000 2,10,000

(iii) 2008-09 5,75,000 1,80,000

(iv) Total (a+b+c) 17,25,000 5,40,000

(v) Simple Average [(iv)/3] 5,75,000 1,80,000

(vi) Less: Non-trading income (50,000) (9,000)

(vii) Average pre-tax profi t 5,25,000 1,71,000

C. Computation of Goodwill :

Particulars Ram Ltd. Rahim Ltd.

Rs. Rs.

a. Capitalised value of average profi ts

5,25,000

0.20 ;

1,71,000

0.20 26,25,000 8,55,000

b. Capital Employed 12,60,000 4,75,000

c. Goodwill (a-b) 13,65,000 3,80,000

Preparation of Company Accounts under Various Circumstances

Journal Entries - Books of Ram Ltd.

• Nature of Amalgamation – PURCHASE

• Method of Accounting – PURCHASE METHOD

Particulars Debit Credit

a. For Business Purchase :

Business Purchase A/c Dr. 9,05,000

To Liquidator of Rahim Ltd. A/c 9,05,000

b. For Assets and Liabilities taken over

Goodwill A/c Dr. 3,80,000

Fixed Assets A/c Dr. 4,00,000

Investments A/c Dr. 50,000

Stock A/c Dr. 50,000

Debtors A/c Dr. 80,000

Advance tax A/c Dr. 20,000

Cash and Bank A/c Dr. 1,30,000

To 12% Debenture holders A/c 1,00,000

To Creditors A/c 45,000

To Provision for Taxation A/c 60,000

To Business Purchase A/c 9,05,000

c. For Discharge of Purchase Consideration:

Liquidator of Rahim Ltd. Dr. 9,05,000

To Equity Share capital A/c 2,24,000

To Securities premium A/c 6,80,000

To Cash A/c 40

d. Contra Entry

Amalgamation Adjustment A/c Dr. 40,000

To Export Profi t Reserve A/c 40,000

Balance Sheet Ram Ltd as at 01.04.09 (after Merger)

Liabilities Rs. Assets Rs.

Share capital : Fixed assets :

Issued, Subscribed Paid up 9,24,000 Goodwill (WN # 3C) 3,80,000

Share capital Sundry Fixed assets 13,50,000

92,400 Equity Shares of Rs. 10 each. (9,50,000 + 4,00,000)

(Of which 22,400 shares were Investment 2,50,000

issued for consideration other Current assets, Loans

than cash) and Advances :

Reserves and surplus Stock (1,20,000 + 50,000) 1,70,000

Share Premium 6,80,960 Debtors (75,000 + 80,000) 1,55,000

General Reserve 3,50,000 Advance tax (80,000 + 20,000) 1,00,000

Advanced Financial Accounting & Reporting

Liabilities Rs. Assets Rs.

Profi t and Loss A/c 2,10,000 Cash and Bank Balances

Add: Proposed (2,75,000 + 1,30,000 - 40) 4,04,960

Dividend cancelled 1,40,000 3,50,000 Miscellaneous Expenses :

Export Profi t Reserve 1,10,000 Preliminary Expenses 10,000

(70,000 + 40,000) Amalgamation

Secured Loans Adjustment A/c 40,000

12% Debenture 2,00,000

(1,00,000 + 1,00,000)

Current liabilities and

provisions:

Sundry creditors

(40,000 + 45,000) 85,000

Provision for tax

(1,00,000 + 60,000) 1,60,000

28,59,960 28,59,960

Illustration - 10

The following are the Balance sheets of Fat Ltd. and Thin Ltd. for the year ending on 31st March, 2009.

(Figures in Crores)

Fat Ltd. Thin Ltd.

Equity Share capital. @ Rs. 10 each 50 40

Preference Share capital - in 12% preference shares of Rs. 100 each – 60

Reserves and surplus 200 150

250 250

Loan - Secured 100 100

Total 350 350

Fixed assets (at cost less depreciation) 150 150

Current assets less Current liabilities 200 200

Total 350 350

The present worth of Fixed assets of Fat Ltd. is Rs. 200 crores and that of Thin Ltd. is Rs. 429 crores. Goodwill

of Fat Ltd. is Rs. 40 crores and of Thin Ltd. is 75 crores.

Thin Ltd. absorbs Fat Ltd. by issuing equity shares at par in such a way that intrinsic networth is

maintained.

Goodwill account is not to appear in the books. Fixed assets are to appear at old fi gures.

(a) Show the Balance Sheet after absorption.

(b) Draft a statement of valuation of shares on intrinsic value basis and prove the accuracy of your

workings.

Preparation of Company Accounts under Various Circumstances

Solution :

Part-I : Purchase consideration

WN # 1 : Intrinsic Value of Equity Shares

(Rs. in Crores)

Particulars Fat Ltd. Thin Ltd.

a) Assets :

i. Goodwill 40 75

ii. Fixed assets 200 429

iii. Current asset less Current liabilities 200 200

440 704

b) Liabilities

i. Secured Loans (100) (100)

ii. 12% Preference Share capital - (60)

c) Net Assets attributable to Equity shareholders 340 544

d) Number of Shares (in Crores) 5 4

e) Value per share of Rs. 10 each Rs. 68 Rs. 136

WN # 2 : Determination of Exchange Ratio and the number of shares to be issued

Exchange Ratio is based on intrinsic value per share of the companies

Fat Ltd. : Thin Ltd.

i. Intrinsic value Rs. 68 : Rs. 136

ii. Exchange ratio 1 : 2

1 share of Small Ltd. for 2 shares of Fat Ltd.

Therefore, Number of shares to be issued = Number of shares of Thin Ltd. × %

= 5 crores × 50% (i.e. ratio is 1:2 =50%)

= 2.5 crores

Journal Entries in the books of Thin Ltd.

• Nature of Amalgamation - Purchase

• Method of Accounting - Purchase

(Rs. in Crores)

Particulars Debit Credit

Rs. Rs.

1. For Business Purchase

Business Purchase A/c Dr. 25

To Liquidator of Fat Ltd. 25

2. For assets and liabilities taken over :

Fixed Assets A/c Dr. 150

Net Current Assets A/c Dr. 200

To Secured Loans A/c 100

To Capital Reserve A/c 225

To Business Purchase A/c 25

3. For Discahrge of Purchase Consideration :

Liquidator of Fat Ltd. A/c Dr. 25

To Equity Share Capital A/c 25

Advanced Financial Accounting & Reporting

Balance Sheet of Thin Ltd. as at 1st April, 2009

Liabilities Rs. Assets Rs.

Share capital 65 Fixed assets

6.5 crore equity shares of (150 + 150) 300

Rs.10 each

(of the above shares, 2.5 Net Current assets 400

crores equity shares are (200 + 200)

allotted as fully paid up

for consideration other

than cash)

12% Preference Share capital 60

(60 lakhs shares of Rs. 100 each)

Reserves and surplus :

Capital Reserve 225

Other Reserve 150 375

Secured Loans (100+100) 200

700 700

WN 3 : Statement to prove the accuracy of workings.

(Rs. in Crores)

(i) Equity Share capital (after absorption) 65

Add: Reserves Surplus (after absorption) 375

Add: Unrecorded value of goodwill (40+75) 115

Add: Unrecorded incremental value of Fixed assets (50+279) 329

Value of the Business 884

(ii) Number of Equity shares (4 + 2.5) 6.5 Crores

(iii) Intrinsic value of an equity share (884/6.5) Rs. 136

Illustration - 11

Divya Ltd. agreed to take over the Swati Ltd. as a going concern-both companies being engaged in the

same trade.

Divya Ltd. was to pay the debentures and liabilities of Swati Ltd. and take over the assets, the consideration

being the issue by Divya Ltd. of 4,00,000 fully paid shares of Rs. 10 each and the payment of Rs. 3,00,000 in

cash to the Swati Ltd. Divya Ltd. was to pay the liquidation expenses, which amounted to Rs. 1,40,000.

The Balances in the books of the respective companies, as on the date of absorption are given hereunder.

Preparation of Company Accounts under Various Circumstances

100

Assets Liabilities

Divya Swati Divya Swati

Particulars Ltd. Ltd. Ltd. Ltd.

Rs. Rs. Rs. Rs.

Authorised Capital :

Divya Ltd. 20,00,000 shares of

Rs.10 each. 2,00,00,000 75,00,000

Swati Ltd. 7,50,000 shares of

Rs.10 each

Issued Capital – – 1,50,00,000 50,00,000

Unpaid Calls 50,000 10,000 – –

10% Debentures – – 50,00,000 10,00,000

Land and Buildings 1,03,33,000 35,68,200 – –

Goodwill 30,00,000 5,00,000 – –

Sundry Debtors and Creditors 7,24,000 3,98,400 834,200 4,36,200

Bank Balances 16,84,200 – – 2,00,000

Stock 17,92,600 7,85,200 – –

Plant and Machinery 38,76,800 16,43,900 – –

Bills Receivable 3,62,100 – – –

Profi t and Loss

Account balances – – 9,88,500 2,69,500

2,18,22,700 69,05,700 2,18,22,700 69,05,700

Assume that the absorption was duly effected but that the unpaid calls and a book debt of Rs.40,000 due

to Swati Ltd. proved irrecoverable.

Prepare the Realisation Account and Members Account in the books of Swati Ltd. and the Balance Sheet

of Divya Ltd. after the absorption. Your working should form part of the answer.

Solution :

Part I - Calculation of Purchase consideration - Payments Method

Divya Ltd to take over Swati Ltd by :

Rs.

a. Issuing 4,00,000 equity shares of Rs.10 each fully paid : 40,00,000

b. Cash : 3,00,000

c. Total Purchase consideration 43,00,000

101

Advanced Financial Accounting & Reporting

Part II - In the books of transferor company Swati Ltd.

Realisation Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Goodwill 5,00,000 By 10% Debentures 10,00,000

To Land 35,68,200 By Sundry Creditors 4,36,200

To Sundry debtors 3,98,400 By Bank Overdraft 2,00,000

To Stock 7,85,200 By Bad debts 40,000

To Plant and Machinery 16,43,900 By Shareholders A/c Loss 9,19,500

To Cash (Realisation Exp.) 1,40,000 on Realisation (balancing fi gure)

By Divya Ltd.

Purchase consideration 43,00,000

Realisation Expenses 1,40,000

70,35,700 70,35,700

Shareholders Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Unpaid capital 10,000 By Equity Share capital 50,00,000

To Realisation A/c (Loss) 9,19,500 By Profi t and Loss A/c 2,29,500

To Divya Ltd. 43,00,000 (2,69,500 – 40,000)

(purchase consideration)

52,29,500 52,29,500

Note :

a. Realisation loss includes the irrecoverable amount of debtors considered as bad debt in Realisation

amount.

b. For Realisation expenses reimbursed by Divya Ltd.

Particulars Debit Credit

i. Realisation A/c Dr. 1,40,000

To Cash A/c 1,40,000

ii. Divya Ltd A/c Dr. 1,40,000

To Realisation A/c 1,40,000

Part III - In the Books of Divya Ltd :

• Nature of Amalgamation - Purchase

• Method of Accounting - Purchase

Preparation of Company Accounts under Various Circumstances

102

Particulars Debit Credit

Rs. Rs.

a. For Business Purchase :

Business Purchase A/c Dr. 43,00,000

To Liquidator of Swati Ltd. 43,00,000

b. For takeover of Assets and Liabilities :

Goodwill A/c Dr. 5,00,000

Land and Building A/c Dr. 35,68,200

Sundry Debtors A/c (3,98,400 – 40,000) Dr. 3,58,400

Stock A/c Dr. 7,85,200

Plant and Machinery A/c Dr. 16,43,900

To Capital Reserve A/c 9,19,500

To Creditors A/c 4,36,200

To Bank Overdraft A/c 2,00,000

To Business Purchase A/c 43,00,000

To Debentures A/c 10,00,000

c. Discharge of consideration

Liquidator of Swati Ltd. A/c Dr. 43,00,000

To Equity Share capital A/c 40,00,000

To Cash A/c 3,00,000

d. Reimbursement of realisation expenses :

Capital Reserve A/c Dr. 1,40,000

To Cash A/c 1,40,000

[Being Reimbursement of realisation expenses

adjusted against Capital reserve]

Balance Sheet of Divya Ltd. (After Amalgamation)

Liabilities Rs. Assets Rs.

Share capital : Fixed Assets :

Authorised capital 2,00,00,000 Goodwill 35,00,000

20 lakhs shares of Rs. 10 each Land and Building 1,39,01,200

Plant and Machinery 55,20,700

Issued capital 1,90,00,000 Current Assets and Loans

19 lakhs share of Rs. 10 each and Advances :

[of the above, 4 lakh shares Sundry Debtors 10,82,400

were issued to Swati Ltd for Stock 25,77,800

consideration other than Bills Receivable 3,62,100

cash] Bank Balance (16,84,200 - 12,44,200

3,00,000 - 1,40,000)

Less : Unpaid calls (50,000)

1,89,50,000

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Advanced Financial Accounting & Reporting

Liabilities Rs. Assets Rs.

Reserves and Surplus :

Capital Reserve 7,79,500

Profi t & Loss 9,88,500

Secured Loans :

10% Debentures (50+10) 60,00,000

Current Liabilities and

Provision :

Creditors 12,70,400

Bank Overdraft 2,00,000

2,81,88,400 2,81,88,400

Illustration - 12

A Ltd. agreed to take over B Ltd. as on 1st October, 2008. No Balance Sheet of B Ltd. was prepared on that

date.

Balance Sheets of A Ltd. and B Ltd. as at 31st March, 2008 were as follows :

A Ltd. B Ltd. A Ltd. B Ltd.

Rs. Rs. Rs. Rs.

Share capital: 15,00,000 10,00,000 Fixed Assets 12,50,000 8,75,000

In equity shares Current Assets :

of Rs. 10 each Stock 2,37,500 1,87,500

fully paid up Debtors 3,90,000 2,93,750

Reserves and Bank 2,56,000 1,50,000

surplus: Miscellaneous

Reserve 4,15,000 2,56,000 Expenditure

Profi t and Loss 1,87,500 1,50,000 Preliminary

Creditors 93,750 75,000 Expenses 25,000 12,500

21,96,250 14,81,000 21,96,250 14,81,000

Additional information available:

i) For the six months period from 1st April, 2008, A Ltd. made a profi t of Rs. 4,20,000 after writing off

depreciation at 10% per annum on its Fixed assets.

ii) For the same period, B Ltd. made a net profi t of Rs. 2,04,000 after writing off depreciation at 10% p.a.

on its Fixed assets.

iii) Both the companies paid on 1st August, 2008 equity dividends of 15%. Tax at 10% on such payments

was also paid by each of them.

iv) Goodwill of B Ltd. was valued at Rs. 1,20,000, on the date of take-over, stock of B, subject to an abnormal

item of Rs. 7,500 to be fully written off, would be appreciated by 25% (or purpose of take-over).

v) A Ltd. to issue to B’s shareholders fully paid equity share of Rs.10 each, on the basis of the comparative

intrinsic value of the shares on the take-over date.

Preparation of Company Accounts under Various Circumstances

104

Draft the Balance sheet of A Ltd. after absorption of B Ltd.

Solution :

• Nature of Amalgamation - Purchase Method

• Method of Accounting - Purchase Method

Part - 1 Purchase consideration

WN # 1 : Balance sheet of A Ltd. and B Ltd. as on 1st October 2008

[Before absorption]

(Rs.)

A Ltd. Assets A Ltd.

Share capital 15,00,000 10,00,000 Fixed Assets 11,87,500 8,31,250

Reserves and [WN # 1 (a)]

Surplus Current Assets :

Reserves 4,15,000 2,56,000 Stock [WN # 1 (d)] 2,37,500 1,87,500

Profi t and Loss A/c 3,60,000 1,89,000 Debtors 3,90,000 2,56,000

[WN # 1 (d)]

[WN # 1 (c)] Bank [WN # 1 (b)] 5,28,750 2,32,750

Creditors 93,750 75,000 Miscellaneous Exp.

[WN # 1 (d)] Preliminary 25,000 12,500

expenditure

23,68,750 15,20,000 23,68,750 15,20,000

(Rs.)

Particulars A Ltd.

WN # 1(a) Fixed assets :

As on 1.4.08 12,50,000 8,75,000

Less: Depreciation for 6 months

[1-4-08 to 30-9-08] 62,500 43,750

Balance carried to balance sheet 11,87,500 8,31,250

WN # 1(b) Bank Balance :

As on 31.3.08 2,93,750 1,50,000

Add : Net profi t after depreciation 4,20,000 2,04,000

Add : Depreciation 62,500 43,750

7,76,250 3,97,750

Less : Dividend @ 15% (2,25,000) (1,50,000)

Less : Dividend tax @ 10% (22,500) (15,000)

Balance carried to balance sheet 5,28,750 2,32,750

WN # 1(c) Profi t and Loss A/c.

Balance as on 31.3.08 1,87,500 1,50,000

Add : Profi t after depreciation for 6 months 4,20,000 2,04,000

6,07,500 3,54,000

Dividend (2,25,000) (1,50,000)

Dividend tax (22,500) (15,000)

3,60,000 1,89,000

Liabilities B Ltd. B Ltd.

B Ltd.

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Advanced Financial Accounting & Reporting

WN # 1(d) Stock and debtors :

It is assumed that in the absence of any other

information, the amount of stock and debtors

as on 1st October 2008 and 1st April 2008 is

same.

WN # 2 : Intrinsic value per share :

(Rs.)

A Ltd. B Ltd.

A. Assets :

(i) Goodwill – 1,20,000

(ii) Fixed assets 11,87,500 8,31,250

(iii) Stock 2,37,500 2,25,000

(iv) Debtors 3,90,000 2,56,000

(v) Bank 5,28,750 2,32,750

23,43,750 16,65,000

B. Liabilities

Creditors (93,750) (75,000)

C. Net asset (A - B) 22,50,000 15,90,000

D. Number of shares 1,50,000 1,00,000

E. Intrinsic value per share (C÷D) 15 15.90

WN # 3 : Purchase consideration.

a. No. of shares of B Ltd. 1,00,000

b. Value of shares of B Ltd. (1,00,000 × 15.9) = Rs. 15,90,000

c. Intrinsic value per share of A Ltd. Rs. 15

d. No. of share to be issued by A Ltd. to B Ltd. = 1,06,000

15,90,000

... Purchase consideration = Rs. 15,90,000

Share capital Securities premium

Rs. 10,60,000 Rs. 5,30,000

Part II - Balance sheet of A Ltd. (after absorption of B Ltd.)

Liabilities Amount Assets Amount

Rs. Rs.

Share capital Fixed assets :

(1,50,000 + 1,06,000) Goodwill 1,20,000

2,56,000 Equity shares of Rs. 10/- Other Fixed assets 20,18,750

each fully paid [1,06,000 shares Current assets, Loans and

alloted for consideration other 25,60,000 Advances :

than cash] Stock 4,62,500

Reserves and surplus : Debtors 6,46,000

Securities premium 5,30,000 Bank 7,61,500

Preparation of Company Accounts under Various Circumstances

106

Liabilities Amount Assets Amount

Rs. Rs.

Reserves 4,15,700 Miscellaneous Expenditure :

Profi t and Loss A/c 3,60,000 Preliminary expenses 25,000

Current liabilities and

Provisions :

Creditors 1,68,000

40,33,750 40,33,750

Illustration - 13

S and M had been carrying on business independently, agree to amalgamate and form a company N Ltd.

with an authorised Share capital of Rs. 2,00,000 divided into 40,000 equity shares of Rs. 5 each.

On 31st December, 2008, the respective Balance Sheets of S and M were as follows :

Particulars S M

Rs. Rs.

Fixed Assets 3,17,500 1,82,500

Current Assets 1,63,500 83,875

4,81,000 2,66,375

Less : Current liabilities 2,98,500 90,125

1,82,500 1,76,250

Additional Information :

Revalued fi gures of Fixed and Current assets were as follows :

Particulars S M

Fixed Assets 6,55,000 2,95,000

Current Assets 1,49,750 78,875

The debtors and creditors include Rs. 21,675 owed by S to M.

The purchase consideration is satisfi ed by issue of the following shares and debentures:

i. 30,000 equity shares of N Ltd. to S and M in the proportion to the profi tability of their respective

business based on the average net profi t during the last three years which were as follows :

Particulars S M

2006 Profi t 2,24,788 1,36,950

2007 (Loss) / Profi t (1,250) 1,71,050

2008 Profi t 1,88,962 1,79,500

ii. 15% debentures in N Ltd. at par to provide an income equivalent to 10% return on capital employed

in their respective business as on 31st December 2008 after revaluation of assets.

107

Advanced Financial Accounting & Reporting

You are required to :

1. Compute the amount of debentures and shares to be issued to S and M.

2. A Balance sheet of N Ltd. showing the position immediately after amalgamation.

Solution :

Part I : Calculation of shares to be issued and No. of debentures to be issued :

WN # 1 : Calculation of average profi t for the past 3 years.

S =

2,24,788 – 1,250 + 1,88,962

= Rs. 1,37,500/-

M =

1,36,950 + 1,71,050 + 1,79,500

= Rs. 1,62,500/-

WN # 2 : Determination of shares to be distributed to each company

Distribution : 30,000 Equity Shares of N Ltd. are to be distributed between the S Ltd. and M Ltd. in their

profi tability ratio. i.e. 1375 : 1625

Shares to be Issued to S Ltd. = 1,375

3,000

x 30,000 = 13,750 Shares.

Shares to be Issued to M Ltd. = 1,625

3,000

x 30,000 = 16,250 Shares.

WN # 2 : Calculation of the number of debentures to be issued :

i. Calculation of 10% return of capital employed :- (at revalued fi gures)

Particulars S M

a. Fixed Assets 6,55,000 2,95,000

b. Current Assets 1,49,750 78,875

8,04,750 3,73,875

c. Current liabilities (2,98,500) (90,125)

d. Capital employed 5,06,250 2,83,750

e. Return on capital employed @ 10% 50,625 28,375

f. Number of 15% debenture to be issued in order to get

same return of Rs. 50,625/- and Rs. 28,375/- 3,37,500 1,89,167

respectively.

( 50,625

15%

28,375

15%)

= 1,89,200

(rounded of in

nearest

Multiples of

Rs.100

Preparation of Company Accounts under Various Circumstances

108

WN # 3 : Calculation of Purchase consideration and Goodwill or Capital reserve from the

amalgamation:

(Rs.)

Particulars S M Total

I. Purchase Consideration:

a. Value of Equity Shares (WN # 1) 68,750 81,250 1,50,000

(13,750 x 5; 16,250 x 5)

b. 15% Debentures (WN # 2) 3,37,500 1,89,200 5,26,700

c. Total 4,06,250 2,70,450 6,76,700

II. Net Assets taken over:

a. Fixed assets (Revalued Figures) 6,55,000 2,95,000 9,50,000

b. Add: Current assets (*78,875 - 21,675 1,49,750 57,200* 2,06,950

Inter Co. Owings)

c. Less: Current liabilities (**2,98,500 -

21,675 Inter Co. Owings) (2,76,825)** (90,125) (3,66,950)

d. Total (a+b+c) 5,27,925 2,62,075 7,90,000

III. Goodwill / (Capital reserve) (I - II) (1,21,675) 8,375 (1,13,300)

Balance Sheet of N Ltd. as on 31st Dec. 2008

Liabilities Amount Assets Amount

Rs. Rs.

Share capital : Fixed Assets 9,50,000

Authorised : Current Assets 2,06,950

40,000 Equity Shares of Rs. 5 each 2,00,000

Issued and Subscribed :

30,000 Equity Shares of Rs. 5 each 1,50,000

fully paid up

(All the above shares are issued for a

consideration other than cash persuant

to contract of Amalgamation)

Reserves and surplus :

Capital reserve (WN # 3) 1,13,300

Secured Loans :

15% Debentures (WN # 2) 5,26,700

Current liabilities and Provision :

Current liabilities 3,66,950

Provisions —

11,56,950 11,56,950

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Advanced Financial Accounting & Reporting

Illustration - 14

The following are the summarised Balance sheets of three undertakings as on 31st March, 2009.

Particulars B Ltd. E Ltd. D Ltd.

Rs. Rs. Rs.

Freehold premises at cost 5,00,000 1,80,000 1,20,000

Other Fixed assets at cost less depreciation 15,80,000 3,70,000 2,00,000

Stock in trade 13,50,000 1,80,000 1,10,000

Sundry Debtors 12,30,000 4,30,000 2,10,000

Cash at Bank. 2,10,000 1,20,000 55,000

48,70,000 12,80,000 6,95,000

Equity Shares of Rs. 10 each 30,00,000 5,00,000

Capital: D Ltd. 4,15,000

Reserves 12,20,000 2,60,000

Creditors 6,50,000 5,20,000 2,80,000

48,70,000 12,80,000 6,95,000

It was decided that on 31st March 2009 would acquire the whole of the Share capital of E Ltd. and the

goodwill, Fixed assets and stocks of D, the purchase consideration in both cases being discharged by the

issue of equity shares in B Ltd., valued at Rs. 12.50 per share. The terms agreed upon were the following:

1. The Fixed assets were to be taken at the value placed on them by an independent valuer.

2. The stocks of D were to be reduced by Rs. 10,000 because of obsolete items. Stocks of E Ltd. were to

be taken at their book value.

3. In the case of E Ltd. debtors and creditors to be taken at book value less Rs. 30,000 for debtor and Rs.

15,000 for creditor.

4. Goodwill was to be valued at two years’ purchase of the average profi ts of the last three years subject

only to the following adjustments.

In the case of E Ltd.

i. The Director’s remuneration charged in each year was to be reduced by Rs. 25,000; and

ii. The depreciation charged in each year on Other Fixed assets was to be substituted with

depreciation on those assets calculated at 10% of cost on straight line basis.

In the case of D :

i. Notional expenses of Rs. 50,000 p.a. in total, are to be provided; and

ii. Rs. 20,000 being exceptional items of expense was to be added back to the profits in 2007.

Preparation of Company Accounts under Various Circumstances

110

Other Information :

Particulars B Ltd. E Ltd. D Ltd.

Rs. Rs. Rs.

i. Depreciation on Other Fixed assets till date 6,20,000 2,50,000 1,00,000

ii. Independent valuation as on 31st March 2009;

Freehold premises 6,00,000 2,50,000

Other Fixed assets 3,30,000 2,10,000

iii. Profi ts for the last three years;

2006-07 90,000 90,000

2007-08 1,21,000 65,000

2008-09 1,31,060 95,000

Depreciation charged on other Fixed assets of E Ltd. was Rs. 54,500 in 2006-07, Rs. 44,580 in 2007-08 and

Rs. 45,360 in 2008-09.

iv. Particulars of other Fixed assets at 31 st March. 2009 at cost were :

Before 31 st March 2007 6,00,000

Purchase on 1st April, 2007 1,10,000

Disposed of on 1 st April 2008 80,000

(acquired on 1 April 1996)

You are required to prepare :

i. a statement showing the shares to be issued for the acquisition; and

ii. the Balance sheet of B Ltd. at on April 2009.

ignore taxation.

Solution :

Part - (i) Purchase consideration

WN # 1 : Calculation of goodwill

Particulars E Ltd. D Ltd.

Rs. Rs.

Total Profi ts for three years

2006-07 90,000 90,000

2007-08 1,21,000 65,000

2008-09 1,31,060 95,000

3,42,060 2,50,000

Add: Directors fees 75,000

Less: Additional Depreciation* (49,560) –

Add: Exceptional item for Exp. 20,000

Less : Notional salaries for partners each Rs.50,000/ p.a. (1,50,000)

Total 3,67,500 1,20,000

No. of years 3 3

Average Profi ts 1,22,500 40,000

Goodwill (2 years purchase) [(h) × 2] 2,45,000 80,000

111

Advanced Financial Accounting & Reporting

* Calculation of Additional Depreciation :

Year 2006 2007 2008 Total

Depreciation to be charged 60,000 71,000 63,000

Less: Depreciation already charged (54,500) (44,580) (45,360)

Additional depreciation to be charged 5,500 26,420 17,640 49,560

Statement showing shares to be issued to E Ltd. and D Ltd.

Particulars E Ltd. D Ltd.

Rs. Rs.

a. Fixed assets :

i. Freehold premises 6,00,000 2,50,000

ii. Others 3,30,000 2,10,000

iii. Goodwill (WN # 1) 2,45,000 80,000

b. Current assets :

i. Stock in trade 1,80,000 1,00,000

ii. Sundry Debtors 4,00,000 –

iii. Cash at Bank 1,20,000 –

18,75,000 6,40,000

c. Less: Sundry creditors (5,05,000) –

d. Net asset value 13,70,000 6,40,000

e. Share Price 12.50 12.50

f. No. of Shares to be issued (d × e) 1,09,600 51,200

13,70,000 6,40,000

(12.50) (12.50)

Balance Sheet of B Ltd. as at 31st March 2009

Liabilities Rs. Assets Rs.

Share capital : Fixed assets :

4,60,800 shares of Rs. 10 each Goodwill 80,000

fully paid Freehold Premises 7,50,000

(of the above, 1,60,800 shares are 46,08,000 Other Fixed assets 17,90,000

being issued for consideration Investments 13,70,000

other than cash)

Reserves and surplus : (Fully paid shares in

General reserves 12,20,000 Subsidiary Co.)

Securities Premium 4,02,000 Current assets:

Current liabilities and Provisions : Stock in trade 14,50,000

Creditors 6,50,000 Sundry Debtors 12,15,000

Cash at Bank 2,25,000

68,80,000 68,80,000

Preparation of Company Accounts under Various Circumstances

112

Illustration - 15

On 1st April, 2008 Hero Ltd. was incorporated with an authorised capital of Rs. 1,000 lakhs. It issued to its

promoters equity capital of Rs. 50 lakhs which was paid for in full. On that day it purchased the running

business of Vijay Ltd. for Rs. 200 lakhs and allotted at par equity capital of Rs. 200 lakhs in discharge of

the consideration. The net assets taken over from Vijay Ltd. were valued as follows : Fixed assets Rs. 150

lakhs, inventory Rs. 10 lakhs, customers’ dues Rs. 70 lakhs and Creditors Rs. 30 lakhs.

Hero Ltd. carried on business and the following information is furnished to you:

a. Summary of cash/bank transactions for year ended 31 st March, 2009.

Rs. in lakhs

Equity capital raised :

Promotors (as shown above) 50

Others 250 300

Collections from customers 4,000

Sale proceeds of Fixed assets (cost Rs.18 crores) 20

Less : 4,320

Payment to suppliers 2,000

Payment for employees 700

Payment for expenses 500 3,200

Investments in Upkar Ltd. 100

Payments to suppliers of Fixed assets :

Instalment due 600

Interest 50 3,200

Tax payment 270

Dividend 50

Closing cash/bank balance 50

1,320

b. On 31st March, 2009 Hero Ltd.’s assets and liabilities were.

Rs. in lakhs

Inventory at cost 15

Customers’ dues 400

Prepaid expenses 10

Advances to suppliers 40

Amounts due to suppliers of goods 260

Amounts due to suppliers of Fixed assets 750

Outstanding expenses 30

c. Depreciation for the year under :

i. Companies Act, 1956 Rs. 180 lakhs

ii. Income tax Act, 1961 Rs. 200 lakhs

113

Advanced Financial Accounting & Reporting

d. Provide for tax at 35% of “total income”. There are no disallowables for the purpose of income taxation,

provision for tax is to be rounded off.

i. Revenue statement for the year ended 31st March, 2009 and

ii. Balance Sheet as on 31st March, 2009 from the above information.

Solution :

WN # 1 : Computation of purchase consideration

Rs. in lakhs

Fixed Assets 150

Inventory 10

Customer’s Dues 70

Less: Creditors (30)

Purchase consideration 200

IN THE BOOKS OF HERO LTD.

• Nature of Amalgamation - Purchase Method

• Method of Accounting - Purchase Method

Rs. in lakhs

Particulars Debit Credit

1. For Business Purchase :

Business Purchase A/c Dr. 200

To Liquidator of Vijay Ltd. A/c 200

2. Incorporation of assets and liabilities taken over :

Fixed Assets A/c Dr. 150

Inventory A/c Dr. 10

Customer’s dues A/c Dr. 70

To Creditors A/c 30

To Business Purchase A/c 200

Note : There is no goodwill or Capital reserve arising.

3. Discharge of Consideration :

Liquidator of Vijay Ltd. A/c Dr. 200

To Equity Share Capital A/c 200

Debtors / Customers Account

Dr. Cr.

Particulars Amount Particulars Amount

To Business Purchase 70 By Bank 4,000

To Sales [balance c/d] 4,330 By Balance c/d 400

4,400 4,400

Preparation of Company Accounts under Various Circumstances

114

Suppliers Account

Dr. Cr.

Particulars Amount Particulars Amount

To Bank * 1,960 By Business Purchase 30

To Balance c/d 260 By Purchase [balance c/d] 2,190

2,220 2,220

Amount 2,000

Less : Advances 40

1,960

Rs. in lakhs

Dr. Fixed assets Accounts (Suppliers) Cr.

Particulars Amount Particulars Amount

To Bank A/c 650 By Fixed assets A/c (Bal. fi g.) 1,350

To Balance c/d 750 By Interest A/c 50

1,400 1,400

Rs. in lakhs

Dr. Fixed assets Account Cr.

Particulars Amount Particulars Amount

To Business Purchase A/c 150 By Bank A/c 20

To Profi t and Loss A/c 2 By Balance c/d 1,482

To Suppliers A/c 1,350

1,502 1,502

Rs. in lakhs

Dr. Expenses Account Cr.

Particulars Amount Particulars Amount

To Bank A/c 500 By Profi t and Loss a/c 520

To Outstanding expenses A/c 30 (Balancing Figure)

By Balance c/d (prepaid) 10

530 530

Revenue Statement for the year ended 31.3.09

Rs. in lakhs

Particulars Amount Amount

a) Sales 4,330

b) Less: Expenditure

Stock taken over 10

Add: Purchases 2,190

2,200

Less : Closing Stock 15

Inventory consumed 2,185

Employee cost 520

115

Advanced Financial Accounting & Reporting

Expenses 700 (3,405)

Profi t before Interest depreciation and Tax 925

Less: Interest (50)

Profi t before depreciation and Tax 875

Less: Depreciation as per Companies Act, 1956 (180)

695

Add: Profi t on sale of Fixed assets 2

Profi t before tax 697

Less: Provision for tax * 236.25

Profi t After Tax 460.75

Less: Dividend (50)

Balance Carried forward to Balance Sheet. 410.75

* Calculation of Tax provision

Particulars Rs. in lakhs

Profi t before Tax. 697

Less: Profi t and Loss on sale of Fixed assets (2)

Add: Depreciation as per Companies Act 180

Less: Depreciation as per IT Account (200)

Adjusted Profi t before tax 675

Less: Tax @ 35% 236.25

438.75

Balance sheet of Hero Ltd. as on 31.3.09

Liabilities Rs. in Assets Rs. in

Lakhs Lakhs

Equity Share capital: Fixed assets 1,482

Authrised Share capital 1,000 Less: Depreciation (180) 1,302

Issued, subscribed and fully Investments in Upkar Ltd.

paid-up capital Current assets, Loans and

Existing 300 + Issued 200 Advances:

(of the above, shares worth 500 Inventories 15

Rs.200 crores were issued Customers Dues 400

for a consideration other Cash and Bank 50

than cash) Advances to Suppliers 40

Reserves and surplus : Prepaid Expenses 10

Profi t and Loss A/c 410.75 Advance tax 270 785

Amount due to suppliers of 750

Fixed assets

Current liabilities and

Provisions :

Creditors 260

Outstanding expenses 30

Provision for tax 236.25 526.25

2,187 2,187

Preparation of Company Accounts under Various Circumstances

116

Illustration - 16

AX Ltd. and BX Ltd. decided to amalgamate their business with a view to a public share issue. A holding

company, MX Ltd. is to be incorporated on 1st May 2009 with an authorised capital of Rs. 60,00,000 in

Rs. 10 ordinary shares. The company will acquire the entire ordinary Share capital of AX Ltd. and BX Ltd.

in exchange for an issue of its own shares.

The consideration for the acquisition is to be ascertained by multiplying the estimated profi ts available to

the ordinary shareholders by agreed price earnings ratio. The following relevant fi gures are given :

AX Ltd. BX Ltd.

Rs. Rs.

Issued Share capital

Ordinary shares of Rs. 10 each 30,00,000 12,00,000

6% Cumulative Preference shares of Rs. 100 each – 10,00,000

5% Debentures, redeemable in 2013 8,00,000

Estimated annual maintainable profi ts, before deduction of 6,00,000 2,40,000

debenture interest and taxation

Price / Earning Ratio 15 10

The shares in the holding company are to be issued to members of the subsidiaries on 1st June 2009, at a

premium of Rs. 2.50 per share and thereafter these shares will be marketable on the Stock Exchange.

It is anticipated that the merger will achieve signifi cant economics but will necessitate additional working

capital. Accordingly, it is planned that on 31st December, 2009, MX Ltd. will make a further issue of

60,000 ordinary shares the public for cash at the premium of Rs. 3.75 a share. These shares will not rank

for dividends until 31st December, 2009.

In the period ended 31st December, 2009, bank overdraft facilities will provide funds for the payment of

MX Ltd. of preliminary expenses estimated at Rs. 50,000 and management etc. expenses estimated at Rs.

6,000.

It is further assumed that interim dividends on ordinary shares, relating to the period from 1st June to

31st December, 2009 will be paid on 31st December 2009 by MX Ltd. at 3% by AX Ltd. at 5% and by BX

Ltd. at 2%.

You are required to project, as on 31st December 2009 for MX Ltd., (a) the Balance Sheet as it would appear

immediately after fully subscribed share issue, and (b) the Profi t and Loss Account for the period ending

31st December, 2009.

Assume the rate of corporation tax to be 40% you can make any other assumption you consider relevant.Advanced Financial Accounting & Reporting

Solution :

WN # 1 : Computation of Purchase Consideration

AX Ltd. BX Ltd.

a. Earnings before Interest and Tax (EBIT) 6,00,000 2,40,000

b. Less: Interest – (40,000)

c. Earnings before tax (EBT) 6,00,000 2,00,000

d. Less: Tax @ 40% (2,40,000) (80,000)

e. Earnings after tax (EAT or PAT) 3,60,000 1,20,000

f. Less: Preference Dividend – (60,000)

g. Profi t for Equity Shareholders 3,60,000 60,000

h. P/E Ratio 15 10

i. Total Consideration (Profi t × P/E ratio) 54,00,000 6,00,000

j. Share capital (432000 × 10) 43,20,000 48000 × 10 4,80,000

k. Share Premium (432000 × 2.5) 10,80,000 48000 × 2.5 1,20,000

Projected Profi t and Loss Account for the period ending on 31st Dec. 2009

a. Dividend Received from Subsidiaries

AX Ltd. 30,00,000 × 5% 1,50,000

BX Ltd. 12,00,000 × 2% 24,000

1,74,000

b. Less: Management Expense (6,000)

Less: Dividend @ 3.5% on 48,00,000 1,68,000

(43,20,000 + 4,80,000) (1,68,000)

c. Projected profi t Nil

WN # 2 :

Bank Account

Dr. Cr.

Particulars Amount Particulars Amount

To Shares issued 8,25,000 By Preliminary expenses 50,000

(60,000 @ 13.75) By Management expenses 6,000

To Dividend Received - AX Ltd. 1,50,000 By Dividend paid 1,68,000

- BX Ltd. 24,000 By Balancec/d 7,75,000

9,99,000 9,99,000

Preparation of Company Accounts under Various Circumstances

118

Projected Balance Sheet of MX Ltd. as on 31.12.09

Liabilities Rs. Assets Rs.

Share capital Investments:

[Authorised 6,00,000 Equity Subsidiaries

Share of Rs. 10 each] 60,00,000 Shares at Cost 60,00,000

Issued Capital Bank 7,75,000

4,80,000 x 10 48,00,000

60,000 x 10 6,00,000 54,00,000

Share Premium

RX Ltd. 10,80,000

PX Ltd. 1,20,000

Others (60,000 x 3.75) 2,25,000

14,25,000

Less : Preliminary Expenses (50,000) 13,75,000

67,75,000 67,75,000

Note : The preliminary expenses are to be written off against securities premium A/c.

III. Purchasing Company holding shares in Selling Company

Illustration - 17

It has been decided that P Ltd. will absorb the entire undertaking of S Ltd. and T Ltd. as on 1.4.2009. The

outside shareholders in the latter companies are to be issued equity shares in P Ltd. on the basis of an agreed

issue price of Rs.200 per share. For this purpose, the interests of such shareholders are to be determined

according to the intrinsic values of the shares of the respective companies. N Ltd. is a subsidiary of T Ltd.

and is also to be merged into P Ltd. appropriately.

The Balance Sheets of the companies as at 31.3.2009, stood as under :

(Rs. Lakhs)

P S T N

Sources of Funds:

Share capital

Equity shares Rs. 100 each 1,500 1,000 800 400

Reserves 2,000 540 702 400

Loans 1,600 900 1,000 700

Total 5,100 2,440 2,502 1,500

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Advanced Financial Accounting & Reporting

(Rs. Lakhs)

P S T N

Application of Funds :

Land 200 100 50 10

Buildings 500 400 100 200

Machinery 1,500 800 500 500

Other Fixed Assets 400 100 200 50

Investments

4 lakhs shares of S 500

2 lakhs shares of T 300

4 lakhs shares of N - - 400

Others 100 - -

Net Current Assets 1,600 1,040 1,252 740

Total 5,100 2,440 2,502 1,500

For the purpose of the scheme, it is agreed to give effect to the following value

appreciations of the assets of the companies to be absorbed.

Land - 100%

Buildings - 50%

Machinery - 20%

In order to obtain the consent of the creditors of T Ltd., it becomes necessary to accept a claim of Rs.20 lakhs

hitherto classifi ed as contingent. 60% of the claim is accepted by T Ltd. and the balance is to be settled by

P Ltd.

You are required to :

i. Compute the number of shares to be issued by P Ltd. to eligible outsiders

ii. Show journal entries.

iii. Draft the Balance sheet of P Ltd. after the absorption.

Solution :

Part 1. Calculation of Purchase consideration.

WN # 1 : Calculation of Intrinsic value of shares.

Rs. in Lakhs.

S T N

a. Land (↑100%) 200 100 20

b. Building (↑50%) 600 150 300

c. Machinery (↑20%) 960 600 600

d. Others Fixed Assets 100 200 50

e. Net current Asset 1040 1252 740

Preparation of Company Accounts under Various Circumstances

120

S T N

f. Investment in N Ltd. (100% subsidiary company) — 1010 —

[4 Lakhs shares × Rs. 252.50] 2900 3312 1710

g. Loans (900) (1000) (700)

h. Contingent loan (60% of 20) — (12) —

i. Value of Net Assets 2,000 2,300 1010

j. No. of shares Outstanding 10 8 4

k. Intrinsic value per share (i/j) 200 287.50 252.50

WN # 2 : Purchase consideration

Lakhs.

Particulars S T

a. No. of shares outstanding 10 8

b. Less: Already held by P Ltd. (4) (2)

c. No. of shares held by outsiders 6 6

d. Value payable at intrinsic value [WN # 2(c)xWN # 1 (k)] Rs. 1,200 Rs. 1,725

e. No. of shares to be issued at value of Rs. 200 6 8.625

f. Payment to be made for T Ltd. is : Shares – 8

Cash (for fractional shares) 0.625 x 200

= Rs. 125/-

Part II - In the books of purchasing Co. P Ltd.

A. Take over of S Ltd.

• Nature of Amalgamation - Purchase

• Method of Accounting - Purchase

(Rs. in Lakhs)

Particulars Debit Credit

a. For Purchase Consideration Due :

Business Purchase A/c (6×200) Dr. 1,200

To Liquidator of S Ltd’s. A/c 1,200

b. For Assets and liabilities takeover :

Land A/c Dr. 200

Building A/c Dr. 600

Machinery A/c Dr. 960

Other Fixed Assets A/c Dr. 100

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Advanced Financial Accounting & Reporting

Particulars Debit Credit

Net Current Assets A/c Dr. 1040

To Capital Reserve A/c (balancing fi gure) 300

To Loans A/c 900

To Business purchase A/c 1,200

To Investments in S Ltd 500

c. Discharge of consideration

Liquidator of S Ltd. A/c Dr. 1,200

To Equity Share Capital A/c (6 x 100) 600

To Securities Premium A/c (6 x 100) 600

B. Take over of T Ltd.

• Nature of Amalgamation - Purchase

• Method of Accounting - Purchase

Rs. in Lakhs

Particulars Debit Credit

a. For Purchase Consideration Due :

Business Purchase A/c Dr. 1,725

To Liquidator of T Ltd. A/c 1,725

b. For takeover of assets and liabilities:

Land A/c Dr. 120

Building A/c Dr. 450

Machinery A/c Dr. 1200

Other Fixed Assets A/c Dr. 250

Net Current Assets A/c Dr. 1992

To Capital Reserve A/c (balancing fi gure) 267

To Loans A/c 1712

To Contingent loan payable A/c 8

To Business purchase A/c 1725

To Investments in T Ltd. A/c 300

c. Settlement of contingent liability:

Contingent liability payable A/c Dr. 8

To Net current asset (cash) 8

Preparation of Company Accounts under Various Circumstances

122

Rs. in Lakhs

Particulars Debit Credit

d. For discharge of consideration:

Liquidator of T Ltd. A/c Dr. 1,725

To Equity Share Capital A/c (8 × 100) 800

To Securities Premium A/c (8 × 100) 800

To Cash A/c 125

Amalgamated Balance Sheet of P Ltd. as at 1st April 2009

Rs. in lakhs

Particulars Amount

Source of Funds :

Authorised, issued subscribed and fully paid up equity shares of Rs. 10 each

Equity Share capital (1,500 + 600 + 800.00) 2,900

[Out of the above 6 lakhs shares to S Ltd. and 8 Lakhs shares to

T Ltd. were issued for consideration other than cash]

Reserves and surplus :

Capital Reserve (300 + 267) 567

Securities premium (600 + 800) 1400

Other Reserves 2,000

Loans (1600 + 900 + 1012 + 700) 4,212

Total 11,079

Application of Funds :

Fixed assets :

Land (200 + 200 + 100 + 20) 520

Building (500 + 600 + 150 + 300) 1,550

Machinery (1,500 + 960 + 600 + 600) 3,660

Other Fixed assets (400 + 100 + 200 + 50) 750

Investments 100

Net Current assets (1,600 + 1,040 + 1,252 + 740 – 8 – 125) 4,499

Total 11,079

Illustration - 18

The Balance Sheets of Sweet Ltd. and Salt Ltd. as on 31.03.08 were as follows:

Balance Sheet as on 31.03.08

Liabilities Sweet Ltd. Salt Ltd. Assets Sweet Ltd. Salt Ltd.

(Rs.) (Rs.) (Rs.) (Rs.)

Equity Share 8,00,000 3,00,000 Building 2,00,000 1,00,000

capital (Rs. 100) Machinery 5,00,000 3,00,000

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Advanced Financial Accounting & Reporting

Liabilities Sweet Ltd. Salt Ltd. Assets Sweet Ltd. Salt Ltd.

(Rs.) (Rs.) (Rs.) (Rs.)

10% Preference - 2,00,000 Furniture 1,00,000 60,000

Share capital Investment:

(Rs. 100) 600 shares 60,000 —

of Small Ltd.

General Reserve 3,00,000 1,00,000 Stock 1,50,000 1,90,000

Profi t and Loss A/c 2,00,000 1,00,000 Debtors 3,50,000 2,50,000

Creditors 2,00,000 3,00,000 Cash and Bank 90,000 70,000

Preliminary 50,000 30,000

Expenses

15,00,000 10,00,000 15,00,000 10,00,000

Sweet Ltd. has taken over the entire undertaking of Salt Ltd. on 30.09.08, on which date,

the position of Current assets except cash and Sweet Ltd Salt Ltd

bank balances and Current liabilities were as (Rs.) (Rs.)

follows:

Stock 1,20,000 1,50,000

Debtors 3,80,000 2,50,000

Creditors 1,80,000 2,10,000

Profi ts earned for the half year ended on 30.09.08 after charging depreciation as 5% on building, 15% on

machinery and 10% on furniture, are:

Sweet Ltd. Rs. 1,02,500

Salt Ltd. Rs. 54,000

On 30.08.08 both companies have declared 15% dividend for 2007-08.

Goodwill of Salt Ltd. has been valued at Rs. 50,000 and other Fixed assets at 10% above Sweet their book

values on 31.03.08. Preference shares of Salt Ltd. are to be allotted 10%. Preference Shares of Sweet Ltd.

and Equity shareholders of Salt Ltd. are to receive requisite number of equity shares of Sweet Ltd. valued

at Rs. 150 per share on satisfaction of their claims.

Show the Balance Sheet as of 30.09.08 assuming absorption is through by that date.

Solution :

Part. I

Balance Sheet of Sweet Ltd. & Salt Ltd. as on September 30, 2008

Liabilities Sweet Ltd. Salt Ltd. Assets Sweet Ltd. Salt Ltd.

(Rs.) (Rs.) (Rs.) (Rs.)

Equity Share 8,00,000 3,00,000 Fixed Assets :

capital Rs. 100 each Building 1,90,000 95,000

Machinery 4,25,000 2,55,000

10% Preference — 2,00,000 Furniture 90,000 54,000

Share capital Investment 60,000 —

Preparation of Company Accounts under Various Circumstances

124

Liabilities Sweet Ltd. Salt Ltd. Assets Sweet Ltd. Salt Ltd.

(Rs.) (Rs.) (Rs.) (Rs.)

Reserves and Current assets

surplus Loans and

General Reserve 3,00,000 1,00,000 Advances :

Profi t and Loss A/c 1,91,500* 1,09,000*

Current liabilities Stock 1,20,000 1,50,000

and Provisions Debtors 3,80,000 2,50,000

Creditors 1,80,000 2,10,000 Cash (bal. fi g) 1,56,500 85,000

Miscellaneous

Expense not

written off:

Preliminary Exp. 50,000 30,000

14,71,500 9,19,000 14,71,500 9,19,000

* Calculation of Profi t & Loss Account Balances

Particulars Sweet Ltd. Salt Ltd.

Opening balance 2,00,000 1,00,000

Add.Profi t for half year 1,02,500 54,000

Less: Equity dividend (1,20,000) (45,000)

Add: Dividend income on 600 Equity Shares 9,000 –

Total 1,91,500 1,09,000

Assumptions:

a) Preference dividend has already been paid

b) Half year profi t given is “Trading Profi t” and does not include dividend income.

c) The entire dividend income is post-acquisition (ie. investment has been acquired prior to 1.4.08)

Part II

Purchase Consideration - Net Assets Method

Particulars Amount Amount

Rs. Rs.

Goodwill 50,000

Building 1,10,000

Machinery 3,30,000

Furniture 66,000

Stock 1,50,000

Debtors 2,50,000

Cash 851000 10,41,000

Less: Creditors (2,10,000)

Purchase Consideration 8,31,000

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Advanced Financial Accounting & Reporting

Analysis of Purchase Consideration :

Purchase Consideration = Rs. 8,31,000

Preference Shareholders Net Assets pertaining to Equity

Rs. 2,00,000 Shareholders. Rs. 6,31,000 (Bal. fi g)

Issue Proportionate Net Assets pertaining

10% preference to outside share holders (80%)

shares at par. Rs. 5,04,800

(80% of Rs.6,31 ,000)

3,365 Equity shares at Cash for fractions

Rs.150 each Rs.50

Total consideration summary :

Particulars Amount

Rs.

i) Preference Share capital at par 2,00,000

ii) 3,365 Equity shares @ Rs. 150 per share 5,04,750

iii) Cash 50

Total 7,04,800

Part - III : In the books of Sweet Ltd.

• Nature of Amalgamation - Purchase

• Method of Accounting - Purchase

Journ entries

Particulars Debit Credit

a. For Purchase Consideration Due :

Business Purchase A/c Dr. 7,04,800

To Liquidator of Salt Ltd. 7,04,800

2. For Assets of Libilties taken over :

Building A/c Dr. 1,10,000

Machinery A/c Dr. 3,30,000

Furniture A/c Dr. 66,000

Preparation of Company Accounts under Various Circumstances

126

Particulars Debit Credit

Stock A/c Dr. 1,50,000

Debtors A/c Dr. 2,50,000

Cash A/c Dr. 85,000

To Creditors A/c 2,10,000

To Business Purchase A/c 7,04,800

To Investment in Salt Ltd. A/c 60,000

To Capital Reserve A/c 16,200

3. Discharge of Purchase Consideration

Liquidator of Salt Ltd. A/c Dr. 7,04,800

To 10% Preference Share Capital A/c 2,00,000

To Equity Share Capital A/c 3,36,500

To Securities Premium A/c 1,68,250

To Bank/Cash A/c 50

Amalgamated Balance Sheet of Sweet Ltd. as on 30.09.2008

Liabilities Amount Assets Amount

Rs. Rs. Rs.

Share Capital : 11,36,500 Fixed Assets:

113650 Equity Shares of Building 2,00,000

Rs.10 each Less: Depreciation 10,000

(Out of which 33650 share are 1,90,000

allotted for consideration Add: Taken over 1,10,000 3,00,000

other than cash)

10% Preference Share 2,00,000 Machinery 5,00,000

capital of Rs. 100 each Less: Depreciation 75,000

(The above shares are Add: Taken Over 3,30,000 7,55,000

alloted for consideration

other than cash) Furniture 1,00,000

Reserves and surplus Less: Depreciation 10,000

Capital Reserve 16,200 Add: Taken over 66,000 1,56,000

Securities Premium 1,68,250 Current assets,

General Reserve 3,00,000 Loans and Advances:

Profi t and Loss A/c 1,91,500 Stock 2,70,000

Current liabilities and Sundry Debtors 6,30,000

Provisions Cash and Bank 2,41,450

Sundry creditors 3,90,000 Miscellaneous Expenditure

Preliminary Exp. 50,000

24,02,450 24,02,450

127

Advanced Financial Accounting & Reporting

Illustration - 19

The Balance Sheets of S Ltd. and H Ltd. as on 31.3.09 were as follows.

(Rs. in Lakhs)

Liabilities S Ltd. H Ltd.

Equity Share capital 80 25

Reserves and surplus 400 75

10% 25,000 Debentures of Rs. 100 each – 25

Other Liabilities 120 –

600 125

Assets

Fixed assets at cost 200 75

Less: Depreciation 100 100 50 25

Investments in H Ltd.

2 Lakhs Equity shares of Rs. 10

each at cost 32

10% 25,000 debentures of Rs. 100

each at cost 24 56

Current assets 800 300

Less: Current liabilities (356) 444 (200) 100

600 125

In a scheme of absorption duly approved by the Court, the assets of ‘H’ Ltd. were taken over at an agreed

value of Rs. 130 lakhs. The liabilities were taken over at par. Outside shareholders of ‘H’ Ltd. were allotted

equity shares in S Ltd. at a premium of Rs. 90 per share in satisfaction of other claims in ‘H’ Ltd. for purposes

of recording in the books of ‘S’ Ltd. Fixed assets taken over from ‘H’ Ltd. were revalued at Rs. 40 lakhs.

The scheme was put through on 1st April, 2009.

a. Journal Entries in the books of ’S’ Ltd.

b. Show the balance of ‘S’ Ltd. after absorption of ‘H’ Ltd.

Preparation of Company Accounts under Various Circumstances

128

Solution :

WN # 1 : Purchase consideration of shares to be issued

Purchase

Consideration

Rs. 130 lakhs

Debentures Equity Share holders

Rs. 25 lakhs Rs. 105 lakhs

Worth of shares belonging to S Ltd. Amount Pertaining to

2 lakhs outsiders

2.5 lakhs

× 105 = Rs. 84 lakhs

105-84 = Rs. 21 lakhs*

‘Number of shares to be issued to

outside shareholders @ 10/

each at a premium of Rs. 90/- = Rs. 21,00,000

100

= 21,000 Shares.

a) Part - II Journals in Books of S Ltd.

• Nature of Amlagamation - Purchase Method

• Method of Accounting - Purchase Method

(Rs. in lakhs)

Particulars Debit Credit

i. For Purchase Consideration Due :

Business Purchase A/c Dr. 21

To Liquidator for H Ltd.” A/c 21

(Being the purchase consideration payable to liquidator

of H Ltd. for business purchase)

ii. For assets and liabilities taken over :

Fixed Assets A/c Dr. 40

Current Assets A/c Dr. 300

To Current Liabilities A/c 200

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Advanced Financial Accounting & Reporting

Particulars Debit Credit

To Liability for 10% Debentures A/c 25

To Business Purchase A/c 21

To Investment in H Ltd. A/c 32

To Capital Reserve (balancing fi gure) 62

(Being the assets and liabilities taken over from H Ltd)

iii. Discharge of purchase consideration:

Liquidator of H Ltd. A/c Dr. 21

To Equity Share Capital A/c 2.10

To Securities Premium A/c 18.90

(Being the allotment of 21 lakhs equity shares of Rs. 10

each to outside shareholders of H Ltd. at a premium of

Rs.90 per share.)

iv. Cancellation of Liability of Debentures:

10% Debenetures A/c Dr. 25

To Investments in Debentures A/c 24

To Capital Reserve A/c 1

(Being the cancellation of debentures of H Ltd. )

Balance Sheet of S Ltd. as on 1st April, 2009

(Rs. in lakhs)

Liabilities Rs. Assets Rs.

Share capital : Fixed assets

(8.21 lakhs equity shares of 82.10 (100+40) 140.00

Rs. 10 each) Current assets and

(Of the above shares, 21,000 Loan and advances

equity share are allotted as fully Current assets

paid up for consideration other (800+300) 1100.00

than cash)

Reserves and Surplus :

As per last Balance Sheet 400.00

Capital Reserve (62+1) 63.00

Securities Premium A/c 18.90

Other liabilities 120.00

Current liabiltiies and provisions :

Current liabilities

(356 + 200) 556.00

1,240.00 1,240.00

Note: It has been assumed that Current assets have been taken over by S Ltd. at their book value.

Preparation of Company Accounts under Various Circumstances

130

Illustration - 20

The Balance sheet of H Ltd. as on 31.3.08 :

(Figures in Rs. lakhs)

Liabilities Amount Assets Amount

Equity Share Capital 4.00 Fixed Assets less depreciation 6.00

(in equity shares of Rs. 10 each) to date

10% Preference Share Capital 3.00 Stock and debtors 5.30

General Reserve 1.00 Cash and Bank 0.70

Profi t & Loss Account 1.00

Creditors 3.00

12.00 12.00

M Ltd. another existing company holds 25% of equity Share capital of H Ltd. purchased at Rs.10 per

share.

It was agreed that M. Ltd. should take over the entire undertaking of H Ltd. on 30.9.08 on which date the

position of Current assets (except cash and bank balances) and creditors was as follows.

Stock and debtors 4 lakhs

Creditors 2 lakhs

Profi ts earned for half year ended 30.9.08 by H Ltd. was Rs. 70,500 after charging depreciation of Rs. 32,500 on

fi xed assets. H Ltd. declared 10% dividend for 2007-08 on 30.8.08 and the same was paid within a week.

Goodwill of H Ltd. was valued at Rs. 80,000 and block assets were valued at 10% over their book value

as on 31.3.08 for purposes of take over. Preference shareholders of H Ltd. will be allotted 10% preference

shares of Rs. 10 each by M Ltd. Equity share holders of H Ltd. will receive requisite number of equity shares

of Rs. 10 each from M Ltd. valued at Rs. 10 per share.

i. Compute the purchase consideration.

b. Explain, how the Capital reserve or goodwill, if any, will appear in the balance sheet of M Ltd. after

absorption.

131

Advanced Financial Accounting & Reporting

Solution :

WN # 1 : Calculation of Cash and Bank Balances as on 30th September 2008

Balance Sheet of H Ltd. as at 30.09.08

Liabilities Amount Assets Amount

Equity Share capital Rs Block Assets 6,00,000 Rs.

(40,000 equity shares of Rs. 10 4,00,000 Less: Depreciation (32,500) 5,67,500

each)

10% Preference Share capital 3,00,000 Stock and Debtors 4,00,000

Reserves and surplus Cash and Bank (balancing 1,33,000

General Reserve 1,00,000 fi gure)

Profi t and Loss A/c* 1,00,500

Creditors 2,00,000

11,00,500 11,00,500

Profi t & Loss Account

Particulars Amount

Opening Balance 1,00,000

Add: Half year profi t 70,500

Less: Preference dividend @ 10% (30,000)

Less: Equity dividend @ 10% (40,000)

Closing balance 1,00,500

a. Purchase Consideration - Net Assets Method

Particulars Amount Amount

Fixed assets 6,60,000

Stock and Debtors 4,00,000

Cash and Bank 1,33,000

Goodwill 80,000 12,73,000

Less: Creditors (2,00,000)

Net Assets Taken over 10,73,000

Preparation of Company Accounts under Various Circumstances

132

Net Assets Rs. 10,73,000

Preference Shareholders Net Assets pertaining to

Rs. 3,00,000 Equity shareholders

Rs.7,73,000

Satisfi ed by issuing 10% Proportionate net assets for

preference share at par the outside shareholders (75%)

5,79,750

Total Purchase Consideration

Particulars Amount

Rs.

a. 10% Preference Share Capital 3,00,000

b. Equity Share Capital (Outsiders) 5,79,750

c. Total 8,79,750

Calculation of Capital Reserve

Particulars Amount

Rs.

a. Net Assets takenover 10,73,000

b. Less:

i) Preference shares to be alloted 3,00,000

ii) Equity shares to be allotted 5,79,750

iii) Cost of Investments 1,00,000 (9,79,750)

c. Capital Reserve 93,250

Balance sheet of M Ltd. as on 30th September 2008 (Extracts)

Liabilities Rs. Assets Rs.

Reserves and Surplus:

Capital Reserve 93,250

Less: Goodwill 80,000 13,250

133

Advanced Financial Accounting & Reporting

Illustration - 21

The summarised Balance sheets of A Ltd. and its subsidiary B Ltd. as on 31.3.2009 are as follows:

A Ltd. B Ltd.

Rs. Rs.

Equity Share Capital (Rs. 10 each) 1,00,00,000 20,00,000

Reserves and Surplus 1,40,00,000 60,00,000

Secured Loans 40,00,000 –

Current liabilities 60,00,000 20,00,000

3,40,00,000 1,00,00,000

Fixed Assets 1,20,00,000 35,00,000

Investment in B Ltd. 7,40,000 –

Sundry Debtors 70,00,000 10,00,000

Inventories 60,00,000 50,00,000

Cash and Bank 82,60,000 5,00,000

3,40,00,000 1,00,00,000

A Ltd. holds 76% of the paid up capital of B Ltd. The balance shares in B Ltd. are held by a foreign Collaborating

Company. A memorandum of understanding has been entered into with the foreign company

providing for the following.

a. The shares held by the foreign company will be sold to A Ltd. The price per share will be calculated

by capitalising the yield at 16%. Yield, for this purpose, would mean 40% of the average of pre-tax

profi ts for the last 3 years, which were Rs. 35 lakhs, Rs.44 lakhs and Rs.65 lakhs.

b. The actual cost of shares to the foreign company was Rs. 2,40,000 only. The profi t that would accrue

to them would be taxable at an average rate of 20%. The tax payable be deducted from the proceeds

and A Ltd. will pay it to the Government.

c. Out of the net consideration, 50% would be remitted to the foreign company immediately and the

balance will be an unsecured loan repayable after one year. It was also decided that A Ltd. would

absorb B Ltd. simulataneously by writing down the Fixed assets of B Ltd. by 5%. The Balance sheet

fi gures included. a sum of Rs.1 ,50,000 due by B Ltd. to A Ltd.

The entire arrangement was approved by all concerned for giving effect to on 1.4.2009. You are required

to show the Balance Sheet of A Ltd. as it would appear after rrangement is put through on 1.4.2009.

Preparation of Company Accounts under Various Circumstances

134

Solution :

• Nature of Amalgamation - Purchase Method

• Method of Accounting - Purchase Method

WN # 1 : Computation of Purchase consideration :

a. Yield of B Ltd.

= (35+44+65) × 40% = Rs. 19.20 Lakhs

b. Price per share of B Ltd.

(Figures in Lakhs)

Particulars Amount

Yield of B Ltd. (Rs. in lakhs) 19.20

Capitalisation rate 16%

Value of B Ltd. (Rs. in lakhs) 120.00

No. of Shares Outstanding (lakhs) 2.00

Price per share (Rs.) (120.00/20.00) (Rs. 120 lakhs /2.00 lakh shares) 60

c. Purchase Consideration :

(Rs. in Lakhs)

Particulars Amount

Shares held by Foreign Collaborator (2,00,000 x 24%) 48,000 shares

Price per share Rs. 60/-

Purchase Consideration Rs. 28,80,000

WN # 2 : Discharge of Purchase Consideration :

a. Tax Payable:

(Rs. in Lakhs)

Purchase Consideration 28.80

Less: Cost of Acquisition (2.40)

Capital Gains 26.40

Tax payable @ 20% 5.28

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Advanced Financial Accounting & Reporting

b. Mode of payment of purchase consideration

Purchase Consideration 28.80

Less: Income Tax payable (5.28)

23.52

To be remitted immediately To be retained as Unsecured Loans

50% 50%

Rs. 11.76 Rs. 11.76

WN # 3 : Calculation of Goodwill / Capital Reserve on Absorption

A. Calculation of Net Assets:

Particulars Amount Amount

a. Assets taken over :

i. Fixed assets 35

Less: 5% reduction in value (1.75) 33.25

ii. Sundry Debtors 10.00

iii. Inventories 50.00

iv. Cash and Bank balances 5.00

98.25

b. Current liabilities 20.00

c. Net Assets taken over (a-b) 78.25

B. Goodwill / Capital Reserve :

Particulars Amount Rs. in

Lakhs

Net Assets taken over 78.25

Less: Purchase Consideration (28.80)

Less: Investments in B Ltd. (7.40)

Capital Reserve 42.05

Preparation of Company Accounts under Various Circumstances

136

WN # 4 : Computation of Cash and Bank Balances after absorption

Particulars Rs. in

Lakhs

Balance in A Ltd. 82.60

Cash and Bank Balance of B. Ltd. 5.00

Less : Remittance to Foreign Collaborating Company (11.76)

Less : TDS paid (5.28)

Cash and Bank balance 70.56

Balance Sheet of A Ltd. as on 1st April, 2009

Liabilities Rs. Amount Assets Rs. Amount

Equity Share Capital 100.00 Fixed assets

of Rs. 10 each (120 + 33.25) 153.25

Reserves and Surplus: Current assets,

Capital Reserve 42.05 Loans and Advances:

Other Reserve 140.00 182.05 Sundry Debtors 80

Secured Loans 40.00 (70+10)

Unsecured Loans (WN # 2) 11.76 Less: Inter Company

Current liabilities :- owings (1.5) 78.50

A Ltd. 60.00 Inventories (60+50) 110.00

B Ltd. 20.00 Cash & Bank 70.56

Less: Inter Co. Owings (1.50) 78.50 (WN #4)

412.31 412.31

Illustration - 22

The Balance Sheets of S Ltd. and P Ltd. as on 31.03.09 are as under:

(Rs. in Lakhs)

Liabilities S P Assets S P

Equity Shares of Rs. 100 each 25.00 50.00 Fixed Assets 110.00 50.00

Reserves 131.00 29.25 Investments 16.25 25.00

12% Debentures 11.00 5.50 Current Assets 40.25 3.25

Creditors 8.00 2.75 Miscellaneous 8.50 9.25

Expenditure

175.00 87.50 175.00 87.50

Investments of S Ltd. represents 12,500 shares of P Ltd. investments of P Ltd. are considered worth Rs. 30

lakhs.

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Advanced Financial Accounting & Reporting

P Ltd. is taken over by S Ltd. on the basis of the intrinsic value of shares in their respective books of accounts.

Prepare a statement showing the number of shares to be allotted by S Ltd. to P Ltd. and the balance sheet

of S Ltd. after absorpotion of P Ltd.

Solution :

Part. I : Purchase consideration

WN # 1 Net Assets

(Rs. in lakhs)

S Ltd. P Ltd.

A. Assets

i) Fixed Assets 110.00 50.00

ii) Investments 18.75* 30.00

iii) Current Assets 40.25 3.25

169.00 83.25

B. Liabilities

i) 12% Debentures 11.00 5.50

ii) Creditors 8.00 2.75

19.00 7.75

150.00 75

C. Net Assets [A-B]

* Investments of ‘S’ Ltd = 12,500 × Rs. 150 [WN # 2]

= Rs. 18.75 Lakhs.

WN # 2 : Intrinsic Value

S Ltd. P. Ltd.

Net assets 150.00 Lakhs 75.00 Lakhs

No. of equity shares 25,000 50,000

Intrinsic value Rs. 600 Rs. 150.00

WN # 3 : Purchase consideration (No. of shares alloted)

No. of equity shares outstanding in P Ltd 50,000

Less: Already held by S Ltd. 12,500

No. of equity shares of outsiders 37,500

Intrinsic value of P Ltd. Rs. 150

Purchase consideration (37,5000 × 150) 56,25,000

Instrinsic value per share of S Ltd. Rs. 600

No. of shares to be allotted 56,25,000/600

9,375 shares

Preparation of Company Accounts under Various Circumstances

138

Equity Share Capital = 9,375 × 100 = 9,37,500

Securities Premium = 9,375 × 500 = 46,87,500

Part - II : In the books of S Ltd.

• Nature of Amalgamation - Purchase

• Method of Accounting - Purchase

Particulars Debit Credit

1. For Purchase Consideration Due :

Business Purchase A/c Dr. 56,25,000

To Liquidator of P Ltd. A/c 56,25,000

2. For assets and liabilities taken over :

Fixed Assets A/c Dr. 50,00,000

Investments A/c Dr. 30,00,000

Current Assets A/c Dr. 3,25,000

To 12% Debentures A/c 5,50,000

To Creditors A/c 2,75,000

To Business Purchase A/c 56,25,000

To Investment in shares of P Ltd. A/c 16,25,000

To Capital Reserve (Balancing Figure) 2,50,000

3. Discharge of purchase consideration :

Liquidator of P Ltd. A/c Dr. 56,25,000

To Share Capital A/c 9,37,500

To Securities Premium A/c 46,87,500

Balance sheet of S Ltd. (after absorption)

(Rs. in lakhs)

Liabilities Amount Assets Amount

Rs. Rs.

Share capital : 34.38 Fixed assets : 160.00

34,375 equity shares of (110+50)

Rs. 100/ - each Investments 30.00

[of the above shares 9,375 Current assets, loans and

equity shares are allotted as advances :

fully paid up for consideration Current assets 43.50

other than cash] Miscellaneous expenditure 8.50

Reserves and surplus

Capital reserve 131.00

Securities premium 2.50

Secured loans 46.87

12% Debenture 16.50

Current liabilities and provisions

Creditors 10.75

242.00 242.00

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Advanced Financial Accounting & Reporting

Illustration - 23

Given below Balance sheets of X Limited and Y Limited as at 31.3.2009.

X Ltd. YLtd.

Rs. in Lakhs Rs. in Lakhs

Sources of Funds

Shareholders’ funds 500 300

Equity Shares of Rs. 100 each

Reserves and surplus

General Reserve 200 100

Profi t and Loss A/c 100 100

Loan Funds

Secured Loans 300 200

Unsecured Loans 100 100

1,200 800

Applications of Funds :

Fixed Assets

Gross block 800 600

Less: Depreciation (200) (150)

Net block 600 450

Investments - in 2.4 lakhs shares of Y Ltd. 300 –

Others – 100

Current assets, Loans and Advances

Less: Current liabilities 400 400

Net Current assets (100) (150)

300 250

1,200 800

X Ltd. agreed to take over all the assets and liabilities of Y Ltd. at book value and discharge the claims

of minority shareholders by issuing its one share for every two shares held. Minorities claims are to be

discharged on the basis of intrinsic value per share. For computing intrinsic value per share net Fixed assets

of Y Ltd are to be valued at Rs. 850 Lakhs. Prepare post merger Balance Sheet of X Ltd. Show all your

workings.

Preparation of Company Accounts under Various Circumstances

140

Solution :

Part I : Calculation of Purchase Consideration

WN # 1 : Computation of Intrinsic Value

Rs. in Lakhs

X Ltd Y Ltd

Fixed assets 600 850

Investments: In Y Ltd. (24 x 30) 720 –

Other investments – 100

Current assets, Loans and Advances 400 400

Less: Current liabilities (100) (150)

Less: Unsecured Loans (100) (100)

Less: Secured Loans (300) (200)

Net Assets 1220 900

Intrinsic Value (Net Assets ÷ No. of shares outstanding) 1220/5 900/3

= 244 = 300

WN # 2 : Purchase Consideration

Particulars

Total number of shares outstanding (lakhs) 3,00,000

Less: Shares held by X Ltd. (lakhs) 2,40,000

Shares held by Outsiders (lakhs) 60,000

Exchange Ratio (lakhs) 1:2

No. of shares to be issued (lakhs) 30,000

Intrinsic Value Per share 244

Purchase Consideration (30,000 × Rs. 244) Rs. 73.2 Lakhs

Part II - In the Books of Purchasing Co. X Ltd

• Nature of Amalgamation : Merger

• Method of Accounting : Pooling of interest

(Rs. in Lakhs)

Particulars Debit Credit

1. For Purchase Consideration Due :

Business Purchase A/c Dr. 73.20

To Liquidator of Y Ltd A/c 73.20

2. For Assets and Liabilities Takeover :

a. Aggregate Consideration

i. Already Paid 300.00

ii. Balance Payable (73.20)

373.20

b. Less: Paidup Capital of Vendor Co. (300.00)

c. Excess

(The above excess to be adjusted against :

*General Reserves of Y Ltd. 73.20

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Advanced Financial Accounting & Reporting

Particulars Debit Credit

d. Balance of General Reserves of Y Ltd. to be

incorporated (100 – 73.20) 26.80

Fixed Assets A/c Dr. 600.00

Investments A/c Dr. 100.00

Current Assets A/c Dr. 400.00

To Provision for depreciation A/c 150.00

To Current liabilities and Provisions A/c 150.00

To Secured Loans A/c 200.00

To Unsecured Loans A/c 100.00

To Business Purchase A/c 73.20

To Investments in Y Ltd A/c 300.00

To General Reserve A/c 26.8

To Profi t and Loss A/c 100.00

3. For Discharge of Purchase Consideration

Liquidator of Y Ltd A/c Dr. 73.2

To Equity Share Capital A/c 30.0

To Securities Premium A/c 43.2

Balance Sheet of X Ltd as at 31 st March 2009

Liabilities Rs. in Assets Rs. in

Lakhs Lakhs

Authorised, Issued, Subscribed Fixed assets 1400

and paid up Share capital of Less : Accumulated

Rs. 100 each (out of the above 30,000 Depreciation 350 1050

shares were issued for Investments 100

consideration other than for cash) 530 Current assets 800

Reserves and surplus

General Reserve 226.80

Profi t and Loss A/c 200

Securities Premium 43.20

Secured Loans 500

Unsecured Loans 200

Current liabilities and 250

Provisions

1950 1950

Preparation of Company Accounts under Various Circumstances

142

IV. Selling Company holding shares in Purchasing Company

Illustration - 24

Following are the Balance sheets of two companies, B Ltd. and D Ltd. as at December 31, 2008.

Liabilities B Ltd. D Ltd. Assets B Ltd. D Ltd.

Rs. Rs. Rs. Rs.

Equity Share Capital : Sundry Assets 7,50,000 3,50,000

(Shares of Rs. 10 each) 5,00,000 30,00,000 10,000 Shares in

Reserve 1,00,000 55,000 B Ltd. — 1,00,000

Creditors 1,50,000 95,000

Total 7,50,000 4,50,000 Total 7,50,000 4,50,000

B Ltd. was to absorb D Ltd. on the basis of intrinsic value of the shares, the purchase consideration was to

be discharged in the form of fully paid shares, entries to be made at par value only. A sum of Rs. 20,000

is owed by B Ltd. to D Ltd. Also included in the stocks of B Ltd. Rs. 30,000 goods supplied by D Ltd. cost

plus 20%. Give Journal entires in the books of both the Companies.

Solution :

Part I : In the Books of D Ltd.

Particulars Debit Credit

Rs. Rs.

1. Realisation A/c Dr. 3,50,000

To Sundry Assets A/c 3,50,000

[Being the assets taken over by B Ltd. transferred

to Realisation A/c]

2. Creditors A/c Dr. 95,000

To Realisation A/c 95,000

[Being Creditors taken over by B Ltd. transferred

Realisation A/c]

3. B Ltd. A/c Dr. 2,12,500

To Realisation A/c 2,12,500

[Being purchase consideration (WN # 2) receivable]

4. Shares in B Ltd. A/c Dr. 2,12,500

To B Ltd. A/c 2,12,500

[Being discharge of purchase consideration]

5. Shareholders A/c Dr. 42,500

To Realisation A/c 42,500

[Being realisation loss transferred to Shareholder A/c]

6. Share Capital A/c Dr. 3,00,000

Reserves A/c Dr. 55,000

To Shareholders A/c 3,55,000

[Being Share capital and Reserves transferred to

Shareholders A/c]

7. Shareholders A/c Dr. 3,12,500

To Shares in B Ltd. 3,12,000

[Being the settlement to shareholders for the

amount due]

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Advanced Financial Accounting & Reporting

Calculation of Purchase consideration - Net Assets Method

WN # 1 : Intrinsic value of share

Particulars B Ltd D Ltd.

(Rs.) (Rs.)

a) Sundry Assets 7,50,000 3,50,000

b) Investments in B Ltd. 10,000 shares @ Rs. 12 each — 1,20,000

c) Creditors (1,50,000) (95,000)

d) Net Assets 6,00,000 3,75,000

e) No. of shares outstanding 50,000 30,000

f) Intrinsic Value of shares [d ÷ e] 12 12.5

WN # 2 : Purchase Consideration

Particulars Amount

a) No. of shares of D Ltd. 30,000

b) Value of shares @ Rs. 12.50 Rs. 3,75,000

c) No. of shares issuable based on intrinsic value of Rs. 12 31,250

(3,75,000 ÷ 12)

d) No. of shares held by D Ltd. (10,000)

e) Net shares to be issued 21,250

f) Total consideration at par (21,250 x Rs. 10) Rs. 2,12,500

Part - II : In the books of B Ltd.

Nature of Amalgamation - Merger

Method of Accounting - Pooling of Interest

Particulars Debit Credit

(Rs.) (Rs.)

1. For Purchase Consideration Due :

Business Purchase A/c Dr. 2,12,500

To Liquidator of D Ltd.’s A/c 2,12,500

2. a. For of assets and liabilities taken over

i. Aggregate consideration to share holders of

Selling Company

* Shares already held by D Ltd. 1,00,000

* Shares now issued 2,12,500

ii. Paid up capital of D Ltd. 3,12,500

(3,00,000)

iii. Excess 12,500

iv. Above excess to be adjusted against 12,500

reserves of D Ltd.

v. Balance of reserves to be incorporated 42,500

(55,000 - 12,500)

b. Assets A/c Dr. 3,50,000

To Creditors A/c 95,000

To Reserves A/c 42,500

To Business Purchase A/c 2,12,500

Preparation of Company Accounts under Various Circumstances

144

Particulars Debit Credit

(Rs.) (Rs.)

3. Discharge of Purchase consideration

Liquidator of D Ltd.’s A/c Dr. 2,12,500

To Equity Share Capital A/c 2,12,500

4. Others

a. Cancellation of Inter company owings

Creditors A/c Dr. 20,000

To Sundry Assets A/c 20,000

b. Adjusted of Stock Reserve

Reserve A/c Dr. 5,000

To Stock Reserve 5,000

Balance Sheet of B Ltd. as on 31.12.2008 (after Amalgamation)

Liabilities Amount Assets Amount

Share Capital 7,12,500 Sundry Asset 10,75,000

(of the above, 21,250 shares (7,50,000+3,50,000–

issued for consideration other 20,000 – 5,000)

than cash)

Reserves and Surplus

Reserve (1,00,000+42,500 – 5,000) 1,37,500

Creditors 2,25,000

10,75,000 10,75,000

Illustration - 25

Jay Ltd., and Krishna Ltd., had the following fi nancial position as at 31st March, 2009.

Jay Krishna Jay Krishna

Ltd. Ltd. Ltd. Ltd.

Share capital : 24,00,000 18,00,000 Goodwill 15,00,000 3,00,000

Equity shares of Fixed assets 12,00,000 21,00,000

Rs. 100 each fully paid Investment at cost 9,00,000 6,00,000

General Reserve 9,00,000 6,00,000 Current assets 9,00,000 7,50,000

Investment Allowance

Reserve — 9,00,000

Liabilities 12,00,000 4,50,000

45,00,000 37,50,000 45,00,000 37,50,000

It was decided that Jay Ltd. will take over the business of Krishna Ltd., on that date, on the basis of the

respective share values adjusting, wherever necessary, the book values of assets and liabilities on the

strength of information given below :

1) Investment of Krishna Ltd., included 3,000 shares in Jay Ltd., acquired at a cost of Rs. 150 per share.

The other investments of Krishna Ltd., have a market value of Rs. 75,000;

2) Investment Allowance Reserve was in respect of additions made to Fixed assets by Krishna Ltd., in

the years 2004-2007 on which Income Tax relief has been obtained. In terms of the Income Tax Act,

the company has to carry forward till 2011, reserve of Rs. 4,50,000 for utilisation;

3) Goodwill of Jay Ltd., and Krishna Ltd., are to be taken at Rs. 12,00,000 and Rs. 6,00,000 respectively;

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Advanced Financial Accounting & Reporting

4) The market value of investments of Jay Ltd., was Rs. 6,00,000;

5) Current assets of Jay Ltd., included Rs. 24,00,000 of stock in trade obtained from Krishna Ltd. which

company sold at a profi t of 25% over cost ;

6) Fixed assets of Jay Ltd., and Krishna Ltd., are valued at Rs. 15,00,000 and Rs. 22,50,000 respectively.

Suggest the scheme of absorption and show the journal entries necessary in the books of Jay Ltd. Also

prepare the Balance Sheet of that company after takeover of the business of Krishna Ltd.

Solution :

Part I : Purchase Consideration

WN # 1 : Intrinsic Value of Shares

Particulars Jay Ltd. Krishna Ltd.

Rs. Rs.

Goodwill 12,00,000 6,00,000

Fixed assets 15,00,000 22,50,000

Investments - Outside 6,00,000 75,000

- Inter Co [13,000 shares @ Rs. 125 each] — 3,75,000

Current assets 9,00,000 2,50,000

Liabilities (12,00,000) (4,50,000)

Net assets 30,00,000 36,00,000

No. of shares outstanding 24,000 18,000

Intrinsic value per share (30,00,000/125); (36,00,000/180) 125 200

WN # 2 : Purchase Consideration

Particulars Krishna Ltd.

Rs.

Total no. of shares outstanding in Krishna Ltd. 18,000

Value of shares @ Rs. 200/- each 36,00,000

No. of shares issuable on the basis of Intrisic value of share 28,800

(36,00,0000 ÷ 125)

Less : Shares already held (3,000)

No. of shares to be issued 25,800

Shares price 125

Purchase Consideration (25,800 × 125) 32,25,000

Part II : In the Books of Jay Ltd.

Nature of Amalgamation - Purchase

Method of Accounting - Purchase

Particulars Debit Credit

(Rs.) (Rs.)

1. For Purchase Consideration Due

Business Purchase A/c Dr. 32,25,000

To Liquidator of Krishna Ltd. A/c 32,25,000

2. For Assets and Liabilities taken over :

Goodwill A/c Dr. 6,00,000

Preparation of Company Accounts under Various Circumstances

146

Particulars Debit Credit

(Rs.) (Rs.)

Fixed Assets A/c Dr. 22,50,000

Investments A/c Dr. 75,000

Current Assets A/c Dr. 7,50,000

To Liabilities A/c 4,50,000

To Business Purchase A/c 32,25,000

3. For Discharge of Purchase consideration

Liquidator of Krishna Ltd. A/c Dr. 32,25,000

To Equity Share Capital A/c 25,80,000

To Securities Premium A/c 6,45,000

4. Contra entry for statutory reserve

Amalgamation adjustment A/c Dr. 60,000

To Investment allowance A/c 60,000

5. For adjustment of stock reserve

Goodwill A/c Dr. 48,000

To Stock Reserve A/c 48,000

Balance Sheet of Jay Ltd. (after amalgamation)

Liabilities Amount (Rs) Assets Amount Rs

Share capital 49,80,000 Goodwill 21,48,000

49,800 shares of Rs. 1000 (of which Fixed Assets 34,50,000

25,800 shares of Rs. 1000 Investment 9,75,000

each issued for consideration Curent Assets : 16,02,000

other than cash) Miscellaneous Expenditure

Reserves and surplus Amalgamation Adjustment A/c 4,50,000

Securities premium 6,45,000

Investment Allowance Reserve 4,50,000

General reserve 9,00,000

Current liabilities 16,50,000

86,25,000 86,25,000

V. Cross Holding

Illustration - 26

The following Balance sheets of A Ltd. and B Ltd. as at 31st March, 2009 are given to you :

A Ltd. B Ltd.

Rs. Rs.

Liabmties:

Equity Share capital

of Rs.10 each 15,00,000 5,00,000

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Advanced Financial Accounting & Reporting

A Ltd. B Ltd.

Rs. Rs.

General Reserve 2,00,000 1,00,000

Profi t and Loss Account 1,60,000 10,000

10% Debentures — 3,00,000

Current liabilities 2,00,000 90,000

20,60,000 10,00,000

Assets:

Fixed Assets 10,00,000 50,000

Sundry Debtors 2,90,000 1,50,000

Stock 4,80,000 2,10,000

10,000 shares in B Ltd. 1,50,000 —

30,000 shares in A Ltd. — 5,00,000

Cash at bank 1,40,000 90,000

20,60,000 10,00,000

B Ltd. traded raw material which were required by A Ltd. for manufacture of its products. Stock of A Ltd.

includes Rs. 1,00,000 for purchases made from B Ltd. on which the company (B Ltd.) made a profi t of 12%

on selling price. A Ltd. owed Rs. 25,000 to B Ltd. in this respect. It was decided that A Ltd. should absorb

B Ltd. on the basis of the intrinsic value of the shares of the two companies. Before absorption, A Ltd.

declared a dividend of 10%. A Ltd. also decided to revalue the shares in B Ltd. before recording entries

relating to the absorption.

Show the journal entries, which A Ltd. must pass to record the acquisition and prepare its balance sheet

immediately thereafter. All workings should from part of your answer.

Solution :

Part I - Purchase consideration - Net Asset Method.

WN #1: Net assets excluding inter company investment at the time of Amalgamation

Rs.

Particulars A B

Fixed Assets 10,00,000 50,000

Sundry Debtors 2,90,000 1,50,000

Stock 4,80,000 2,10,000

Cash 1,40,000 90,000

Dividend Receivable 30,000

Less :

10% Debentures — (3,00,000)

Current liabilities (2,00,000) (90,000)

Proposed Dividend (1,50,000)

15,60,000 1,40,000

Preparation of Company Accounts under Various Circumstances

148

WN # 2 : Intrinsic value of investment

A = 15,60,000 + 0.2 B

B = 1,40,000 + 0.2 A

A = 15,60,000 + 0.2 (1,40,000 + 0.2A)

A = 15,60,000 + 28,000 + 0.04A

0.96A = 15,88,000

A = 16,54,166.67

B = 1,40,000 + 0.2 (16,54,166.67)

= 4,70,833.32

Summary :

Particulars A Ltd. B Ltd.

a) Net Assets (Rs.) 16,54,167 4,70,833

b) No. of shares outstanding 1,50,000 50,000

c) Intrinsic value per share Rs. 11 Rs. 9.4

WN # 3: Purchase consideration

Total no. of B Ltd.’s shares outstanding 50,000

Less: No. of shares held by A Ltd 10,000

Shares held by outsiders 40,000

Value of the above shares (40,000 × Rs. 9.40) Rs. 3,76,000

Number of shares issuable at intrinsic value (3,76,000÷11) 34,182

Less: Number of shares already held by B Ltd. 30,000

Number of shares to be issued 4,182

Purchase consideration (4182 x 11) Rs. 46,002

In Shares In Cash

Rs. 46,000 Rs.2

Part II - In the books of Selling Company - B Ltd.

Section A: Pre-Amalgamation Event

Particulars Debit Credit

i. Dividend Receivable

Dividend Receivable A/c Dr. 30,000

To Profi t and Loss A/c 30,000

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Advanced Financial Accounting & Reporting

Note : Revised Profi t and Loss A/c balance = Rs. 10,000 + 30,000

= Rs. 40,000

Section B : Entries relating to Amalgamation

Realisation Account

Dr. Cr.

Particulars Amount Particulars Amount

To Fixed Assets 50,000 By Debentures 3,00,000

To Debtors 1,50,000 By Creditors 90,000

To Stock 2,10,000 By A Ltd.’s A/c (Purchasing Co.) 46,002

To Cash 90,000 By Share capital (Head as Investment) 1,00,000

To Dividend Receivable 30,000

To Profi t transferred 6,002

to share holders

5,36,002 5,36,002

Particulars Debit Credit

Rs. Rs.

1. Transfer to Realisation Account

a. Transfer of Assets

Realisation A/c Dr. 5,30,000

To Fixed Assets A/c 50,000

To Debtors A/c 1,50,000

To Stock A/c 2,10,000

To Cash A/c 90,000

To Dividend Receivable A/c 30,000

(Being assets taken over by transferred

to Realisation A/c)

b. Transfer of Liabilities

10% Debentures A/c Dr. 3,00,000

Creditors A/c Dr. 90,000

To Realisation A/c 3,90,000

(Being liabilities taken over by A Ltd.

transferred to Realisation A/c)

2a. Purchase consideration due:

A Ltd A/c Dr. 46,002

To Realisation A/c 46,002

b. Receipt of Purchase Consideration :

Cash A/c Dr. 2

Equity shares of A Ltd A/c Dr. 46,000

To A Ltd A/c 46,002

Preparation of Company Accounts under Various Circumstances

150

Particulars Debit Credit

Rs. Rs.

3. Cancellation of paid up capital to the extent

of A Ltd’s Interest (Purchasing Co.) :

Share Capital A/c Dr. 1,00,000

To Realisation A/c 1,00,000

4. a. Amount due to outside shareholders :

Transfer of remaining Share capital and all reserves

Share Capital A/c Dr. 4,00,000

General Reserve A/c Dr. 1,00,000

Profi t & Loss A/c Dr. 40,000

To Shareholders A/c 5,40,000

b. Transfer of profi t on realisation to shareholders :

Realisation A/c Dr. 6,002

To Shareholders A/c 6,002

5. Settlement of amount to outsiders

(5,40,000 + 6,002) :

Shareholders A/c Dr. 5,46,002

To Equity shares of A Ltd. (5,00,000 + 46,000) 5,46,000

To Cash A/c 2

PART III - In the books of A Ltd (Purchasing co.)

Section A - Pre Amalgamation Events.

Particulars Debit Credit

1. Proposed dividend :

Profi t & Loss A/c Dr. 1,50,000

To Proposed Dividend A/c 1,50,000

2. Revaluation of Investments

Profi t and Loss A/c Dr. 56,000

To Investments A/c [1,50,000 - (10,000 × 9.4)] 56,000

Section B - Amalgamation events

Nature of Amalgamation : Merger

Method of Accounting : Pooling of Interest

(Rs.)

Particulars Debit Credit

3. For Purchase Consideration Due :-

Business Purchase A/c Dr. 46,002

To Liquidator of B Ltd.’s A/c 46,002

4. For assets and liabilities taken over :

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Advanced Financial Accounting & Reporting

Particulars Debit Credit

a. Aggregate investment -

Consideration Paid

i. Investment of A Ltd. in B 94,000

ii. Paid to outsiders.

I. Now issued 46,002

II. Already held

by A Ltd. in B Ltd. 5,00,000 5,46,002

6,40,002

III. Less: Paid up capital (5,00,000)

IV. Excess 1,40,002

b. Above excess to be adjusted against

i. General reserve of B Ltd. 1,00,000

ii. P & L A/c of B Ltd. 40,000

c. Balance of B Ltd reserve to be 1,40,000

incorporated

i. General reserve (1,00,000 – 1,00,000) Nil

ii. Profi t and Loss A/c (40,000 – 40,000) Nil

Fixed Assets A/c Dr. 50,000

Sundry Debtors A/c Dr. 1,50,000

Stock A/c Dr. 2,10,000

Cash at Bank A/c (90,000 + 2) Dr. 90,002

Dividend Receivable A/c Dr. 30,000

To Debentures A/c 3,00,000

To Creditors A/c 90,000

To Business Purchase A/c 46,002

To Investments in B Ltd A/c 94,000

5. Discharge of Purchase Consideration:

Liquidator of B Ltd A/c Dr. 46,002

To Equity Share Capital A/c 41,818

To Securities Premium A/c 4,182

To cash A/c 2

6. Others

a. Cancellation of inter company dividends.

Proposed Dividend A/c Dr. 30,000

To Dividend Receivable A/c 30,000

b. Cancellation of inter company owings.

Creditors A/c Dr. 25,000

To Debtors A/c 25,000

c. Creation of Stock Reserve

Profi t & Loss A/c Dr. 12,000

To Stock Reserve A/c 12,000

Preparation of Company Accounts under Various Circumstances

152

A Ltd

Balance Sheet as at 31st-March 2009

Liabilities Rs. Assets Rs.

Share Capital : Fixed assets

Authorised, issued, (10 Lakhs + 50,000) 10,50,000

subscribed and fully Current assets, Loans

paid up equity shares 15,41,820 and Advances

of Rs.10 each [of which Stock (480+210) 6,90,000

4182 shares Less : Reserve (12,000) 6,78,000

were issued for debtors (290+150-25) 4,15,000

consideration other Cash at bank

than cash] (1,40,000 + 90,002) 2,30,002

Reserves and Surplus :

Securities premium 4,182

General reserve 2,00,000

Profi t and Loss A/c (58,000) 1,46,182

Secured Loans :

10% Debentures 3,00,000

Current liabilities

and Provisions

A. Current liabilities 2,65,000

B. Proposed dividend 1,20,000

23,73,002 23,73,002

Illustration 27 :

The following are the Balance Sheets of A Ltd. and B Ltd. as on 31st December 2008.

Liabiltiies A Ltd. BLtd. Assets A Ltd. BLtd.

Rs. Rs. Rs. Rs.

Share capital Fixed Assets 7,00,000 2,50,000

Equity shares of 6,00,000 3,00,000 Investment:

Rs. 10 each 6,000 shares of B

10% Preference 2,00,000 1,00,000 Ltd. 80,000 -

shares of Rs. 10 5,000 shares of A

each Ltd. - 80,000

Reserves and 3,00,000 2,00,000 Current Assets:

surplus Stock 2,40,000 3,20,000

Secured loans: Debtors 3,60,000 1,90,000

12% Debentures 2,00,000 1,50,000 Bills receivable 60,000 20,000

Current liabilities Cash at bank 1,10,000 40,000

Sundry creditors 2,20,000 1,25,000

Bills payable 30,000 25,000

15,50,000 9,00,000 15,50,000 9,00,000

Fixed assets of both the companies are to be revalued at 15% above book value. Stock in— trade and Debtors

are taken over at 5% lesser than their book value. Both the companies are to pay 10% Equity dividend,

Preference dividend having been already paid.

153

Advanced Financial Accounting & Reporting

After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following terms.

i. 8 Equity shares of Rs. 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.

ii. 10% Preference Shareholders of B Ltd. will be paid at 10% discount by issue of 10% Preference Shares

of Rs. 100 each at par in A Ltd.

iii. 12% Debentureholders of B Ltd. are to be paid at 8% premium by 12% Debentues in A Ltd. issued

at a discount of 10%.

iv. Rs. 30,000 is to be paid by A Ltd. to B Ltd. for Liquidation expenses. Sundry creditors of B Ltd. include

Rs. 10,000 due to A Ltd.

Prepare :

(a) Absorption entries in the books of A Ltd.

(b) Statement of consideration payable by A Ltd.

Solution:

Part - I Purchase consideration payable by A Ltd.

A. Equity share holders:

No of equity shares of B Ltd. 30,000

Less:- Held by A Ltd. 6,000

No. of equity shares held by outsiders 24,000

Exchange ratio 8:6

No. of equity shares to be issued by A Ltd. (24,000 × 8/6) 32,000

Less: Already held by B Ltd. in A Ltd. (5,000)

No. of equity shares to be issued now 27,000

Value of shares to be issued 27,000 × 10 = Rs. 2,70,000

B. Preference share holders:

Preference Share capital of B Ltd. 1,00,000

Payable at discount of 10% [100,000 - (10% of 100,000)] 90,000

10% Preference shares to be issued at par by A Ltd. to B Ltd. Rs. 90,000

C. Purchase consideration (A+B) Rs. 3,60,000

Part II - Absorption entries in the books of A Ltd.

A. Pre - Amalagamation Events :-

Particulars Debit Credit

1. Revaluation of Fixed assets

Fixed Assets A/c Dr. 1,05,000

To Revaluation Reserve A/c 1,05,000

2. Dividend received from B Ltd. on 600 shares

Bank A/c Dr. 6,000

To Reserves and Surplus 6,000

Preparation of Company Accounts under Various Circumstances

154

Particulars Debit Credit

3. Dividend on equity Share capital @ 10%

i. Due entry

Reserves and Surplus Dr. 60,000

To Proposed Dividend A/c 60,000

ii. Payment entry

Proposed Dividend A/c Dr. 60,000

To Bank A/c 60,000

B. Amalgamation Events

Nature of Amalgamation - Purchase

Method of Accounting - Purchase

Particulars Debit Credit

1. For Purchase Consideration Due:

Business purchase A/c Dr. 3,60,000

To Liquidator of B Ltd. 3,60,000

2. For assets and liabilities taken over

Fixed Assets (115% of 2,50,000) Dr. 2,87,500

Stock A/c (95% of 3,20,000) Dr. 3,04,000

Debtors A/c [95% of 200,000] - (5% of 190,000) Dr. 1,80,500

Bills Receivable A/c Dr. 20,000

Bank A/c * Dr. 15,000

To 12% Debentures of B Ltd A/c 1,62,000

To Sundry creditors A/c 1,25,000

To Bills payable A/c 25,000

To Business Purchase A/c 3,60,000

To Investment in B Ltd. A/c 80,000

To Capital Reserve A/c (Balancing Figure) 55,000

3. For Discharge of Purchase consideration

Liquidator of B Ltd A/c Dr. 3,60,000

To Equity Share Capital A/c 2,70,000

To 10% Preference Share Capital A/c 90,000

4. Liquidation expenses incurred by B Ltd, later reimbursed by A Ltd.

Capital Reserve A/c Dr. 30,000

To Bank A/c 30,000

5. Discharge to debenture holders of B Ltd.

12% Debenture Holders A/c Dr. 1,62,000

Discount on Issue of debentures A/c Dr. 18,000

To 12% Debentures A/c. 1,80,000

155

Advanced Financial Accounting & Reporting

Particulars Debit Credit

6. Cancellation of inter company owings

Sundry Creditors A/c Dr. 10,000

To Sundry Debtors A/c 10,000

* Bank Balance of B Ltd.

Balance as per Balance Sheet 40,000

Add : Dividend Received from A Ltd (10% on 50,000) 5,000

Less : Dividend paid on Share capital (10% on 3,00,000) [30,000]

15,000

# 12% Debentures of B Ltd. 1,50,000

Payable at 8% premium 1,50,000 × 108%

= 1,62,000

VI. Chain Holding

Illustration - 28

The following are the summarized Balance Sheet of A Ltd. and B Ltd.

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Equity Share Capital A/c 32,000 28,000 Sundry assets 42,000 33,000

Profi t and Loss A/c 5,000 — Shares in B Ltd. 20,000 —

Creditors 15,000 6,000 Profi t and Loss A/c — 1,000

Loan - C Ltd. 10,000 —

62,000 34,000 62,000 34,000

The whole of the shares of A Ltd. are held by C Ltd. and the entire Share capital of B Ltd. is held by A Ltd.

A new company Z Ltd. is formed to acquire the sundry assets and liabilities of A Ltd. and B Ltd. For the

purpose, the sundry assets of A Ltd. are revalued at Rs. 30,000 and those of B Ltd. at Rs. 20,000.

Show the journal entries and prepare necessary ledgers A/c to close the books of A Ltd. and B Ltd.

Solution :

In the Books of A Ltd.

(Rs.)

Particulars Debit Credit

1. Realisation A/c Dr. 62,000

To Sundry Assets A/c 42,000

To Investment in B Ltd. A/c 20,000

[Being sundry assets and shares in B Ltd. transferred

to Realisation A/c on sale of business of A Ltd.]

2. Creditors A/c Dr. 15,000

Loan (C Ltd.) A/c Dr. 10,000

Preparation of Company Accounts under Various Circumstances

156

Particulars Debit Credit

To Realisation A/c 25,000

[Sundry creditors and loans transferred to

Realisation A/c on sale of business to Z Ltd.]

3. Z Ltd. A/c Dr. 5,000

To Realisation A/c 5,000

[Amount of purchase consideration receivable

from Z Ltd.]

4. Shares in Z Ltd. A/c Dr. 5,000

To Z Ltd. A/c 5,000

[Amount of purchase consideration received as

shares of B Ltd.]

5. Shares in Z Ltd. A/c Dr. 14,000

To Realisation A/c 14,000

[Amount of shares in Z Ltd. received against

investment in Z Ltd.]

6. Shareholders (C Ltd.) A/c Dr. 18,000

To Realisation A/c 18,000

[Loss on realisation transferred to Shareholders A/c]

7. Equity Share Capital A/c Dr. 32,000

Profi t and Loss A/c Dr. 5,000

To Realisation A/c 37,000

[Balance of Share capital and Profi t and Loss A/c

transfer to Share holder A/c]

8. Shareholders (C Ltd.) A/c Dr. 19,000

To Shares in Z Ltd. A/c 19,000

[Amount payable to shareholders discharged by

issue of shares in Z Ltd. (14,000 ÷ 5,000)]

In the Books of B Ltd.

Particulars Debit Credit

1. Realisation A/c Dr. 33,000

To Sundry Assets A/c 33,000

[Being Sundry Assets and Shares in B Ltd.

transferred to Realisation account on sale

of business to Z Ltd.]

2. Creditors A/c Dr. 6,000

To Realisation A/c 6,000

[Sundry Creditor is transferred to Realisation A/c

on sale of Business to Z Ltd.]

3. Z Ltd. A/c Dr. 14,000

To Realisation A/c 14,000

157

Advanced Financial Accounting & Reporting

Particulars Debit Credit

[Amount of purchase consideration receivable

from Z Ltd. on transfer sundry assets, creditor

and Loan vide agreement dated.....]

4. Equity Share Capital A/c Dr. 28,000

To Shareholders (A Ltd.) A/c 28,000

[Being amount of Share capital transferred to

Shareholder A/c]

5. Shareholders A/c Dr. 14,000

To Realisation A/c 13,000

To Profi t and Loss A/c 1,000

[Loss on realisation and Profi t and Loss A/c debit

balance transferred to Share holders A/c]

6. Shares in Z Ltd. A/c Dr. 14,000

To Z Ltd. A/c 14,000

[Amount of purchase consideration received in

shares of Z Ltd.]

7. Shareholders (A Ltd.) A/c Dr. 14,000

To Shares in Z Ltd. 14,000

[Amount payable to shareholders discharged by

issue of shares in Z Ltd.]

WN # 1 : Calculation of Purchase Consideration (Net Assets Method)

Particulars A Ltd. B Ltd.

Value of net assets 30,000 20,000

Creditors (15,000) (6,000)

Loans from C Ltd. (10,000) —

Purchase Consideration 5,000 14,000

In the Books of B Ltd. :

Realisation Account

Dr. Cr.

Particulars Amount Particulars Amount

To Sundry Assets 33,000 By Creditors A/c 6,000

By A Ltd. (Purchase Consideration) 14,000

By Shareholders (A Ltd.) A/c 13,000

(Loss on Realisation)

33,000 33,000

Preparation of Company Accounts under Various Circumstances

158

Shareholders (A Ltd.) Account

Dr. Cr.

Particulars Amount Particulars Amount

To Realisation A/c 13,000 By Share Capital A/c 28,000

To Profi t and Loss A/c 1,000

To Shares in Z Ltd. A/c 14,000

28,000 28,000

In the Books of A Ltd. :

Realisation Account

Dr. Cr.

Particulars Amount Particulars Amount

To Sundry Assets 42,000 By Creditors A/c 15,000

To Investments in B Ltd. 20,000 By Loan (Z Ltd.) 10,000

By A Ltd. (Purchase 5,000

consideration)

By Shares in A Ltd. 14,000

By Shareholders A/c 18,000

(Loss on Realisation)

62,000 62,000

Sundry Shareholders (A Ltd.) Account

Dr. Cr.

Particulars Amount Particulars Amount

To Realisation A/c 18,000 By Share capital A/c 32,000

To Shares in Z Ltd. 19,000 By Profi t and Loss A/c 5,000

(14,000 from B Ltd.

5,000 from Z Ltd.)

37,000 37,000

VII. Internal Reconstruction

Illustration - 29 :

The Balance Sheet of Z Ltd. before reconstruction is:

Liabilities Rs. Assets Rs.

Building at cost

12,000 7% Preference Less: Depreciation 4,00,000

shares of Rs.50 each 6,00,000 Plant at cost

7,500 Equity shares of Rs. 100 Less: Depreciation 2,68,000

each 7,50,000 Trade Marks and Goodwill

at Cost 3,18,000

159

Advanced Financial Accounting & Reporting

Liabilities Rs. Assets Rs.

(Note : Preference dividend is Stock 4,00,000

in arrear for fi ve years) Debtors 3,28,000

Loan 5,73,000 Preliminary expenses 11,000

Sundry creditors 2,07,000 Profi t and Loss A/c 4,40,000

Other liabilities 35,000

Total 21,65,000 Total 21,65,000

The Company is now earning profi ts short of working capital and a scheme of reconstruction has been

approved by both classes of shareholders. A summary of the scheme is as follows:

a. The Equity Shareholders have agreed that their Rs. 100 shares should be reduced to Rs. 5 by cancellation

of Rs. 95 per share. They have also agreed to subscribe in each for the six new Equity Shares of Rs. 5

each for each Equity Share held.

b. The Preference Shareholders have agreed to cancel the arrears of dividends and to accept for each

Rs.50 share, 4 new 5 per cent Preference Shares of Rs.10 each, plus 3 new Equity Shares of Rs. 5 each,

all credited as fully paid.

c. Lenders to the Company of Rs. 1,50,000 have agreed to convert their loan into share and for this

purpose they will be allotted 12,000 new preference shares of Rs.10 each and 6,000 new equity share

of Rs. 5 each.

d. The Directors have agreed to subscribe in cash for 40,000, new Equity Shares of Rs. 5 each in addition

to any shares to be subscribed by them under (a) above.

e. Of the cash received by the issue of new shares, Rs.2,00,000 is to be used to reduce the loan due by

the Company.

f. The equity Share capital cancelled is to be applied:

i. to write off the preliminary expenses;

ii. to write off the debit balance in the Profi t and Loss A/c ; and

iii. to write off Rs.35,000 from the value of Plant.

Any balance remaining is to be used to write down the value of Trade Marks and Goodwill.

Show by journal entries how the fi nancial books are affected by the scheme and prepare the balance sheet

of company after reconstruction. The nominal capital as reduced is to be increased to the old fi gures of Rs.

6,50,000 for Preference capital and Rs.7,50,000 for Equity capital.

Solution :

Particulars Debit Credit

1. Reduction of Equity capital

Equity Share capital A/c (Face Value Rs. 100) Dr. 7,50,000

To Equity Share capital (Face value Rs. 5) A/c 37,500

To Reconstruction A/c 7,12,500

Preparation of Company Accounts under Various Circumstances

160

Particulars Debit Credit

2. Right issue : (7,500 × 6 = 45,000 Shares)

(a) Bank A/c Dr. 1,12,500

To Equity Share Application A/c 1,12,500

(b) Equity Share Application A/c Dr. 1,12,500

To Equity Share Capital A/c 1,12,500

3. Cancellation of arrears of preference dividend

NO ENTRY (as it was not provided in the Books of Accounts)

Note :

(a) On cancellation, it ceases to be a contingent

liability and hence no further disclosure

(b) Preference shareholders have to forego

voting rights presently enjoyed at par with

equity share holders

4. Conversion of preference shares

7% Preference Share Capital A/c Dr. 6,00,000

Reconstruction A/c (balancing fi gure) Dr. 60,000

To 5% Preference Share Capital (12,000×4×10) 4,80,000

To Equity Share Capital (6,000 × 6 × 5) 1,80,000

5. Conversion of Loan

Loan A/c Dr. 1,50,000

To 5% Preference Share Capital A/c 1,20,000

To Equity Share Capital A/c 30,000

6. Subscription by directors:

(a) Bank A/c Dr. 1,00,000

To Equity Share Application A/c 1,00,000

(b) Equity Share Application A/c Dr. 1,00,000

To Equity Share Capital A/c 1,00,000

7. Repayment of loan

Loan A/c Dr. I2,00,000

To Bank 2,00,000

8. Utilisation of reconstruction surplus

Reconstruction A/c Dr. 6,52,500

To Preliminary Expenses A/c 11,000

To Profi t and Loss A/c 4,40,000

To Plant A/c 35,000

To Trademark and Goodwill A/c 1,66,500

161

Advanced Financial Accounting & Reporting

Reconstruction Account

Dr. Cr.

Particulars Amount Particulars Amount

To Preference shareholders 60,000 By Equity Share capital (FV Rs. 50) 7,12,500

To Preliminary expenses 11,000

To Profi t and Loss A/c 4,40,000

To Plant A/c 35,000

To Trademark and Goodwill 1,66,500

7,12,500 7,12,500

Bank Account

Dr. Cr.

Particulars Amount Particulars Amount

To Equity share application A/c 1,12,500 By Loan A/c 2,00,000

To Equity share application A/c 1,00,000 By Balance c/d 12, 500

2,12,500 2,12,500

Balance sheet of Z Ltd. (and Reduced)

Liabilities Rs. Assets Rs. Rs.

Authorised and issued Fixed assets :

capital Building at Cost

60,000 Preference shares 6,00,000 Less: Depreciation 4,00,000

of Rs. 10 each Plant Cost

1,50,000 Equity shares of 7,50,000 Less: Depreciation 2,68,000

Rs. 5 each Less: Reduction 35,000 2,33,000

Issued, subscribed and paid up Trade mark and

Equity capital 90,000 equity Goodwill at Cost 3,18,000

shares of Rs. 5 each 4,50,000 Less: Reduction 1,66,500 1,51,500

Current assets:

5% Preference Share Stock 4,00,000

capital Debtors 3,28,000

60,000 Preference shares 6,00,000 Bank 12,500

of Rs. 10 each Miscellaneous Exp.

Loan 5,73,000 Preliminary Exp. 11,000

Less: Reduction 3,50,000 2,23,000 Less: Reduced 11,000 Nil

Current liabilities and

Provisions

Sundry creditors 2,07,000

Other Liabilities 35,000

15,25,000 15,25,000

Preparation of Company Accounts under Various Circumstances

162

Illustration - 30

M Ltd. is in the hands of a Receiver for debenture holders who holds a charge on all assets except uncalled

capital. The following statement shows the position as regards creditors as on 31st March, 2009 :

Liabilities Rs. Assets Rs.

Share capital 3,60,000 Property, Machinery

in shares of Rs.60 each and Plant etc. (Cost

Rs. 30 paid up - Rs. 3,90,000)

First Debentures 3,00,000 estimated at 1,50,000

Second Debentures 6,00,000 Cash in hand of

Unsecured Creditors 4,50,000 the Receiver 2,10,000

Charged under Debentures 4,20,000

Uncalled Capital 1,80,000

Defi ciency 7,50,000

17,10,000 17,10,000

A holds the First Debentures for Rs. 3,00,000 and Second Debentures for Rs. 3,00,000. He is also an unsecured

creditor for Rs. 90,000. B holds Second Debentures for Rs. 3,00,000 and is an unsecured creditor for Rs.

60,000.

The following scheme of reconstruction is proposed:-

1. A is to cancel Rs. 2,10,000 of the total debt owing to him, to advance Rs. 30,000 in cash and to take

First Debentures (in cancellation of those already issued to him) for Rs. 5,10,000 in satisfaction of all

his claims.

2. B is to accept Rs. 90,000 in cash in satisfaction of all claims by him.

3. Unsecured creditors (other than A and B) are to accept four shares of Rs.7.50 each, fully paid in

satisfaction of 75% of every Rs.60 of their claim. The balance of 25% is to be postponed and to be

payable at the end of three years from the date of Court’s approval of the scheme. The nominal Share

capital is to be increased accordingly.

4. Uncalled capital is to be called up in full and Rs. 52. 50 per share cancelled, thus taking the shares of

Rs. 7.50 each.

Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary

journal entries and the Balance Sheet of the Company after the scheme has been carried into effect.

Solution :

WN # 1 : Calculation of P & L Debit Balance at the time of Reconstruction

Liabilities Rs. Assets Rs.

Share capital 1,80,000 Fixed assets 3,90,000

1 st Debenture 3,00,000 (Book value)

2nd Debenture 6,00,000 Cash 2,70,000

Unsecured creditors 4,50,000 Profi t and Loss A/c (Bal. fi g.) 8,70,000

15,30,000 15,30,000

163

Advanced Financial Accounting & Reporting

Particulars Debit Credit

Rs. Rs.

1. Restructuring of A’s liability:

a. Ascertainment of amount due

1st DebenturesA/c Dr. 3,00,000

2nd Debentures A/c Dr. 3,00,000

Unsecured Creditors A/c Dr. 90,000

To A’s A/c 6,90,000

b. Waiver

A’s A/c Dr. 2,10,000

To Reconstruction A/c 2,10,000

c. Cash brought in

Bank A/c Dr. 30,000

To A’s A/c 30,000

d. Conversion of liability

A’s A/c Dr. 5,10,000

To 1st Debentures A/c 5,10,000

2. Restructuring of B’s liability:

2nd Debentures A/c Dr. 3,00,000

Unsecured creditors A/c Dr. 60,000

To Bank A/c 90,000

To Reconstruction A/c 2,70,000

3. Restructuring of other unsecured creditors*

(4,50,000 - 90,000 - 60,000 = 3,00,000)

Unsecured Creditors A/c Dr. 3,00,000

To Equity Share capital A/c 1,50,000

To Loan (Unsecured) A/c 75,000

To Reconstruction A/c 75,000

4. Share capital

a. Call money due:

Share call A/c Dr. 1.80,000

To Share capital A/c 1,80,000

b. Share Call Money Received :

Bank A/c Dr. 1,80,000

To Share call A/c 1,80,000

c. Capital Reduction :

Equity Share Capital A/c (Face value Rs. 60) Dr. 3,60,000

To Equity Share capital (Face value Rs.7.50) 45,000

To Reconstruction A/c 3,15,000

5. Utilisation of reconstruction surplus

Reconstruction A/c Dr. 8,70,000

To Profi t and Loss A/c 8,70,000

Preparation of Company Accounts under Various Circumstances

164

a. Scheme of settlement unit of liability is 60

b. 75% share (60 x .75) 45

i. 4 Equity shares @ Rs. 7.5 30

ii. Waiver 15

c. 25% share (60 x .25) 15

[Can be carried forward as unsecured loan]

Note : Liability is settled in the Ratio of

30:15:15 (i.e. 2:1:1)

Balance Sheet (and Reduced)

Liabilities Rs. Assets Rs.

Share capital 1,95,000 Fixed assets 3,90,000

Debentures 5,10,000 Cash 3,90,000

Unsecured Loans 75,000

7,80,000 7,80,000

Dr. Reconstruction Account Cr.

Particulars Rs. Particulars Rs.

To Profi t and Loss A/c 8,70,000 By A’s A/c 2,10,000

By B’s A/c 2,70,000

By Unsecured creditors 75,000

By Equity Share Capital 3,15,000

8,70,000 8,70,000

Dr. Cash/Bank Account Cr.

Particulars Rs. Particulars Rs.

To A’s A/c 3,00,000 By B’s A/c 90,000

To Share call A/c 1,80,000 By Balance c/d 3,90,000

4,80,000 4,80,000

Illustration - 31

The following was the Balance Sheet of Bhushan Developers Ltd., as on 31st March 2009 :

Liabilities Rs. Assets Rs.

Authorised capital : Goodwill 10,000

20,000 Equity Shares of Land and buildings 20,500

Rs.10 each 2,00,000 Machinery 50,850

Issued, subscribed and Stock 10,275

paid up capital Book debts 15,000

12,000 Shares of Cash at bank 1,500

Rs.10 each 1,20,000 Profi t and Loss A/c :

Less: Calls in arrear Balance as per last

(Rs. 3 per share

165

Advanced Financial Accounting & Reporting

Liabilities Rs. Assets Rs.

Balance Sheet 22,000

on 3,000 shares) (9,000) Less: Profi t for the year (1,200)

1,11,000

Sundry creditors 15,425 20,800

Provision for taxation 4,000 Preliminary expenses 1,500

1,30,425 1,30,425

The directors have had a valuation made of the machinery and fi nd it overvalued by .. Rs.10,000. It is

proposed to write down this asset to its true value and to extinguish the defi ciency in the Profi t and loss

account and to write off goodwill and preliminary expenses, by the adoption of the following course :

1. Forfeit the shares on which the call is outstanding.

2. Reduce the paid up capital by Rs.3 per share.

3. Reissue the forfeited shares at Rs.5 per share.

4. Utilise the provision for taxes, if necessary.

The shares on which the calls were in arrear were duly forfeited and reissued on payment of Rs.5 per

share. You are requested to draft the journal entries necessary and the Balance sheet of the Company after

carrying out the terms of the scheme as set above.

Solution :

Particulars Debit Credit

Rs. Rs.

1. Forfeiture of 3,000 shares :

Equity Share Capital A/c Dr. 30,000

To Calls in arrears A/c 9,000

To Share forfeiture A/c 21,000

2. Reduction of capital

Equity Share capital (Face value - Rs. 10) Dr. 90,000

To Equity Share capital (Face value Rs. 7) A/c 63,000

To Reconstruction A/c 27,000

3. Re-issue of forfeiture shares :

Bank A/c Dr. 15,000

Shares Forfeiture A/c Dr. 6,000

To Equity Share Capital A/c 21,000

4. Transfer of unutlised balance in share forfeiture A/c to Capital Reserve

Shares Forfeiture A/c Dr. 15,000

To Capital Reserve 15,000

5. Utilisation of Reconstruction A/c

Reconstruction A/c Dr. 27,000

Capital Reserve A/c Dr. 15,000

Provision for Tax A/c (Balancing Figure) Dr. 300

To Profi t and Loss A/c 20,800

To Preliminary Expenses A/c 1,500

To Machinery A/c 10,000

To Goodwill A/c 10,000

Preparation of Company Accounts under Various Circumstances

166

Balance sheet of Bhushan Developers Ltd. (and Reduced) as at 01.04.09

Liabilities Rs. Rs. Assets Rs Rs.

Authorised Capital : Goodwill 10,000

20,000 Equity Shares of Less: Reduced 10,000 Nil

Rs. 10 each 20,00,000 Land and Building 20,500

Issued, Subscribed Machinery 50,850

and paid up Capital 84,000 Less: Reduced 10,000 40,850

12,000 shares of Rs.7 each Stock 10,275

Sundry creditors 15,425 Book Debts 15,000

Provision for tax 4,000 Cash at Bank 16,500

Less: Reduced 300 3,700 Profi t and Loss A/c 20,800

Less: Reduced 20,800 Nil

Preliminary Expenses 1,500

Less: Reduced 1,500 Nil

1,03,125 1,03,125

Illustration - 32

The Balance sheet of Z Ltd. at 31st March 2009 was as follows:

Liabilities Rs. Rs. Assets Rs Rs.

Share capital Intangibles 68,000

Authorised 14,00,000 Freehold premises at cost 1,40,000

Issued and subscribed capital Plant and equipment at cost

64,000 8% cumulative Less depreciation 2,40,000

preference shares of Investments in shares in

Rs. 10 each fully paid Q Ltd. at cost 3,24,000

64,000 equity shares of Stocks 2,48,000

Rs.10 each, Rs.7.5 paid 4,80,000 Debtors 3,20,000

Loans from directors 60,000 Deferred revenue expenditure 48,000

Sundry creditors 4,40,000 Profi t and Loss A/c 4,40,000

Bank overdraft 1,08,000

18,28,000 18,28,000

Note : The arrear of preference dividends amount to Rs. 51,200.

A scheme of reconstruction was duly approved with effect from 1 April 2009 under the

conditions stated below:

a. The unpaid amount on the equity shares would be called up.

b. The preference shareholders would forego their arrear dividends. In addition, they would accept a

reduction of Rs. 2.5 per share. The dividend rate would be enhanced to 10%.

c. The equity shareholders would accept a reduction of Rs. 7.5 per share.

d. Z Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the Share capital of that ompany. Q Ltd.

is not a quoted company. The average net profi t (after tax) of the company is Rs. 2,50,000. The shares

would be valued based on 12% capitalisation rate.

e. A bad debt provision at 2% would be created.

167

Advanced Financial Accounting & Reporting

f. The other assets would be valued as under:

Rs.

Intangibles 48,000

Plant 1,40,000

Freehold premises 3,80,000

Stocks 2,50,000

g. The profi t and loss account debit balance and the balance standing to the debit of

the deferred revenue expenditure account would be eliminated.

h. The directors would have to take equity shares at the new face value of Rs. 2.5 per

share in settlement of their loan.

The equity shareholders, including the directors, who would receive equity shares in settlement of

their loans, would take up two new equity shares for every one held.

i. The preference shareholders would take up one new preference share for every four

held.

j. The authorised Share capital would be restated to Rs. 14,00,000.

k. The new face values of the shares-preference and equity will be maintained at their reduced levels.

You are required

1. to prepare the necessary ledger accounts to effect the above; and

2. to prepare the balance sheet of the company after reconstruction.

Solution:

Share Call Account

Dr. Cr.

Particulars Amount Particulars Amount

To Equity Share Capital A/c 1,60,000 By Bank A/c 1,60,000

1,60,000 1,60,000

Equity Share Capital Account

Dr. Cr.

Particulars Amount Particulars Amount

To Reconstruction A/c 4,80,000 By Balance b/d 4,80,000

To Equity Share Capital A/c 1,60,000 By Equity Share Call A/c 1,60,000

5,40,000 5,40,000

8% Preference Share Capital Account

Dr. Cr.

Particulars Amount Particulars Amount

To Reconstruction A/c 1,60,000 By Balance b/d 6,40,000

To 10% Preference 4,80,000

Share Capital A/c

6,40,000 6,40,000

Preparation of Company Accounts under Various Circumstances

168

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 3,24,000 By Reconstruction A/c 11,500

By Balance c/d (WN # 1) 3,12,500

3,24,000 3,24,000

WN # 1 : Value of investments

Particulars Amount

Rs.

Average net profi t (after tax) 2,50,000

Capitalisation Rate 12%

Value of Q Ltd. 2083333.33

Share of Z Ltd. 15%

Value of Z Ltd. investment in Q Ltd. 3,12,500

Bank Account

Dr. Cr.

Particulars Amount Particulars Amount

To Equity Share Call A/c 1,60,000 By Balance b/d 2,08,000

To Equity Share Application By Balance c/d 5,12,000

Money A/c 4,40,000

To Preference Share Application 120,000

Money A/c

7,20,000 7,20,000

Reconstruction Account

Dr. Cr.

Particulars Amount Particulars Amount

To Provision for Bad Debts A/c 6,400 By Equity Share capital A/c 4,80,000

To Intangible A/c 20,000 By 8% Preference Share 1,60,000

To Plant A/c 1,00,000 Capital A/c

To Profi t and Loss A/c 4,40,000 By Freehold Property A/c 2,40,000

To Deferred revenue Exp. A/c 48,000 By Stock A/c 2,000

To Investment in Q Ltd. A/c 11,500

To Capital Reserve A/c 2,56,100

8,82,000 8,82,000

Investment in shares in Q Ltd. Account

169

Advanced Financial Accounting & Reporting

Provision for Bad debts Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 6,400 By Reconstruction A/c 6,400

6,400 6,400

Intangibles Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 68,000 By Reconstruction A/c 20,000

By Balance c/d 48,000

68,000 68,000

Plant Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 2,40,000 By Reconstruction A/c 1,00,000

By Balance c/d 1,40,000

2,40,000 2,40,000

Freehold Premises Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 1,40,000 By Balance c/d 3,80,000

To Reconstruction A/c 2,40,000

3,80,000 3,80,000

Stock Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 2,48,000 By Balance c/d 2,50,000

To Reconstruction A/c 2,000

2,50,000 2,50,000

Profi t and Loss Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 4,40,000 By Reconstruction A/c 4,40,000

4,40,000 4,40,000

Preparation of Company Accounts under Various Circumstances

170

Deferred Revenue Expense Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 48,000 By Reconstruction A/c 48,000

48,000 48,000

Loans from Directors Account

Dr. Cr.

Particulars Amount Particulars Amount

To Equity Share capital 60,000 By Balance b/d 60,000

(No. 24,000)

(Face value of Rs 2.5)

60,000 60,000

Equity Share capital Account (Face value Rs. 2.5)

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 6,60,000 By Equity Share capital 1,60,000

(Face value Rs. 10)

By Loans from directors A/c 60,000

By Share application money A/c 4,40,000

6,00,000 6,00,000

10% Preference Account

Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d 6,00,000 By 8% Preference Share Capital 4,80,000

By Share application money A/c 1,20,000

6,00,000 6,00,000

Share Application Money Account

Dr. Cr.

Particulars Amount Particulars Amount

To Equity Share Capital 4,40,000 By Bank A/c 4,40,000

(Face value Rs. 25) By Bank A/c 1,20,000

To 10% preference Share Capital 1,20,000

6,00,000 6,00,000

171

Advanced Financial Accounting & Reporting

Balance Sheet of Z Ltd. as on 01.04.2009

Liabilities Amount Assets Amount

Authorised Share Fixed assets

capital : 14,00,000 Intangibles 68,000

2,64,000 share of Less : Reduced (20,000) 48,000

Rs. 2.5 each 6,60,000

(of above 24,000) Feehold Premises 1,40,000

shares of Rs. 2.5 Lakhs Add: Increased 2,40,000 3,80,000

issued for Plant and Equipment net of

consideration other Depreciation 2,40,000

than cash to directors) Less : Reduced (1,00,000) 1,40,000

10% Preference Share 6,00,000 Investment in Shares in

capital 80,000 shares Q Ltd. at Cost 3,24,000

of Rs. 7.5 each Less : Reduced (11,500) 3,12,500

Reserve and surplus Stock 2,48,000

Capital reserve 2,56,100 Add: Increased 2,000 2,50,000

Sundry creditors 4,40,00 Debtors 3,20,000

Less : Provision (6,400) 3,13,600

Bank 5,12,000

Deferred Revenue Exp. 48,000

Less : Reduced (48,000) Nil

Profi t and Loss A/c 4,40,000

Less : Reduced (4,40,000) Nil

19,56,100 19,56,100

Notes :

1. It is assumed that there is permanent decline in the value of investments of Q Ltd.

2. Preference dividend, on cancellation, ceases to be a contingent liability. Hence, it is needles to disclose

the interest as Contingent Liability.

VIII. Reverse Merger

Illustration - 33

The following are the Balance sheets of AB Ltd. and XY Ltd. as on 31.12.2008.

(‘000)

Liabilities AB Ltd. XY Ltd. Assets AB Ltd. XY Ltd.

Rs. Rs. Rs. Rs.

Share capital : Fixed assets

Equity Shares of Rs.100 2,000 1,000 (net of depreciation) 2,700 850

each fully paid up Investments 700 –

Reserves and surplus 800 – Sundry Debtors 400 150

10% Debentures 500 – Cash and Bank 250 –

Loan from Financial Profi t and Loss A/c – 800

Institutions 250 400

Preparation of Company Accounts under Various Circumstances

172

Liabilities AB Ltd. XY Ltd. Assets AB Ltd. XY Ltd.

Rs. Rs. Rs. Rs.

Bank Overdraft – 100

Sundry creditors 300 300

Proposed Dividend 200 –

Total 4,050 1,800 Total 4,050 1,800

It was decided that XY Ltd. will acquire the business of AB Ltd. for enjoying the benefi t of carry forward

of business loss. After acquisition, XY Ltd. will be renamed as Z Ltd. The following scheme has been

approved for the merger.

i. XY Ltd. will reduce its shares to Rs. 10 and then consolidate 10 such shares into one share of Rs. 100

each (New Share).

ii. Financial institutions agreed to waive 15% of the loan of XY Ltd.

iii. Shareholders of AB Ltd. will be given one new share of XY Ltd. in exchange of every share held in

AB Ltd.

iv. AB Ltd. will cancel 20% holdings of XY Ltd. Investments were held at Rs. 250 thousands.

v. After merger, the proposed dividend of AB Ltd. will be paid to the shareholders of AB Ltd.

vi. Authorised Capital of XY Ltd. will be raised accordingly to carry out the scheme. vii. Sundry creditors

of XY Ltd. includes payables to AB Ltd. Rs. 1,00,000.

Pass the necessary entries to implement the scheme in the books of AB Ltd. and XY Ltd. and prepare a

Balance Sheet of Z Ltd.

Solution :

Part - I Purchase consideration

WN # 1 : Shareholding of AB Ltd. in XY Ltd.

Particulars Amount Rs.

a. Original Share capital of XY Ltd. 10,00,000

[10,000 equity shares of Rs. 100 each]

b. Share capital of XY Ltd. after reduction 1,00,000

[10,000 equity shares of Rs. 10 each]

c. Share capital of XY Ltd. after reconsolidation 1,00,000

[1000 equity shares of Rs. 100 each]

d. Holding of AB Ltd in XY Ltd. 20%

e. Value of holding of AB Ltd in XY Ltd. 20,000

[200 equity shares of Rs. 100 each]

173

Advanced Financial Accounting & Reporting

WN # 2 : Purchase consideration

a. No. of equity shares of AB Ltd. (20,00,000 ÷ 100) 20,000

b. Exchange ratio 1:1

c. No. of equity shares to be given by XY Ltd. to AB Ltd. 20,000

d. Less : No. of Equity shares held by AB Ltd. in XY Ltd. 200

e. No. of shares now to be given 19,800

f. Purchase consideration (19,800 equity shares of Rs. 100 each) 19,80,000

Part - II : Journal entries in the books of AB Ltd.

(Rs. ‘000)

Particulars Debit Credit

1. a. Transfer to realisation account of all Assets taken

over except investment held by selling company in

purchasing company

Realisation A/c Dr. 3,800

To Fixed assets A/c 2,700

To Investments [700 - 250] A/c 450

To Sundry Debtors A/c 400

To Cash and Bank A/c 250

b. Transfer to realisation account of all liabilities taken over

10% Debentures A/c Dr. 500

Loan from fi nancial institations A/c Dr. 250

Sundry Creditors A/c Dr. 300

Proposed Dividend A/c Dr. 200

To Realisation A/c 1250

2. Purchase consideration

a. Due entry

XY Ltd. A/c Dr. 1,980

To Realisation A/c 1,980

b. Receipt

Shares in XY Ltd. A/c Dr. 1,980

To XY Ltd. A/c 1,980

3. Transfer of realisation loss to share holders

Equity shareholders A/ c Dr. 570

To Realisation A/c 570

4. Transfer of Share capital and Reserves and surplus to equity share holders

Share capital A/c Dr. 2,000

Reserves and surplus A/c Dr. 800

To Equity shareholders 2,800

5. Settlement to share holders by transfer of purchase

consideration now received and shares already held

by AB Ltd. in XY Ltd.

Equity shareholders A/c Dr. 2,230

To Equity shares of XY Ltd. 2,230

Preparation of Company Accounts under Various Circumstances

174

Part. III. Journal entries in the books of XY Ltd.

(Rs. ‘000)

Particulars Debit Credit

1. Reduction of Share capital

Equity Share Capital (Rs. 100) A/c Dr. 1,000

To Equity Share Capital (Rs. 10) A/c 100

To Reconstruction A/c 900

2. Consolidation of equity shares of Rs.10 each to Rs. 100 each

Equity Share Capital (Rs. 10) A/c Dr. 100

To Equity Share Capital (Rs. 100) A/c 100

3. Waiver of loan by fi nancial institution

Loan from fi nancial institution A/c Dr. 60

To Reconstruction A/c 60

4. Write off the debit balance of Profi t and Loss A/c by utilising

Reconstruction A/c and balance of Reconstruction A/c

transferred to Capital reserve

Reconstruction A/c Dr. 960

To Profi t and Loss A/c 800

To Capital Reserve A/c 160

Entries relating to Amalgamation :

• Nature of Amalgamation - Merger

• Method of Accounting - Pooling of Interest Method

(Rs. ‘000)

Particulars Debit Credit

1. For Purchase Consideration Due

Business Purchase A/c Dr. 1,980

To Liquidator of AB Ltd. A/c 1,980

2. For assets and liabilities taken over

Purchase consideration now paid 1,980

Shares already held by AB Ltd. 250

Total consideration 2,230

Less: Paid-up Share capital of AB Ltd. 2,000

Excess Purchase Consideration Paid 230

This excess is to be adjusted against reserves of AB Ltd.

Reserves of AB Ltd. 800

Less: Excess as above 230

Balance to be incorporated 570

175

Advanced Financial Accounting & Reporting

Particulars Debit Credit

Fxed assets (net of depreciation) A/c Dr. 2,700

Investment A/c Dr. 450

Sundry Debtors A/c Dr. 400

Cash and Bank A/c Dr. 250

To Reserves and Surplus A/c 570

To Debentures A/c 500

To Loan from fi nancial institutions A/c 250

To Sundry Creditors A/c 300

To Proposed Dividend A/c 200

To Business Purchase A/c 1,980

3. Discharge of purchase consideration

Liquidator of AB Ltd. A/c Dr. 1,980

To Equity Share capital of XY Ltd. A/c 1,980

4. Payment of proposed divided to shareholders of AB Ltd.

Proposed Dividend A/c Dr. 200

To Bank A/c 200

5. Cancellation of inter company owings

Sundry Creditors A/c Dr. 100

To Sundry Debtors A/c 100

Balance sheet of Z Ltd. as on 31st March 09

(After Acquisition)

(Rs.’000)

Liabilities Amount Assets Amount

Rs. Rs.

Share capital Fixed assets net of depreciation 3,550

20,800 equity shares @ [2,700 + 850]

Rs.100/- each [1980+20+80] 2,080

Reserves and surplus Investments [700-250] 450

Capital reserves 160 Sundry debtors [400 + 150 – 100] 450

General reserves 570

Secured loan :

10% Debentures 500

Loan from Finanacial

Institution (340 + 250) 590

Bank over draft

[200+100-250] 50

Current liabilities and

provisions

Creditors [600-100) 500

4,450 4,450

Preparation of Company Accounts under Various Circumstances

176

IX. External Reconstruction

Illustration - 37

A Ltd. is engaged in the manufacture of D and N. It has two wholly owned subsidiaries. B Ltd. and C Ltd.

which have never traded. The draft fi nancial statement of parent company shows :

Balance Sheet as on 31st March, 2009

Liabilities Rs. Assets Rs.

Share Capital 40,000 Fixed Assets 21,400

Reserves and surplus 48,800 Investment in B Ltd. 10,000

Secured loan 12,000 Investment in C Ltd. 10,000

Sundry creditors 90,000 Current assets

Owing to subsidiaries 20,000 Stock and Work-in-progress 43,400

Proposed dividend 4,000 Sundry debtors 9,360

Cash at bank 36,400

2,14,800 2,14,800

Profi t and Loss Account for the year ended 31st March, 2009

Rs.

Net Profi t 37,200

Dividend Paid 4,000

Transfer to Reserve 33,200

The two managing directors Mr. Kali and Mr. Prem who own 40% and 60% respectively of the Share

capital of A Ltd. will become individually concerned with B Ltd. and C Ltd. respectively in order to allow

them to develop their own interests.

They have agreed to a scheme of reconstruction whereby the respective trade and assets apart from cash

at bank and liabilities will be transferred to the two subsidiaries. The resulting inter-company debts will be

waived and A Ltd. will be placed into liquidation. The liquidator will retain Rs. 5,200 of the cash at bank to

meet the costs of liquidation and reorganisation and pay dividend. He will distribute the remaining cash

at bank and shares in two subsidiaries to A Ltd’s shareholders Mr. Kali and Mr. Prem.

As far as his cash distribution pool permits, each director will then purchase, at net assets value, those

shares in his own company distributed by the liquidator to his former colleague. It has been agreed that

B Ltd. will receive a fi rst tranch of the assets of A Ltd. comprising stock and work in progress of Rs. 15,000.

C Ltd. will take over the liability for the Secured Loan. The remainder of the net assets will be transferred to

the subsidiary companies in the ratio of 75% to B Ltd. and 25% of C Ltd. with the group freehold property,

included in the Fixed assets at Rs. 15,000 being revalued at the open market value of Rs. 42,000 and being

transferred to C Ltd.as a part of its share.

You are required to :

a. Produce the proforma balance sheets of the two former subsidiary immediately after

reorganisation.

b. Calculate the fi nal share holdings in each of the two companies.

177

Advanced Financial Accounting & Reporting

Solution :

Purchase Consideration :

Particulars B Ltd. C Ltd.

Rs. Rs.

Stock in trade 15,000 —

Secured Loan — (12,000)

Remaining Net Assets in the Ratio of 75:25 (WN#1) 60,300* 20,100*

75,300 8,100

Total Purchase Consideration Rs. 83,400

WN # 1 : Net Asset Value :

Particulars Rs. Rs.

a. Fixed Asset: 15,000

Add: Increase due to Revaluation 27,000

Others (21,400 – 15,000) 6,400 48,400

b. Stock and Work-in-progress 43,400

Less: Separately taken by B Ltd. 15,000 28,400

c. Sundry Debtors 93,600

d. Total Assets (a+b+c) 1,70,400

e. Sundry Creditors (90,000)

f. Net Assets 80,400

g. B Ltd. Share (75% of Net Assets) 60,300

h. A Ltd. Share (25% of Net Assets) 20,100

Shareholders Account

Dr. Cr.

Kali Prem Kali Prem

(40%) (60%) (40%) (60%)

To Cash 12,480@ 18,720@ By Share capital 16,000 24,000

To B Ltd. 33,360 By Reserve 19,520 29,280

To C Ltd. 50,040 By Realisation (Profi t) 10,320# 15,480#

45,840 68,760 45,840 68,760

Cash

Particulars Amount

Opening balance 36,400

Retained by liquidator (5,200)

Closing balance 31,200

Kalii’s share [40% of (c)] 12,480

Prem’s share [60% of (c)] 18,720

Preparation of Company Accounts under Various Circumstances

178

# Realisation Profi t

Particulars Amount

Dividend 4,000

Revaluation on Fixed assets (42,000 – 15,000) 27,000

Liquidation expenses: (5,200)

Net realisation profi t 25,800

Kali [40% of (d)] 10,320

Prem [60% of (d)] 15,480

WN # 2 : Statement showing Goodwill or Capital Reserves

Particulars B Ltd. C Ltd.

(Rs.) (Rs.)

a. Purchase Consideration 75,300 8,100

b. Less: Net Assets as at the date of acquisition

representedby : 10,000 10,000

- Share capital

c. Goodwill 1,900

d. Capital Reserves 65,300

Proforma Balance Sheet of B Ltd. as on 31st March, 2009.

Liabilities Amount Assets Amount

Rs. Rs.

Share Capital 10,000 Fixed Assets 6,400

Reserves and Surplus 65,300 Current Assets:

Current liabilities Stocks and Work-in-Progress 43,400

Creditors 68,100 Debtors 93,600

1,43,400 1,43,400

Proforma Balance Sheet of C Ltd. as on 31st March, 2009.

Liabilities Amount Assets Amount

Rs. Rs.

Share Capital 10,000 Fixed assets 42,000

Secured Loan 12,000 Goodwill 1,900

Current liabilities 21,900

43,900 43,900

179

Advanced Financial Accounting & Reporting

X. Surrender of Shares

Illustration - 35

The business of P Ltd. was being carried on continuously at losses. The following are the extracts from the

Balance Sheet of the Comapny as on 31st March, 2009.

Balance Sheet as on 31st March, 2009

Liabilities Amount Assets Amount

Rs. Rs.

Authorised, Issed and Goodwill 50,000

Subscribed Capital : Plant 3,00,000

30,000 Equity Shares of Rs. 10 Loose Tools 10,000

each fully paid 3,00,000 Debtors 2,50,000

2,000 8% Cumulative Pref. Stock 1,50,000

Shares of Rs. 100 each fully paid 2,00,000 Cash 10,000

Securities Premium 90,000 Bank 35,000

Unsecured Loan(From Director) 50,000 Preliminary Expenses 5,000

Sundry creditors 3,00,000 Profi t & Loss Account 2,00,000

Outstanding Expenses 70,000

(including Directors’

remuneration Rs.20,000)

10,10,000 10,10,000

Note : Dividends on Cumulative Preference Shares are in arrears for 3 years.

The following scheme of reconstruction has been agreed upon and duly approved by the Court.

1. Equity shares to be converted into 1,50,000 shares of Rs. 2 each.

2. Equity shareholders to surrender to the Company 90 per cent of their holding.

3. Preference shareholders agree to forego their right to arrears to dividends inconsideration of which

8 percent Preference Shares are. to be converted into 9 per cent Preference Shares.

4. Sundry creditors agree to reduce their claim by one fi fth in consideration of their

getting shares of Rs. 35,000 out of the surrendered equity shares.

5. Directors agree to forego the amounts due on account of unsecured loan and

Director’s remuneration.

6. Surrendered shares not otherwise utilised to be cancelled.

7. Assets to be reduced as under :

Goodwill by Rs. 50,000

Plant by Rs. 40,000

Tools by Rs. 8,000

Sundry Debtors by Rs. 15,000

Stock by Rs. 20,000

8. Any surplus after meeting the losses should be utili sed in writing down the value of the plant

further.

9. Expenses of reconstruction amounted to Rs. 10,000.

Preparation of Company Accounts under Various Circumstances

180

10. Further 50,000 Equity shares were issued to the existing members for increasing the working capital.

The issue was fully subscribed and paid-up.

A member holding 100 equity shares opposed the scheme and his shares were taken over by the Director

on payment of Rs. 1,000 as fi xed by the Court.

You are required to pass the journal entries for giving effect to the above arrangement and also to draw

up the resultant Balance Sheet of the Company.

Solution :

Particulars Debit Credit

Rs. Rs.

a. Sub Division of Shares

Equity Share Capital (Rs. 10 each) A/c Dr. 3,00,000

To Equity Share Capital (Rs. 2 each) A/c 3,00,000

b. Surrender of Shares

Equity Share Capital (Rs. 2) A/c Dr. 2,70,000

To Shares Surrendered A/c 2,70,000

c. Conversion of Preference Share Capital

8% Cumulative Preference Share Capital A/c Dr. 2,00,000

To 9% Cumulative Preference Share Capital A/c 2,00,000

d. Surrendered shares issued to creditors

under reconstruction scheme

Shares Surrendered A/c Dr. 35,000

To Equity Share Capital A/c 35,000

e. Expenses Paid

Expenses A/c Dr. 10,000

To Bank A/c 10,000

f. Cancellation of unissued surrendered shares

Shares Surrendered A/c Dr. 2,35,000

To Capital Reduction A/c 2,35,000

g. Amount sacrifi ced by Directors

Unsecured Loan A/c Dr. 50,000

Sundry Creditors A/c Dr. 60,000

Outstanding Expenses A/c Dr. 20,000

To Capital Reduction A/c 1,30,000

h. Assets Written off

Capital Reduction A/c Dr. 3,65,000

To Goodwill A/c 50,000

To Loose tools A/c 8,000

To Sundry debtors A/c 15,000

181

Advanced Financial Accounting & Reporting

Particulars Debit Credit

Rs. Rs.

To Stock - in - trade A/c 20,000

To Profi t and Loss A/c 2,00,000

To Preliminary expenses A/c 5,000

To Expenses A/c 10,000

To Plant A/c 57,000

i. Issue of Shares

Applications received

Bank A/c Dr. 1,00,000

To Share Application A/c 1,00,000

Allotment of Shares

Share Application A/c Dr. 1,00,000

To Share Capital A/c 1,00,000

(Being 50000 equity shares of Rs. 2 each

issued as fully paid as per Board’s

Resolution dated... )

Note 1 : a. Cancellation of Preference dividend need not be journalised; on cancellation it cease to be

contingent liability and hence no further disclosure.

b. Preference shareholders have to forego policy rights presently enjoyed at par with Equity

Shareholders.

Note 2 : The transfer of 100 shares by the dissentient shareholders to the director concerned need not

be journalised.

Note 3 : It has been assumed that the share premium account is to be kept infact since the scheme is

silent about it.

Balance Sheet of P Ltd (And Reduced) as on 31st March 2009.

Liabilities Amount Amount Assets Amount Amount

Rs. Rs. Rs. Rs.

Share capital Fixed assets

Authorised Goodwill 50,000

1,50,000 Equity shares of 3,00,000 Less : Amount written off

Rs. 2 each under the scheme of

reconstruction 50,000 Nil

2000 9% Preference shares Plant 3,00,000

of Rs.100 each 2,00,000 Less : Amount written

off under the scheme of

Preparation of Company Accounts under Various Circumstances

182

Liabilities Amount Assets Amount

Rs. Rs.

reconstruction 57,000 2,43,000

Issued, subscribed and Current assets, Loans

paid up Advances

82,500 Equity Shares of Rs. 10 Loose tools. 2,000

each fully paid Stock-in-trade 1,30,000

(Of the above 17,500 Sundry Debtors 2,35,,000

shares have been issued for Cash at Bank 1,25,000

consideration other than cash Cash in Hand 10,000

under the scheme of 1,65,000

reconstruction)

20,000 9% Cumulative preference

shares of Rs. 100 each fully paid 2,00,000

Reserves and surplus:

Share Premium 90,000

Secured Loans Nil

Unsecured Loans Nil

Current liabilities and

provisions :

Sundry creditors 2,40,000

Outstanding expenses 50,000

7,45,000 7,45,000

XI. Demerger

Illustration - 36

The following is the Balance Sheet of P Ltd.

Liabilities Rs.

Equity Share Capital 2,00,000

Reserves and Surplus 4,00,000

Secured Loan 2,00,000

Unsecured Loans 6,00,000

14,00,000

183

Advanced Financial Accounting & Reporting

Assets Rs. Rs.

Fixed Assets 7,00,000

Investments 4,00,000

(Market Value Rs. 9,00,000)

Current Assets 4,00,000

Less: Current liabilities (1,00,000) 3,00,000

14,00,000

The company consists of three divisions. The scheme was agreed upon, according to which a new company

B Ltd. is to be formed. It will takeover investmen.ts at Rs. 9,00,000 and unsecured loans at balance

sheet value. It is to allot equity shares of Rs.10 each at par to the shareholders of P Ltd. in satisfaction of

the amount due under the arrangement. The scheme was duly approved by the High Court. Pass journal

entries in the books of P Ltd.

Solution :

In the Books of P Ltd.

Particulars Debit Credit

Rs. Rs.

1. B Ltd. A/c Dr. 9,00,000

To Investments A/c 4,00,000

To Shareholders A/c 5,00,000

[Being investments transferred at agreed value of

Rs. 9,00,000]

2. Unsecured Loans A/c Dr. 6,00,000

To B Ltd. A/c 6,00,000

[Being unsecured loan taken over by B Ltd.]

3. Shareholders A/c Dr. 3,00,000

To B Ltd. A/c 3,00,000

[Being allotment by B Ltd. of 30,000 Equity shares

of Rs. 10 each to shareholders of the company]

4. Shareholders A/c Dr. 2,00,000

To Capital Reserve 2,00,000

[ Being balance in Shareholders A/c transferred to

Capital Reserve ]

Illustration - 37

B Ltd. carried on manufacturing business. Its products were sold to wholesalers and the company had

its own retail shop. A Ltd. carried on similar manufacturing business, but all goods produced were sold

through the company’s own retail shops.

Preparation of Company Accounts under Various Circumstances

184

The summarised Balance Sheets of the two companies as at 31st March, 2009 were as follows:

Liabilities B Ltd. A Ltd. Assets B Ltd. A Ltd.

Rs. Rs. Rs. Rs.

Share capital Fixed assets :

Authorised Equity 40,00,000 6,00,000 Freehold 10,00,000 2,50,000

Shares of Rs. 100 each Properties at cost

Issued and Fully 25,00,000 6,00,000 Plant and

paid up Machinery at cost 13,00,000 1,00,000

Profi t and Loss A/c 3,40,000 90,000 less depreciation

Creditors 4,20,000 70,000 Current assets :

Stock 4,80,000 1,20,000

Debtors 2,30,000 80,000

Bank 2,50,000 2,10,000

32,60,000 7,60,000 32,60,00 7,60,000

The original cost of Plant and Machinery was :

B Ltd. Rs. 26,00,000

A Ltd. Rs. 2,00,000

The following arrangements were made and carried out on April 1, 2009 :

1. B Ltd. purchased from the shareholders of A Ltd. all the issued shares @ Rs. 140 per share.

2. The shareholders of A Ltd. took over one of the freehold properties of A Ltd. for Rs. 60,000, at the book

value of the same. It was agreed that the amount should be set off against the amount due to them

under (1) above and the balance due to them to be satisfi ed by the issue of an appropriate number of

equity shares in B Ltd. at Rs. 195 per share.

The necessary transfer in regard to the setting off the price of the property taken over by the shareholders

against the amount due to them from B Ltd. were made in the books of the two companies.

3. All manufacturing was to be carried on by B Ltd. and all retail business is to be carried on by A Ltd.

in this connection.

i. B Ltd. purchased the whole of A Ltd’s plant and machinery for Rs. 1,50,000 and certain of their

free-hold property (cost Rs. 1,00,000) at Rs. 1,20,000.

ii. A Ltd. purchased B Ltd’s freehold retail shop buildings (cost to B and Co. Ltd. Rs. 75,000) at Rs.

60,000 and took over the retail stock at Rs. 80,000 at the book value.

4. B Ltd. drew a cheque in favour of A Ltd. for the net amount due, taking into account all the matters

mentioned above.

5. Immediately after the transfer of shares in (1) above, A Ltd. declared and paid a dividend of Rs. 60,000

(Ignore income tax)

185

Advanced Financial Accounting & Reporting

Draft the balance sheet of both the companies immediately after the completion of the transaction.

Solution :

In the books of B Ltd

Calculation of purchase consideration and Number of shares to be issued

Particulars Amount

a. Number of Equity shares of A Ltd. 6,000

b. Purchase price of B Ltd. per share Rs. 140

c. Purchase consideration (6,000 x 140) Rs. 8,40,000

d. Value of Freehold property to be adjusted against the Rs. 60,000

consideration due

e. Net Consideration (c – d) Rs. 7,80,000

f. Issue price per share of B Ltd. Rs. 195

g. Number of shares to be issued (e ÷ f) 4,000

Freehold Properties Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 10,00,000 By A Ltd. 60,000

To A Ltd. 1,20,000 By Profi t and Loss A/c 15,000

By Balance c/d 10,45,000

11,20,000 11,20,000

* Loss on sale of freehold retail shop building (Rs. 60,000 - Rs. 75,000)

Plant and Machinery Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 13,00,000 By Balance c/d 14,50,000

To A and Co (P) Ltd. 1,50,000

14,50,000 14,50,000

Investment in A Ltd. Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Share capital 4,00,000 By Bank A/c 60,000

To Securities Premium 3,80,000 [Pre-acquisition Dividend)

To A Ltd. 60,000 By Balance c/d 7,80,000

8,40,000 8,40,000

Preparation of Company Accounts under Various Circumstances

186

Stock Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 4,80,000 By A Ltd. 80,000

By Balance c/d 4,00,000

4,80,000 4,80,000

A Ltd. Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Freehold property A/c 60,000 By Freehold Property A/c 1,20,000

To Stock Al/c 80,000 By Plant and Machinery A/c 1,50,000

To Bank (Net amount due to 1,90,000 By Investment in A Ltd. A/c 60,000

A Co., paid by way of

cheque)

3,30,000 3,30,000

Bank Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 2,50,000 By A Ltd. 1,90,000

To Investment in A Ltd. A/c By Balance c/d 1,20,000

(Pre-acquisition 60,000

Dividend)

3,10,000 3,10,000

Profi t & Loss Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Freehold Property A/c 15,000 By Balance b/d 3,40,000

To Balance c/d 3,25,000

3,40,000 3,40,000

Share Capital Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance c/d 29,00,000 By Balance b/d 25,00,000

By Investment in A Ltd. 4,00,000

29,00,000 29,00,000

187

Advanced Financial Accounting & Reporting

Securities Premium Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance c/d 3,80,000 By Investment in A Ltd. 3,80,000

3,80,000 3,80,000

Balance Sheet of B Ltd. as on 31/03/2009

Liabilities Amount Assets Amount

Share Capital Fixed Assets

[Authorised 40,000 40,00,000 Freehold Properties 10,45,000

shares of Rs. 100 each] Plant and Machinery less dep. 14,50,000

Issued, Subscribed and Paid up Investment

29,000 shares of Rs. 100 each Shares in Subsidiary Co. 7,80,000

fully paid Current assets, Loans and

(of which 4,000 shares were Advances :

issued pursuant to a contract 29,00,000 Stock in trade 4,00,000

without payment being Sundry debtors 2,30,000

received in cash) Cash at Bank 1,20,000

Reserves and Surplus :

Securities Premium A/c 3,80,000

Profi t and Loss A/c 3,25,000

Current liabilities and

Provisions :

Sundry Creditors 4,20,000

40,25,000 40,25,000

In the books of A Ltd.

Profi t & Loss Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Dividend 60,000 By Balance b/d 90,000

To Balance c/d 1,00,000 By Freehold Properties A/c 20,000

(Profi t on transfer)

By Plant Machinery A/c 50,000

(Profi t on transfer)

1,60,000 1,60,000

Preparation of Company Accounts under Various Circumstances

188

Freehold Properties Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 2,50,000 By B Ltd. A/c 1,20,000

To Profi t and Loss A/c 20,000 By Shareholder A/c 60,000

To B Ltd. A/c 60,000 By Balance (c/d) 1,50,000

3,30,000 3,30,000

Plant and Machinery Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,00,000 By B Ltd. A/c 1,50,000

To Profi t and Loss A/c 50,000

1,50,000 1,50,000

Stock Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,20,000 By Balance c/d 2,00,000

To B Ltd. 80,000

2,00,000 2,00,000

Bank Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 2,10,000 By Dividend A/c 60,000

To B Ltd. A/c 1,90,000 By Balance c/d 3,40,000

4,00,000 4,00,000

B Ltd. Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Freehold properties 1,20,000 By Stock A/c 80,000

To Plant and Machinery 1,50,000 By Bank A/c 1,90,000

2,70,000 2,70,000

189

Advanced Financial Accounting & Reporting

Balance Sheet of A Ltd. as on 31.03.2009

Liabilities Rs. Assets Rs.

Share capital : Fixed assets

Authorised 6,000 shares of 6,00,000 Freehold Properties 1,50,000

Rs. 100 each

Issued, subscribed and paid up Current assets, Loans and

6,000 shares of Rs. 100 each 6,00,000 Advances :

fully paid Stock in trade 2,00,000

Reserves and surplus : Sundry debtors 80,000

Profi t and Loss A/c 1,00,000 Cash at Bank 3,40,000

Current liabilities and

Provisions :

Sundry creditors 70,000

7,70,000 7,70,000

Illustration - 38

Lazy Ltd. and Yummy Ltd. are two companies. On 31st March, 2009 their Balance Sheets were as under :

(Rs. in crores)

Lazy Ltd. Yummy Ltd.

Sources of funds

Share capital

Authroised : 500 500

Issued : Equity shares of Rs. 100

each fully paid up 300 200

Reserves and surplus.

Capital reserves 40 20

Revenue reserves 700 425

Surplus 10 750 5 450

Owners’ funds 1,050 650

Loan 250 350

Total 1,300 1,000

Funds’ employed in :

Fixed assets :

Cost 1,000 700

Less : Depreciation (400) 600 (300) 400

Net Current assets :

Current assets 2,000 1,500

Less : Current liabilities (1,300) 700 (900) 600

1,300 1,000

Lazy Ltd. has 2 divisions - very profi table division A and loss making division B. Yummy Ltd. similarly

has 2 divisions-very profi table .division B and loss making division A.

Preparation of Company Accounts under Various Circumstances

190

The two companies decided to reorganise. Necessary approval’s from creditors and members and sanction

by High Court have been obtained to the following scheme.

1. Division B of Lazy Ltd. which has Fixed assets costing Rs. 400 crores (written down value Rs. 160

crores). Current assets Rs. 900 crores, Current liabilities Rs. 750 crores and loan funds of Rs. 200 crores

is to be transferred at Rs. 125 crores to Yummy Ltd.

2. Division A of Yummy Ltd. which has Fixed assets costing Rs. 500 crores (depreciation Rs.200 crores),

Current assets Rs.800 crores Current liabilities Rs. 700 crores and loan funds Rs.250 crores is to be

transferred at Rs.140 crores to Lazy Ltd.

3. The difference in the two consideration is to be treated as loan carrying interest at 15% per annum.

4. The directors of each of the companies revalued the Fixed assets taken over as follows :

i. Division A of Yummy Ltd. taken over: Rs. 325 crores.

ii. Division B of Lazy Ltd. taken over: Rs. 200 crores.

All the other assets and liabilities are recorded at the Balance sheet values.

a. The directors of both the companies ask you to prepare the Balance sheets after reconstruction (showing

the corresponding fi gures before reconstruction).

b. Mr. Pravin, who owns 5,000 equity shares of Lazy Ltd. and 3,000 equity shares of Yummy Ltd. wants

to know whether he has gained or lost in terms of net asset value of equity shares on the above

recognisation.

Solution :

Lazy Ltd. Yummy Ltd.

Division A Division B Division A Division B

Rs. 125 Cr. Rs. 140 Cr.

191

Advanced Financial Accounting & Reporting

Books of Lazy Ltd.

A. Transfer of Division B

(Rs. in Crores)

Particulars Debit Credit

i. Due Entry :

Yummy Ltd A/c Dr. 125

Current liabilities A/c Dr. 750

Loan Funds A/c Dr. 200

Provision for Depreciation A/c Dr. 240

To Fixed Assets A/c 400

To Current Assets A/c 900

To Capital Reserve A/c 15

ii. Receipt of consideration - Not Applicable

B. Take over of division A of Yummy Ltd.

Particulars Debit Credit

i. Due Entry :

Business Purchase A/c Dr. 140

To Yummy Ltd. A/c 140

ii. Incorporation of Assets and Liabilities taken over :

Fixed assets A/c Dr. 325

Current assets A/c Dr. 800

To Current liabilities A/c 700

To Loan A/c 250

To Business Purchase A/c 140

To Capital Reserve A/c 35

iii. Discharge of consideration - Not Applicable

Balance Sheet of Lazy Ltd. on 31.03.09

Rs. in Crores

Liabilities Amount Assets Amount

@ * @ *

Share capital 300 300 Fixed Assets

Reserves and surplus Cost (600 + 375) 925 1,000

Capital Reserve [40+15+35] 90 40 Less : Depreciation (160) (400)

Revenue Reserves 700 700 Net Block 765 600

Surplus 10 10 Current Assets 1,900 2,000

Loan funds [250+250–200] 300 250

15% Loan - Yummy Ltd. 15 -

Current liabilities 1,250 1,300

2,655 2,600 2,665 2,600

@ Before Reconstruction * After Reconstruction

Preparation of Company Accounts under Various Circumstances

192

Part - II Books of Yummy Ltd.

A. Transfer of Division A to Lazy Ltd.

(Rs. in Crores)

Particulars Debit Credit

1. For Purchase Consideration Due:

Lazy Ltd. A/c Dr. 140

Current liabilities A/c Dr. 700

Loan A/c Dr. 250

Provision for Depreciation A/c Dr. 200

Capital reserve A/c [balancing fi gure] Dr. 10

To Fixed Assets A/c 500

To Current Assets A/c 800

ii. Receipt of consideration - Not applicable

B. Take over of division B of Lazy Ltd.

(Rs. in Crores)

Particulars Debit Credit

1. For Purchase Consideration Due:

Business purchase A/c Dr. 125

To Lazy Ltd. A/c 125

ii. Incorporation of assets and liabilities taken over :

Fixed Assets A/c Dr. 200

Currnt Assets A/c Dr. 900

To Current liabilities A/c 750

To Loan A/c 200

To Business Purchase A/c 125

To Capital Reserve A/c 25

iii. Discharge of consideration - Not Applicable

Balance Sheet of Yummy Ltd. as on 31st March, 2009

Rs. in Crores

Liabilities Amount Assets Amount

@ * @ *

Share capital 200 200 Fixed Assets :

Reserves and surplus Cost 400 700

Capital Reserve 35 20 Less : Depreciation (100) (300)

Revenue Reserves 425 425 Net Block 300 400

Surplus 5 5 Current Assets 1,600 1,500

Loan 300 350 15% Loan 15 -

Current liabilities 950 900

1,915 1900 1,915 1900

@ Before Reconstruction * After Reconstruction

193

Advanced Financial Accounting & Reporting

Evaluation of Mr. Pravin’s Investment

Rs. in Crores

Lazy Ltd. Yummy Ltd

Before After Before After

Reconstruction Reconstruction Reconstruction Reconstruction

a. Total assets (Rs. Corers) 1300 1415 1000 965

b. Outside liabilities (Rs. Corers) 250 315 350 300

c. Net Assets (Rs. Corers) 1050 1100 650 665

d. Number of shares (in Corers) 3 3 2 2

Outstanding

e. Intrinsic Value (Rs. Per Share)[c/d] 350 367 325 332.50

f. Number of shares held 5,000 5,000 3,000 3,000

g. Value of shares held (Rs.) 17.5 Lakhs 18.35 Lakhs 9.75 Lakhs 9.975 Lakhs

h. Increase in value (Rs.) 85,000 22,500

i. Total increase in

value due to demerger Rs. 1,07,500

Illustration - 39

The following is the Balance sheet of Diverse Ltd. having an authorised capital of Rs.1,000 Cr. as on

31st March, 2009 :

(Rs. in crores)

Rs. Rs.

Sources of funds :

Shareholders’ funds

Share capital

Equity shares of Rs.1 0 each fully paid in cash 250

Reserves and surplus (Revenue) 750 1,000

Loan funds

Secured against : (a) Fixed assets Rs. 300 Cr.

(b) Working capital Rs. 100 Cr. 400

Unsecured 600 1,000

2,000

Employment of funds

Fixed Assets

Gross block 800

Less: Depreciation 200 600

Investment at cost (Market value Rs.1 ,000 Cr.) 400

Net Current assets :

Current assets 3,000

Less: Current liabilities (2,000) 1,000

2,000

Preparation of Company Accounts under Various Circumstances

194

Capital commitments: Rs. 700 crores.

The company consists of 2 divisions.

i. Established division whose gross block was Rs.200 crores and net block was Rs. 30 crores; Current

assets were Rs.1, 500 crores and working capital was Rs.1,200 crores; the entire amount being fi nanced

by shareholders’ funds.

ii. New project division to which the remaining Fixed assets, Current assets and Current liabilities

related.

The following scheme of reconstruction was agreed upon.

a. Two new companies Sunrise Ltd. and Khajana Ltd. are to be formed. The authorised capital of Sunrise

Ltd. is to be Rs. 1,000 crores. The authorised capital of Khajana Ltd. is to be Rs.500 crores.

b. Khajana Ltd. is to take over investments at Rs.800 crores and unsecured loans at balance sheet value.

It is to allot equity share of Rs. 10 each at par to the members of Diverse Ltd. in satisfaction of the

amount due under the arrangement.

c. Sunrise Ltd. is to take over the Fixed assets and net working capital of the new project division along

with the secured loans and obligation for capital commitments for which Diverse Ltd. is to continue

to stand guarantee at book values. It is to allot one crore equity shares of Rs. 10 each as consideration

to Diverse Ltd. Sunrise Ltd. . made an issue of unsecured convertible debentures of Rs.500 crores

carrying interest at 15% per annum and having a right to convert into equity shares of Rs. 10 each

at par on 31.3.2014. This issue was made to the members of Sunrise Ltd. as a right who grabbed the

opportunity and subscribed in full.

d. Diverse Ltd. is to guarantee all liabilities transferred to the 2 companies.

e. Diverse Ltd. is to make a bonus issued of equity shares in the ratio of one equity share for every equity

share held by making use of the Revenue reserves. .

Assume that the above scheme was duly approved by the Honourable High Court and that there are no

other transactions. Ignore taxation.

You are asked to :

i. Pass journal entries in the books of Diverse Ltd., and

ii. Prepare the balance sheets of the three companies giving all the information required by the Companies

Act, 1956 in the manner so required to the extent of available information.

195

Advanced Financial Accounting & Reporting

Solution :

Part. I Basic Information

WN # 1 : Scheme of Reorganisation

DIVERSE Ltd.

Establish New Others

Division Project

Retained Transfer to Investments

Sun Rise Ltd. Unsercured Loans

Transfer to

Khajana Ltd.

Consideration

paid to Considertaion

Diverse Ltd. paid to members

of Diverse Ltd.

WN # 2 : Assets and Liabilities - Division Wise

(Rs. in crores)

Particulars Established New Project Others

Division Division

a. Fixed Assets :

i) Gross Block 200 600 -

ii) Accumulated depreciation (170) (30) -

iii) Net block 30 570 -

b. Investments - - 400

c. Net Current Assets

i) Current Assets 1500 1500 -

ii) Current liabilities (300) (1700) -

iii) Net Current Assets 1200 200 -

d. Secured loans - 400 -

e. Unsecured loans - - 600

Preparation of Company Accounts under Various Circumstances

196

WN # 3 : Purcahse considerations.

A. For transfer to Khajana Ltd. - Net Assets Method.

(Rs. in crores)

Particulars Amount

i) Investments 800

ii) Unsecured loans (600)

iii) Net assets 200

Share of Khajana Ltd.

issued to members of

Diverse Ltd.

B. For transfer to Sunrise Ltd. - Payment Method 10 Crores

1 crores shares of Rs. 10 each Issued to Diverse Ltd.

Part -II

Books of Khajana Ltd.

(Rs. in crores)

Particulars Debit Credit

i. For Purchase Consideration Due:

Business Purchase A/c Dr. 200

To Shareholders of Diverse Ltd. 200

ii. For Assets and Liabiltiies taken over

Investment A/c Dr. 800

To Unsecured Loans 600

To Business Purchase 200

iii. For Discharge of purchase consideration

Shareholders of Diverse Ltd. A/c Dr. 200

To Equity Share capital A/c 200

197Advanced Financial Accounting & Reporting

Balance Sheet of Khajana Ltd. as on 01.04.2009

(Rs. in crores)

Liabilities Rs. Assets Rs.

Authorised Share capital Investments at cost 800

Issued, subscribed and paid (Quoted investments with Market

up Equity capital of Rs. 10 Value of Rs. 1000 Crores)

each fully paid 200

(The above shares are issued

for consideration other than

cash)

Unsecurd Loans 600

(Guaranteed by Diverse Ltd.)

800 800

Part III : Books of Sunrise Ltd.

(Rs. in crores)

Particulars Debit Credit

II. For Purchase Consideration Due:

Business purchase A/ c Dr. 10

To Diverse Ltd. 10

b. For assets and Liabilities taken over

Good will A/c (Balancing Figure) Dr. 40

Fixed Asset A/ c Dr. 570

Current Assets A/c Dr. 1500

To Current liabilities A/c 1700

To Business Purchase A/c 10

To Secured loan A/c 400

c. For Discharge of purchase consideration

Diverse Ltd. A/c Dr. 10

To Equity Share capital 10

d. For Issue of unsecured convertible debentures

i. Bank A/c Dr. 500

To Debenture Application A/c 500

ii. Debenture Application A/c Dr. 500

To 15% Debenture A/c 500

Preparation of Company Accounts under Various Circumstances

198

Balance sheet of Sunrise Ltd as on 1st April, 2009

(Rs. in crores)

Liabilities Rs. Assets Rs.

Authorised Share capital 1,000 Fixed assets :

Issued, subscribed and Paid-up - Goodwill 40

capital - Other Fixed assets 570

Equity Shares of Rs. 10 10

each fully paid-up Current assets :

(The above shares are issued for - Bank 500

consideration other than cash. The - Other Current assets 1,500

entire capital is held by Diverse Ltd)

Debentures 500

Secured Loan 400

Current liabilities and Provisions 1,700

2,610 2,610

Note : 1. Capital commitments: Rs. 700 crores.

2. Secured Loans and Current liabilities guaranteed by M/s. Diverse Ltd.

Part - IV Books of Diverse Ltd.

(Rs. in crores)

Particulars Debit Credit

1. Transfer to Khajana Ltd.

i. For Purchase Consideration Due:

Khajana Ltd. A/c Dr. 200

Unsecured Loans A/c Dr. 600

To Investments A/c 400

To Capital reserve A/c 400

ii. Cancellation of balance in Khajana Ltd. not

receivable, since consideration is paid directly to

members :

Capital Reserve A/c Dr. 200

To Khajana Ltd. 200

2. Transfer to Sunrise Ltd :

i. For purchase consideration Due:

Sunrise Ltd A/c Dr. 10

Current liabilities A/c Dr. 1700

Secured Loan A/c Dr. 400

Provision for depreciation A/c Dr. 30

To Fixed Asset A/c 600

To Current Assets A/c 1500

To Capital Reserve A/c 40

199

Advanced Financial Accounting & Reporting

Particulars Debit Credit

ii. Receipt of consideration

Equity shares of Sunrise Ltd. Dr. 10

To Sunrise Ltd. 10

iii. Others

a. Subscripiton to unsecured convertible

debenture of Sunrise Ltd.

Investments in Debenture of Sunrise Ltd. A/c Dr. 500

To Bank 500

b. Bonus issue

i. Revenue Reserves A/c Dr. 250

To Bonus to Shareholders A/c 250

ii. Bonus to Share holders A/c Dr. 250

To Equity Share capital A/c 250

Balance Sheet of Diverse Ltd.

Liabilities Rs. Assets Rs.

Authorised, issued, subscribed Fixed assets

and fully paid equity shares of Gross Block 200

Rs.10 each Less: Depreciation

(out of which 25 crores Equity 500 Net Block

shares are issued for consideration Investment (Un quoated)

other than cash) - Shares of Sunrise 10

Reserve Surplus : - Debentures of Sunrise 500 510

Capital reserve 240 Current assets Loans and 1,000

Revenue reserve 750 Advances

Less: Bonus Issue (250) 500

Current liabilities and 300

Provisions

1,540 1,540

Capital committment by Sunrise Ltd. Rs. 700 Crores, Guarantees given in respect of liabilities transferred

to Sunrise Ltd, and Khajana Ltd. amounting to Rs. 2100 Crores and Rs. 600 Crores respectively.

Preparation of Company Accounts under Various Circumstances

200

Illustration - 40

The Balance Sheet of Z Ltd. as at 31st March, 2008 is given below. In it, the respective shares of the company’s

two divisions namely “S” Division and “W” Division in the various assets and liabilities have also been

shown.

(All amounts in crores of Rupees)

S Division W Division Total

Fixed assets :

Cost 875 249

Less : Depreciation 360 81

Written-down value 515 168 683

Investments 97

Net Current assets :

Current assets 445 585

Less: Current liabilities (270) (93)

175 492 667

1,447

Financed by :

Loan funds 15 417

Own funds

Equity Share capital : Shares of Rs. 10 each 345

Reserves and surplus 685

1,447

Loan funds included, inter alia, bank Loans of Rs. 15 crore specifi cally taken for W Division and Debentures

of the paid up value of Rs. 125 crore redeemable at any time between 1st October, 2007 and 30th September,

2008.

On 1st April, 2008 the company sold all of its investments for Rs. 102 crore and redeemed all the debentures

at par, the cash transactions being recorded in the Bank Account pertaining to S Division.

Then a new company named Y Ltd. was incorporated with an authorized capital of Rs. 900 crore divided

into shares of Rs. 10 each. All the assets and liabilities pertaining to W Division were transferred to the

newly formed company; Y Ltd, allotting to Z Ltd’s shareholders its two fully paid equity shares of Rs. 10

each at par for every fully paid equity share of Rs. 10 each held in Z Ltd. as discharge of consideration for

the division taken over.

Y Ltd. recorded in its books the Fixed assets at Rs. 218 crore and all other assets and liabilities at the same

values at which they appeared in the books of Z Ltd.

You are required to :

i. Show the journal entries in the books of Z Ltd.

201

Advanced Financial Accounting & Reporting

ii. Prepare Z Ltd’s Balance Sheet immediately after the demerger and the initial Balance Sheet of Y Ltd.

(Schedules in both cases need not be prepared).

iii. Calculate the intrinsic value of one share of Z Ltd. immediately before the demerger and immediately

after the demerger; and

iv. Calculate the gain, if any, per share to the shareholders of Z Ltd. arising out of the demerger.

Solution :

Journal entries in the books of Z Ltd.

(Rs. crores)

Particulars Debit Credit

a. Bank A/c Dr. 102

To Investments A/c 97

To Profi t & Loss A/c 5

[Being sale of investments and profi t realised thereon]

b. Debenture A/c Dr. 125

To Bank A/c 125

[Being redemption of debentures at par]

c. Bank Loan A/c Dr. 15

Current liabilities A/c Dr. 93

Provision for Depreciation A/c Dr. 81

Reserves and Surplus A/c Dr. 645

To Fixed Assets A/c 249

To Current Assets A/c 585

[Being assets and liabilities of W Division transferred

to Y Ltd.]

Preparation of Company Accounts under Various Circumstances

202

Balance Sheet of-Z Ltd. After Demerger as on 01.04.08.

(Rs. in crores)

Liabilities Amount Assets Amount

Share capital : Fixed Assts :

Issued, subscribed and Cost 875

fully paid up Equity Shares Less : Provision for Dep. (360)

of Rs. 10 each 345 515

Reserves and surplus Current assets (WN # 3) 422

Revenue reserves (WN # 1) 45

Loan Funds (WN # 2) 277

Current liabilities and

Provisions :

Current liabilities 270

(pertaining to S Division)

937 937

WN # 1: Revenue Reserves

Particulars Rs. in

Crores

Balance as 31.03.2008 685

Add : Profi t on sale of investment 5

Less: Loss on demerger (645)

Balance as on 01.04.2008 45

WN # 2 : Loan Funds

Particulars Rs. in

Crores

Balance as 31.03.2008 417

Less: Bank Loan transferred to Y Ltd. (15)

Less: Debentures redeemed (125)

Balance as on 01.04.2008 277

WN # 3: Current Assets

Particulars Rs. in

Crores

Balance as 31.03.2008 445

Add: Cash received on sale of investments 102

Less: Cash paid on redemption of debentures (125)

Balance as on 01.04.2008 422

203

Advanced Financial Accounting & Reporting

Balance sheet of Y Ltd. as on 01.04.2008

(Rs in crores)

Liabilities Amount Assets Amount

Share capital Fixed assets (given) 218

Authorised Capital 900 Current assets 585

Equity Shares of Rs. 10 each

Issued, Subscribed and Paid-up

Capital of Equity Shares of Rs. 10

each (345 ×½) 690

(The above shares were issued for

a consideration other than cash)

Reserves and surplus

Capital reserves (WN # 4)

Secured Loan

Loan Fund 5

Bank Loan 15

Current liabilities and Provisions

Current liabilities 93

Total 803 Total 803

WN # 4 : Capital Reserves

Particulars Rs. in Crores Rs. in Crores

i. Purchase consideration 690

ii. Less: Net Assets taken Over

Assets taken over (218 + 585) 803

Less: Liabilities taken over (93+15) (108) (695)

iii. Capital reserves [(i) - (ii)} 5

Calculation of Intrinsic value per share before and after demerger

Rs. in Crores

Particulars Before After

Demerger Demerger

Fixed Assets 683 515

Net Current Assets (WN # 5) 644 152

Total assets 1,327 667

Less : Loan funds (WN # 6) (292) (277)

Net asset value 1,035 390

Number of shares 34.5 34.5

Intrinsic value per share [(v)+(vi)] Rs. 30 Rs. 11.30

Preparation of Company Accounts under Various Circumstances

204

WN # 5 : Current Assets

Rs. in Crores

Particulars Before After

Demerger Demerger

Balance as per balance sheet 667 175

Less : Cash paid on redemption of debentures (125) (125)

Add : Cash received on sale of investments 102 102

644 152

WN # 6 : Loan Funds

Rs. in Crores

Particulars Before After

Demerger Demerger

Balance as per balance sheet 417 417

Less : Redemption of debentures (125) (125)

Less : Transfer of loan funds to Y Ltd. - (15)

292 277

IV. Gain per share to the shareholders of Z Ltd. arising out of the demerger :

For every share in Z Ltd, the shareholders will hold 2 shares in Y Ltd. also.

I. After demerger Rs.

i. Value of one share in Z Ltd. 11.30

ii. Value of two share in Y Ltd. (Rs. 10 x 2) 20.00

iii. Total Value after merger for each share 31.30

II. Before demerger

i. Value of one share in Z Ltd. before merger 30.00

III. Gain per share 1.30

205

Advanced Financial Accounting & Reporting

XII. Sales of Division

Illustration - 41

X Ltd. has 2 divisions A and B.

Division A has been making constant profi ts while Division B has been invariably suffering losses. On 31st

March, 2009 the divisionwise Balance Sheet was :

(Rs. Crores)

A B Total

Fixed Assets cost 250 500 750

Depreciation 225 400 625

(i) 25 100 125

Current Assets : 200 500 700

Less : Current liabilities 25 400 425

(ii) 175 100 275

(i) + (ii) 200 200 400

Financed by :

Loan — 300 300

Capital : Equity Rs. 10 each 25 _ 25

Surplus 175 (100) 75

200 200 400

Division B along with its assets and liabilities was sold for Rs. 25 crores to Y Ltd. a new comapny, who

allotted 1 crore equity shares of Rs. 10 each at a premium of Rs. 15 per share to the memebers of B Ltd. in

full settlement of the consideration in proportion to their shareholding in the company.

Asssuming that there are no other transactions, you are asked to :

i. Pass journal entries in the books of X Ltd.

ii. Prepare the Balance Sheet of X Ltd. after the entires in (i).

iii. Prepare the Balance Sheet of Y Ltd.

Solution :

Part I - Books of A Ltd :

Basic Information :

A Ltd.

Division A Division B

Profi t Making Loss Making

Retained by X Ltd Assets and Liabilites

transferred to Y Ltd for

consideration of Rs. 25 Crores.

Preparation of Company Accounts under Various Circumstances

206

I. Journal Entries

(Rs. Crores)

Particulars Debit Credit

i. Sale of Assets and Liabilities to Y Ltd.

Y Ltd A/c Dr. 25

Loan A/c Dr. 300

Current liabilities A/c Dr. 400

Provision for depreciation A/c Dr. 400

To Fixed Assets A/c 500

To Current Assets A/c 500

To Capital Reserve A/c (bal fi g) 125

ii. Receipt of consideration from B Ltd.

Equity shares in Y Ltd. Dr. 25

To Y Ltd. A/c 25

II.

Balance Sheet of X Ltd as at 31.3.2009

(Rs. in Crores)

Liabilities Rs. Assets Rs.

Share capital : Fixed Assets

Authorised Equity shares of Gross Block Cost : 250

Rs. 10 each Less : Depreciation 225 25

issued and Subscribed 25 Investment in equity

Reserves and surplus shares of Y Ltd.

* Capital reserve 125 (Face Value of Rs. 10

* Profi t and Loss (Existing) 75 subscribed at a

Current liabilities 25 premium of Rs. 15 each 25

Current Assets 200

250 250

Note :

Division ‘B’ was sold to M/s. Y Ltd. The consideration received for the transfer was equity shares of Y Ltd.

of Rs. 10 each fully paid, issued at a premium of Rs. 15.

Total value of consideration = 1 Crore shares × (Rs. 10 + Rs. 15)

= 1 Crore × Rs. 25

= Rs. 25 Crores

207

Advanced Financial Accounting & Reporting

Part II - In the books of Y Ltd.

Journal Entries

(Rs. in Crore)

Particulars Debit Credit

a. For Business purchase

Business Purchase A/c Dr. 25

To X Ltd A/c 25

b. Assets and liabilities taken over

Fixed Assets A/c Dr. 100

Current Assets A/c Dr. 500

Goodwill A/c (Balancing Figure) Dr. 125

To Loan A/c 300

To Current liabilities A/c 400

To Business Purchase A/c 25

c. Discharge of liability

X Ltd A/c Dr. 25

To Equity Share capital A/c 10

To Securities premium A/c 15

Balance Sheet of M/s Y Ltd. as at 31.3.2009

(Rs. in Crores)

Liabilities Amount Assets Amount

Share capital : Goodwill 125

Authorised Equity Shares of Rs. 10 each Fixed Assets 100

1 Crore Shares issued for consideration Current Assets 500

other than by way of cash 10

Reserves and surplues

Securities Premium 15

Loan 300

Current liabilities 400

725 725

Note :

a) Goodwill due to business purchase should be amortized over a period of 5 years.

b) Fixed assets :

Gross Block 500

Less : Accumulated Depn. 400

Net Blcok 100

Preparation of Company Accounts under Various Circumstances

208

XIII. Impact of Reconstruction over Wealth of Investor and Company

Illustration - 42

AB Ltd has 2 divisions - A and B. The Balance Sheet as at 31, October 2008 was as under :

(in Crores)

A B Total

Fixed assets

Cost 600 300 900

Depreciation 500 100 600

W.D.V. 100 200 300

Net Current Assets

Current Assets 400 300 700

Less : Current Liabilities 100 300 100 200 200 500

Total 400 400 800

Financed by :

Loans — 100 100

(Secured by a charge on Fixed assets) — 100 100

Own funds :

Equity capital 50

(Fully paid up Rs. 10 shares) 650

Reserves and surplus 700

Total 400 400 800

It is decided to form a new company B Ltd., to take over the assets and liabilities of B division.

According B. Ltd. was incorporated to take over at balance sheet fi gures, the assets and liabilities of that

division. B Ltd. is to allot 5 crores equity shars of Rs. 10 each in the company to the members of AB Ltd.,

in full settlement of the consideration. The members of AB Ltd. are therefore to become members of B Ltd.

as well without having to make any further investment.

a. You are asked to pass journal entries in relation to the above in the books of AB Ltd. and B. Ltd. Also

show the Balance Sheets of the 2 companies as on the morning of 1st November, 2008, showing corresponding

previous year’s fi gures.

b. The directors of the 2 companies, ask you to fi nd out the net asset value of equity shares pre and post

demerger.

c. Comment on the impact of demerger on “shareholders wealth”.

209

Advanced Financial Accounting & Reporting

Solution :

Part I : In the Books of M/s. AB Ltd.

(Rs. in crores)

Particulars Debit Credit

i. Transfer of assets and liabilities of Division B to B Ltd.

(a) For Purchase Consideration Due:

A Ltd. A/c Dr. 50

Loan funds A/c Dr. 100

Curent liabilities A/c Dr. 100

Povision for depreciation A/c Dr. 100

Profi t and Loss A/c (balancing fi gure) Dr. 250

To Fixed Assets A/c 300

To Current Assets A/c 300

ii. Cancellation of balance in A Ltd. not receivable since

consideration is paid to members of AB Ltd. in full

Reserves A/c Dr. 50

To A Ltd. 50

Part II : In the Books of B Ltd.

(Rs in crores)

Particulars Debit Credit

Rs. Rs.

i. For Purchase Consideration Due:

Business Purchase A/c Dr. 50

To Shareholders of AB Ltd. A/c

ii. Assets and liabilities taken over

Fixed Assets A/c Dr. 200

Current Assets A/c Dr. 300

To Loan A/c 100

To Current liabilities A/c 100

To Capital Reserve (balancing fi gure) 250

To Business Purchase A/c 50

iii. Discharge of purchase consideration

Shareholders of AB Ltd. Dr. 50

To Equity Share capital A/c 50

Preparation of Company Accounts under Various Circumstances

210

Part III : Balance Sheet of two companies after reorganisation.

Balance Sheet of Z Ltd. as on 01.11.2008

(Rs. in crores)

Before Before Before

AB AB B Ltd.

Sources of Funds

i. Share capital 50 50 50

ii. Reserves and surplus

a. Capital Reserve Nil Nil 250

b. Revenue Reserve 650 *350 Nil

iii. Loan Funds 100 Nil 100

800 400 400

Application of Funds :

i. Fixed Asset

Gross Block 900 600 300

Less : Depreciation 600 500 100

Net Block 300 100 200

ii. Current assets (Net) 500 300 200

800 400 400

* Revenue reserve :

Opening balance- - 650

Less : Transfer to B Ltd. - (250)

Less : Cancel due from B Ltd. - (50)

Closing balance - 350

Net assets before and after reorganisation

(Rs. in crores)

A B AB

Value of total assets 800 400 400

Less : Loan funds (100) — (100)

Net assets 700 400 300

Net assets belonging to Equity share holders after December 700

Conclusion :

The impact on share holders wealth after reorganisation is Nil.

211

Advanced Financial Accounting & Reporting

XIV. Buy back of shares :

Illustration - 43

K Ltd. furnishes you with the following Balance Sheet as at 31st March, 2009 :

(Rs. in Crores)

Sources of Funds

Share capital :

Authorised 100

Issued :

12% redeemable preference shares of Rs. 100 each fully paid 75

Equity shares of Rs. 10 each fully paid 25 100

Reserves and surplus

Capital Reserve 15

Securities Premium 25

Revenue Reserves 260 300

400

Funds employed in :

Fixed assets : cost 100

Less: Provision for depreciation 100 nil

Investments at cost (Market value Rs. 400 Cr.) 100

Current assets 340

Less : Current liabilities 40 300

400

The company redeemed preference shares on 1 st April 2009. It also bought back 50 lakh equity shares of

Rs. 10 each at Rs. 50 share. The payments for the above were made out of the huge bank balances, which

appeared as a part of Current assets.

You are asked to :

i. Pass journal entries to record the above

ii. Prepare Balance Sheet

iii. Value equity share on net asset basis.

Preparation of Company Accounts under Various Circumstances

212

Solution :

Part I - Journal entries in the books of K Ltd.

Rs. in crores

Particulars Debit Credit

a. Redemption of Preference Shares on 1st April 2009

i. Due Entry

12% Preference Share capital A/c Dr. 75

To Preference Share Hodlers A/c 75

ii. Payment Entry

Preference Shareholders A/c Dr. 75

To Bank A/c 75

b. Shares bought back

i. On buy back

Shares bought back A/c Dr. 25

To Bank A/c 25

(50 lakhs shares × Rs. 50 per share)

ii. On Cancellation

Equity Share capital A/c (50 Lakhs × Rs. 10) Dr. 5

Securities premium A/c (50 Lakhs × Rs. 40) Dr. 20

To Shares bought back A/c 25

iii. Transfer to Capital Redemption Reserve

Revenue reserve A/c Dr. 80

To Capital Redemption Reserve A/c 80

(Being creation of capital redemption reserve to the

extent of the face value of preference shares

redeemed and equity shares bought back)

Part-II : Balance Sheet of K Ltd after reconstruction :

Balance Sheet of K Ltd as at 1.4.2009

Liabilities Rs. Rs. Assets Rs. Rs.

Share capital Fixed assets

Authorised Cost :

Issued, subscribed and paid up Less : Provision for 100

equity shares of 200 lakhs of Depreciation (100) Nil

Rs. 10 each 20 Investment at Cost

12% Redeemable preference (Market Value of

shares were redeemed at par. Investments=Rs. 400 Crores) 100

Reserves and surplus Current assets as on 31.3.2009 340

Capital reserve 15 Less : Bank payment for

Capital Redemption Reserve 80 redemption and buy back (100) 240

Share Premium (25-20) 5

Revenue reserve (260-80) 180 280

Current liabilities 40

340 340

213

Advanced Financial Accounting & Reporting

Part - III - Net Asset Value of Equity Shares

(Rs. in crores)

Particulars Amount Amount

a. i. Fixed assets Nil

ii. Investments (at market value) 400

iii. Current assets 240 640

b. Less : Current liabilities (40)

Net assets available for equity share holders 600

c. No. of equity shares outstanding (in lakhs) 2

d. Value per equity share of Rs. 10 each = (600÷2) Rs. 300

Illustration - 44

The following was the balance sheet of Diamond Ltd. as at 31st March, 2009.

Liabilities Rs, in lakhs

10% Redeemable Preference Shares of Rs. 10 each, fully paid up 2,500

Equity Shares of Rs. 10 each fully paid up 8,000

Capital Redemption Reserve 1,000

Securities Premium 800

General Reserve 6,000

Profi t and Loss Account 300

9% Debentures 5,000

Sundry creditors 2,300

Sundry Provisions 1,000

26,900

Assets Rs, in lakhs

Fixed assets 14,000

Investments 3,000

Cash at Bank 1,650

Other Current assets 8,250

26,900

On 1st April, 2009 the company redeemed all of its preference shares at a premium of 10% and bought

back 25% of its equity shares @ Rs. 20 per share. In order to make cash available, the company sold all the

investments for Rs.3, 150 lakh and raised a bank loan amounting to Rs. 2,000 lakhs on the security of the

company’s plant.

Pass journal entries for all the above mentioned transactions including cash transactions and prepare the

company’s balance sheet immediately thereafter. The amount of securities premium has been utilized to

the maximum extent allowed by law.

Preparation of Company Accounts under Various Circumstances

214

Solution :

Journal Entries

Particulars Debit Credit

Rs. Rs.

1. Bank A/c Dr. 3,150

To Investment A/c 3,000

To Profi t and Loss A/c 150

(Being sale of investments and profi t thereon)

2. Bank A/c Dr. 2,000

To Bank Loan A/c 2,000

(Being loan taken from bank)

3. 10% Redeemable preference Share Capital A/c Dr. 2,500

Premium on redemption of preference shareholder A/c Dr. 200

To Preference shareholder A/c 2,750

(Being redemption of preference shares)

4 Preference shareholders A/c Dr. 2,750

To Bank A/c 2,750

(Being payment of amount due to preference

shareholders)

5. Securities premium A/c Dr. 250

To Premium on redemption of preference share A/c Dr. 250

(Being use of securities premium to provide premium on

redemption of preference shares)

6. Equity Share capital A/c Dr. 2,000

Securities premium A/c [800 - 250] Dr. 550

General reserves A/c Dr. 1,450

[(200x20) - 2000 - 550]

To Equity shareholders A/c 4,000

(being buy back of equity shares)

Note: Balance of General Reserve

[6000 - 1450] = Rs. 4550.

7. General Reserves A/ c Dr. 4,500

To Capital Redemption Reserve A/c (2000 + 2500) 4,500

(Being creation of capital redemption reserve to the

extent of the face value of preference share redeemed

and equity shares bought back).

Note: Balance in General reserve as on 01.04.09

(4550 - 4500) = Rs. 50.

8. Equity shareholders A/c Dr. 4,000

To Bank A/c 4,000

(Being payment of amount due to equity shareholders).

Note : Cash at Bank

[1650+3150+2000-2750-4000] = Rs.50

215

Advanced Financial Accounting & Reporting

Balance Sheet of Diamond Ltd., as on 01.04.09

Liabilities Rs. Assets Rs.

Share capital Fixed assets

Issued, subscribed and paid up 6,000 Current asset, Loans and 14,000

equity shares of Rs. 10 each Advances

Reserves and surplus

Capital Redemption Reserve 5,500 Cash at Bank 50

(1000 + 4500) Other Current assets 8,250

General Reserves 50

Profi t and Loss A/c (300+ 150) 450

Secured Loans

9% Debentures 5,000

Bank Loan 2,000

Current liabilities and Provisions

Sundry creditors 2,300

Provisions 1,000

Total 22,300 Total 22,300

Illustration - 45

XYZ Ltd. has the following capital structure on of 31st March 2009.

Particulars Rs. in Crores

a. Equity Share capital (Shares of Rs. 10 each) 300

b. Reserves :

General Reserve 270

Security Premium 100

Profi t and Loss A/c 50

Export Reserve (Statutory reserve) 80

c. Loan Funds 800

The shareholders have on recommendation of Board of Directors approved vide special resolution at their

meeting on 10th April 2009 a proposal to buy back maximum permissible equity shares considering the

huge cash surplus following A/c of one of its divisions.

The market price was hovering in the range of Rs. 25/- and in order to induce existing shareholders to offer

their shares for buy back, it was decided to offer a price of 20% above market.

Advice the company on maximum number of shares that can be bought back and record journal entries

for the same assuming the buy back has been completed in full within the next 3 months.

If borrowed funds were Rs. 1200 Lakhs, and 1500 Lakhs respectively would your answer change?

Preparation of Company Accounts under Various Circumstances

216

Solution :

Maximum shares that can be bought back

a. Shares outstanding test (WN # 1 ) 7.5 7.5 7.5

b. Resources test (WN # 2) 6 6 6

c. Debt Equity ratio test (WN # 3) 10.67 4 —

d. Maximum number of shares for 6 4 —

buy back - LEAST of the above

Particulars Situation I Situation II

Debit Credit Debit Credit

a. Shares bought back A/c Dr. 180 120

To Bank A/c 180 120

[Being purchase of shares from public]

b. Share capital A/c Dr. 60 40

Securities premium A/c Dr. 100 80

General reserve A/c (balancing fi gure) Dr. 20 —

To Shares bought back A/c 180 120

[Being cancellation of shares bought on

buy back]

c. General Reserves A/c

To Capital Redemption Reserve A/c

[Being transfer of reserves to capital

redemption reserve to the extent

capital is redeemed]

Note : Under situation III, the company does not qualify the debt equity ratio test. Therefore the company

cannot perform the buy back of shares (Under section 77A of the Companies Act, 1956)

WORKING NOTES :

WN # 1 : Shares outstanding test

Particulars Amount

a. No. of shares outstanding 30 crores

b. 25% of shares outstanding 7.5 crores

Situation I Situation II Situation III

217

Advanced Financial Accounting & Reporting

WN # 2 : Resources test

(Rs. in Crores)

Particulars Amount

a. Paid up capital 300

b. Free reserves 420

c. Shareholders fund (a+b) 720

d. 25% of shareholders fund 180

e. Buyback price per share Rs. 30

f. Number of shares that can be bought back 6 Crores

WN # 3 : Debt Equity ratio test :

(Rs. in Crores)

Particulars Situation I Situation II Situation III

a. Borrowed Funds 800 1,200 1,500

b. Minimum equity to be maintained

after buy back in the ratio 2:1 400 600 750

c. Present equity 720 720 720

d. Maximum possible dilution in equity 320 120 —

e. Maximum shares that can be 10.67 4 —

bought back @ Rs. 30/- per share

XV. Conversion :

Illustration - 46

X Co. Ltd. was incorporated on 1st July, 2008 to take over the business of Mr. A as and from 1st April, 2008,

Mr. A’s Balance Sheet, as at that date, was as under :

Liabilities Rs. Assets Rs.

Trade creditors 36,000 Building 80,000

Capital 1,94,000 Furniture and Fittings 10,000

Debtors 90,000

Stock 30,000

Bank 20,000

2,30,000 2,30,000

Debtors and Bank balance are to be retained by the vendor and creditors are to be paid off by him. Realisation

of debtors will be made by the company on a commission of 5% on cash collected. The company is to

issue A with 10,000 equity shares of Rs. 10 each, Rs. 8 per share paid up and cash of Rs. 5,000.

The company issued to the public for cash 20,000 equity shares of Rs. 10 each on which by 31 st March,

2009, Rs.8 per share was called and paid up except in the case of 1,000 shares on which the 3rd call of Rs.

2 per share had not been reatised. In the case of 2,000 shares, the entire face value of the shares has been

realised. The share issue was underwritten for 2% commission, payable in shares fully paid up.

Preparation of Company Accounts under Various Circumstances

218

In addition to the balances arising out of the above, the following balances were shown by the books of

account of X Co. Ltd. on 31st March, 2009.

Rs.

Discount (including Rs. 1,000 allowed on vendor’s debtors) 6,000

Preliminary Expenses 10,000

Director’s Fees 12,000

Salaries 48,000

Debtors (including vendor’s debtors) 1,60,000

Creditors 48,000

Purchases 3,20,000

Sales 4,60,000

Stock on 31st March, 2009 was Rs. 52,000. Depreciation at 10% on Furniture and Fittings and at 5% on building

is to be provided. Collections from debtors belonging to the vendor were Rs. 60,000 in the period.

Prepare the Trading and Profi t and Loss account for the period ended 31 st March, 2009 of X Co. Ltd. and

its Balance Sheet as at that date.

Solution :

Part I : Calculation of purchase consideration.

Particulars Rs.

a. Consideration paid in the form of cash 56,000

b. Consideration paid in the form of equity shares of X Co. Ltd 80,000

10,000 Shares of Rs. 10 each, Rs.8 paid up

c. Total consideration 1,36,000

Part II : In the Books of Mr. A.

Realisation Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Building 80,000 By X Co. Ltd (Purchase consideration) 1,36,000

To Furniture 10,000

To Stock 30,000

To Profi t on Realisation 16,000

1,36,000 1,36,000

219

Advanced Financial Accounting & Reporting

Journal Entries

Particulars Debit Credit

Rs. Rs.

a. For Purchase Consideration Due:

X Co. Ltd. A/c Dr. 1,36,000

To Realisation A/c 1,36,000

b. Receipt entry

Equity shares in X Ltd. A/c Dr. 80,000

Cash I Bank A/c Dr. 56,000

To X Co. Ltd. A/c 1,36,000

c. Other receipts from X Ltd - Debtors collection

i. Recovery of debtors.

X Co. Ltd. (Vendor Drs) Dr. 90,000

To Debtors A/c 90,000

ii. Receipt of cash and commission paid.

Discount on Debtors A/c Dr. 1,000

Commission to X Co. Ltd A/c Dr. 3,000

Cash/Bank A/c Dr. 57,000

To X Co. Ltd A/c 61,000

[Since the debtors are held by Mr. A, the discount

given to debtors are to be borne by Mr. A.

Commission = Cash collected × 5% = 60,000 × 5%= 3,000

... Balance in vendor debtors A/c (90,000–61,000=29,000)

d. Settlement to creditors

Creditors A/c Dr. 36,000

To Bank A/c 36,000

[Since creditors are also held by Mr. A. and not taken

over by X Co. Ltd.]

Cash / Bank Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To balance b/d 20,000 By Creditors 36,000

To X. Co. (Purchase Consideration) 56,000 By balance c/d 97,000

To X Co. (Debtors Collection) 57,000

1,33,000 1,33,000

To bal b/d 97,000

Balance sheet of Mr. A as at 1 st April 2008

Liabilities Rs. Assets Rs.

Capital 1,94,000 Investment in equity shares of X

Add : Realisation Profi t 16,000 Co. Ltd (Rs. 8 paid) 80,000

Less : Discount to debtors (1,000) Vendor Debtors (X Ltd.) 29,000

Less : Commission Paid. (3,000) Cash /Bank 97,000

2,06,000 2,06,000

Preparation of Company Accounts under Various Circumstances

220

Part III - In the books of X Co. Ltd.

Particulars Debit Credit

a. Take over business of Mr. A

i. For Purchase Consideration Due:

Business Purchase A/c Dr. 1,36,000

To Mr. A 1,36,000

ii. For Assets taken over

Goodwill A/c (balancing fi gure) Dr. 16,000

Building A/c Dr. 80,000

Furniture and fi xture A/c Dr. 10,000

Stock A/c Dr. 30,000

To Business Purchase A/c 1,36,000

iii. Discharge of Purchase Consideration

Mr. A A/c Dr. 1,36,000

To Equity Share capital A/c 80,000

To Bank / Cash A/c 56,000

b. Public Issue of shares

i. Bank A/c Dr. 1,36,000

To Equity shares capital A/c 1,36,000

[Being Rs. 8/- per share received on 17,000 shares

(20,000 - 1,000 - 2,000)]

ii. Bank A/c Dr. 6,000

Calls in Arrears A/c Dr. 2,000

To Equity Share capital A/c 8,000

[Being receipt of Rs. 61 - on 1000 shares. Rs.2/- on

3rd call had not been realised]

iii. Bank A/c Dr. 20,000

To Equity Share capital A/c 16,000

To Calls in advance A/c 4,000

[Being on 2,000 shares, the entire amount of

Share capital received. Rs. 2/- per share not

called up transferred to calls in advance A/c)

Underwriting commission A/c Dr. 4,000

To Equity Share capital A/c 4,000

[Being 2% on the face value of the public issue

paid as underwriting commission. Commission

discharged as fully paid equity shares.

20,000 shares × Rs. 10 each = 2,00,000

2% × 2,00,000 = 4,000]

221

Advanced Financial Accounting & Reporting

Debtors Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Sales By Discount (6,000 - 1,000) 5,000

(Assuming fully credit) 4,60,000 By Cash received (balancing fi gure) 3,24,000

By Balance cld (1,60,000 - 29,000)* 1,31,000

4,60,000 4,60,000

. Vendor Debtors Taken over :

Particulars Rs.

i. Particulars Debtors taken over from Mr. A 90,000

ii. Less : Discount given (1,000)

iii. Less : Cash collected (60,000)

iv. Balance in vendor debtors 29,000

Creditors Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Cash (Balancing fi gure) 2,72,000 By Purchases (assuming fully on 3,20,000

To Balance c/d 48,0000 credit)

3,20,000 3,20,000

Cash / Bank Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Realisation from debtors 3,24,000 By Purchase consideration to Mr.A 56,000

To Receipt from vendor debtors 60,000 By Remittance of vendor Debtors collection 57,000

(60000 – 3000)

To Equity Share capital 1,62,000 By Payment to creditors 2,72,000

(1,36,000 + 6,000 + 20,000) By Preliminary expenses 10,000

By Directors fees 12,000

By Salaries 48,000

By Balance c/d 91,000

(balancing fi gure)

5,46,000 5,46,000

Preparation of Company Accounts under Various Circumstances

222

Computation of Goodwill on acquisition

Particulars Rs. Rs.

Purchase Consideration

- in shares of Rs. 10 each 80,000

- in cash 56,000 1,36,000

Less : Assets taken over :

- Building 80,000

- Furniture and Fittings 10,000

- Stock 30,000 1,20,000

Goodwill 16,000

Trading Account of X Co. Ltd. for the year ended 31st March, 2009

Dr. Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 30,000 By Sales 4,60,000

To Purchase 3,20,000 By Closing Stock 52,000

To Gross profi t c/d 1,62,000

5,12,000 5,12,000

Profi t and Loss Account of X Co. Ltd. for period

from 1st July 2008 to 31st March 2009.

Dr. Cr.

Particulars 1.4.08 to 1.7.08 to Particulars 1.4.08 to 1.7.08 to

30.06.08 31.3.09 30.6.08 31.3.09

To Discount - 5,000 By Gross profi t 40,500 1,21,500

To Directors fees . 12,000 By Commission . 3,000

To Salaries - 48,000 Received

To Depreciation 1,250 3,750

To Capital Reserve 39,250 -

To P & L A/c - 55,750

40,500 1,24,500 40,500 1,24,500

223

Advanced Financial Accounting & Reporting

Note :

a. Entire salary and discount pertains to post incorporation period.

b. Depreciation :

i. Pre-incorporation:

Building : 80,000 × 5% ×

2 = 1,000

Furniture : 10,000 × 10% ×

2 = 250 1,250

ii. Post-incorporation :

Building: 80,000 × 5% × 9/12 = 3,000

Furniture: 10,000 × 10% × 9/12 = 750 3,750

* Profi t during 1.4.93 to 30.6.93 reduces the cost of Acquisition and hence transferred to

Capital reserve.

Balance sheet of X. Co. Ltd. as at 31.03.2009.

Liabilities Rs. Assets Rs.

Share capital Building 80,000

Authorised 3,00,000 Less : Depreciation

Share capital @ 5% 4,000 76,000

Issued and Furniture 10,000

subscribed capital 3,00,000 Less : Depreciation

30,000 shares of Rs. 10 @ 10% 1,000 9,000

each Rs. 8 Current assets,

Called up Capital Loans and Advances

30,000 shares of i) Stock 52,000

Rs. 8 each 2,40,000 ii) Debtors 1,31,000

Less : Calls in arrears 2,000 iii) Cash 91,000 2,74,000

1000 x Rs.2/ - 2,38,000 Miscellaneous

[Out of the above Expenses

shares 10,000 shares i) Preliminary

were issued to Mr. A Expenses 10,000

for consideration other ii) Underwriting

than cash] Commission 4,000 14,000

400 shares of Rs. 10

each fully paid (to be

issued to underwriter

for consideration other

than cash) 4,000 2,42,000

Reserves and surplus

Capital reserve* 23,250

Profi t and Loss A/c 55,750 79,000

Current liabilities and

Provision :

Creditors 48,000

Calls in Advance 4,000 52,000

3,73,000 3,73,000

Preparation of Company Accounts under Various Circumstances

224

* Note : Since both Capital Reserve and goodwill arise out of the business acquisition, they can be netted

off against each other.

Therefore, Capital Reserve is Rs. 23,250.

Pre incorporation profi ts : 39,250

Less : Goodwill on business purchase : (16,000)

Balance of Capital Reserve : 23,250

Group Financial

Statements

STUDY NOTE - 3

This Study Note includes:

• Holding Company

• Consolidated Income

• Preparation of the Group Cash Flow Statement

Group Financial Statements

226

3.1 Holding Company

The tendency to combine in order to derive advantages of economics of scale as well as market power/

monopoly power, fi rms may amalgamate – one fi rm may absorb another fi rm in which case their size

increases and legal in a larger fi rm comes into existence. This implies dissolution of one or more existing

fi rms. A legal procedure has to be followed for this purpose. However, Firms may continue without any

dissolution by investing in the shares of another company and thereby, acquiring ownership interest to

the extent of the holding. If a company holds more than 51% of the issued share capital of another fi rm

or controls composition of Board of Directors of another fi rm, the company holding the majority share is

termed as holding company and the company whose shares are held is termed as subsidiary company.

A partly owned subsidiary is one in which the holding company (or the group) does not hold all the

shares. The interest of shareholders outside the group is called ‘Minority Interest’.

While the wholly owned subsidiary is one where all the shares are owned by the holding company. From

legal point of view both the companies continue to enjoy, separate legal entity but from the point of view

of investor, lender as well as management, then, may very well be regarded as single entity. Legally

accounts of these companies are complied separately but a more realistic picture will be presented if

consolidated accounts especially with respect to published statements- income and position statements

are also included in published reports. For this purpose inter company transactions have to be eliminated

from all stages and a single Profi t and Loss Account and Balance Sheet compiled for the group as a whole.

If a company is a subsidiary company, it is also deemed to be a subsidiary of the holding company.

3.2 Methods of Combination

In order to be able to account for combinations, we must fi rst explore some of the methods which may be

used to effect them. Such methods may best be classifi ed as to whether or not a group structure results

from the combination. Let us take as an example: two companies L and M and assume that the respective

Boards of Directors and owners have agreed to combine their business.

Combinations Which Result in a Group Structure

Two such combinations may be considered. In the fi rst case, company L (say) may purchase the shares of

Co. M (say) and thereby acquire a subsidiary company, alternatively Co. M may purchase the shares of

Co. L. The choice of consideration given in exchange for the shares acquired, will determine whether or

not the old shareholders in what becomes the subsidiary Co., have any interest in the combined business.

Thus, if Co. L issues shares in exchange for shares in Co. M the old shareholders of Co. M have an interest

in the resulting holding company and thereby in the group. Whereas, if Co. L pay cash for the shares in

Co. M, the old shareholders in M take their cash and cease to have any, interest in the resulting group.

In the second case a new company LM (say) may be established to purchase the shares of both M Co. and

L Co. Thus the shareholders in L and M may sell their shares to LM in exchange for shares in LM. The

resulting group structure would be:-

Holding Company

Subsidiary Companies

L M

227

Advanced Financial Accounting & Reporting

The shareholders in LM would be the old shareholders in LM would be the old shareholders in the two

separate companies and their respective interests would depend, as in the above examples, upon the

valuation placed the two separate companies–which should in turn depend upon the bargaining between

the two Boards of Directors.

It would be possible for LM Co. to issue not only shares but also loan stock in order tom purchase shares

in L Co. and M Co. It would be diffi cult for payment to be made in cash and LM Co. is a newly formed

company, although it could, of course offer – shares or raise loan to obtain cash.

Combinations not Resulting in Group Structure

Again, two such combinations may be considered. First, instead of purchasing the shares of Co.M.Co.L

may obtain control of the net assets of M by making a direct purchase of those net assets. The net assets

would thus be absorbed into Co.L and Co.M would itself receive the consideration. This, in due course

would be distributed to the shareholders of M by its liquidator. Once again, the choice of consideration

determines whether or not the old shareholders in Co. M have any interest in the enlarged Co.L, second,

instead of one of the companies purchasing the net assets of the other, a new company may be formed

to purchase the net assets of both the existing companies. Thus a new company LM may be formed to

purchase the net assets of Co.L and Co.M. If payments is made by issue of shares in Co. LM these will be

distributed by the respective liquidators so that the end result in one company, LM which own the net

assets previously held by the separate companies and has as its shareholders the old shareholders in the

two separate companies.

Preference for Group Structure

The above are methods of effecting combination between two or indeed more, companies. It appears

that the majority of large business combination makes use of a group structure rather than a purchase of

assets or net assets. Such a structure is advantageous in that separate companies enjoying limited liability

as already is existence. It follows that names and associated Goodwill, of the original Companies are not

lost and, in addition, that it is not necessary to renegotiate contractual agreement. All sorts of other factors

will be important in practice, some example are the desire to retain staff, the impact of taxation and stamp

duty, whether or not there is remaining minority interest.

Choice of Consideration

As discussed above, the choice of consideration will determine who is interested in the single business

created by the combination and therefore be affected by the size of the companies and also by the intention

of the parties to the combination and also by the conditions in the market securities and taxation system

in force.

The main type of consideration are cash, loan stock, equity shares and some form of convertible securities,

all sorts of combinations of these are possible.

3.3 Accounting Treatment

It seems to be intention of the companies act that the fi nancial year of holding and subsidiary fi rm should

end on the same date. Section 212 of The Companies Act 1956 requires a that a holding company shall

attach to its Balance Sheet the following documents.

• A copy of the Balance Sheet of the subsidiary.

Group Financial Statements

228

• A copy of the Profit and Loss Account of the subsidiary.

• A copy of the board of Directors report and auditor’s report.

• A statement of holding company’s interest.

Accounting Standard AS –21 which has come into effect 1–4–2001 requires that holding company shall

also present consolidated fi nancial statement in addition to the separate fi nancial statements as stated

above. Student is advised to study AS–21 in this context. Consolidated Balance Sheet with respect to the

consolidation process is carried out on a step by step basis so that common transaction are eliminated and

the assets and liabilities of the entire group are presented in a single Balance Sheet and P/L Account at

market prices. The consolidation of the Balance Sheet is carried out in the following steps :

1. Elimination of inter company investments account: a holding company by definition holds majority

shares in the subsidiary company which appears as an investment on the assets side of the Balance

Sheet of the holding company. In the context of subsidiary company it is part of issued capital on the

liability side.

As a fi rst step in the consolidated process the investment account in the Balance Sheet of the holding

company in the subsidiary company is eliminated and the assets (leaving aside fi ctitious assets or including

an adjustment for them) and all outside liabilities will be incorporated into the holding company’s Balance

Sheet as shown below :-

Balance Sheet as on 31-03-2010

H S H S

Share Capital @Rs. 10 each 20000 10000 Sundry Assets 20000 10000

Sundry Liabilities 10000 5000 Investments in S. 10000 -

Ltd. (1000 shares)

30000 15000 30000 10000

Solution:

Consolidated Balance Sheet

Rs. Rs. Rs. Rs.

Share Capital 20000 Sundry Assets 20000

Sundry Liabilities H

H 10000 S 15000 35000

S 50000 15000

35000 35000

In the above case the subsidiary fi rm is fully owned by the holding company and therefore the entire

net assets of the subsidiary fi rm are in the ownership of the holding company and for the purpose

consolidation they have been incorporated into Balance Sheet of the holding company. However, very

often the holding company have holds only majority shares in which case the extent of the ownership

interest ( no. of shares held in the form of investments by the Holding company/ total issued capital of S

229

Advanced Financial Accounting & Reporting

limited in terms of number of shares) In the process of consolidated therefore, assets and liabilities should

be incorporated only to the extent of ownership interest. However, this method is not allowed in practice

as per convention.

2. Determination of Minority Interest: The shares of the subsidiary firm held by outsiders i.e. other

than the Holding company are in aggregate termed as minority interest since majority shares are

held by Holding company. As per I, even in case of partly owned subsidiary firm the entire assets

and liabilities of the subsidiary companies are incorporated in the consolidated Balance Sheet and an

additional calculation is made to determine the extent of minority interest in the assets of subsidiary

firms and this is shown as additional liability in consolidated Balance Sheet. The claim of the majority

(or outside) shareholders will consist of the face value of the shares held by them plus a proportional

share in any increases in the value of assets of the company minus their portion of company’s losses

or decrease in the value of assets of the company.

Illustration:

From the following prepare a consolidated Balance Sheet.

(Figures in Rupees)

H S H S

Share Capital@Rs. 10

each

20000 10000 Shares in S. Ltd. 80000

S. Liabilities 10000 5000 800 shares

Other assets 22000 15000

30000 15000 30000 15000

H limited has acquired the shares on the closing Date of the Balance Sheet

Solution

Consolidated Balance Sheet

Rs. Rs. Rs. Rs.

Share Capital 20000 Sundry assets

Sundry Liabilities H 22000

H 10000 S 15000 37000

S 5000 15000

Minority Interest 2000

37000 37000

Net Assets available for distribution of Equity shareholders of S Limited =

(Assets - Liabilities) = (15000 - 5000) = Rs. 10000

Minority Interest = (10000*1/5) = 2000

(800/1000) = (4/5) Majority Interest

Group Financial Statements

230

3. Goodwill, Capital Reserve / Cost of Control – In the Balance Sheet of subsidiary company when

a company acquires shares there are likely to be accumulated Profit/Losses. These will not be

incorporated into the consolidated Balance Sheet but with respect to the Holding companies cost of

investment reflected on the assets side in the holding’s company Balance Sheet a comparison will

be carried out with the actual value of these investments. The subsidiary Co’s Balance Sheet (paid

up value of shares + accumulated profit or – accumulated losses = market value of the investment).

The difference between the cost of acquisition of share and the market value determined above will

be goodwill if cost of acquisition is less and accordingly goodwill A/c or capital reserve A/c will be

incorporated into the consolidated Balance Sheet. This figure is also termed as cost of control since

the holding company has a controlling investment in the subsidiary firm.

Illustration:

H Ltd. Acquires 3/4 of the share capital of S Ltd. On 31-12-2009 whose Balance Sheets are follows:

H S H S

Share Capital@Rs. 20000 10000 Fixed assets 20000 10000

10 each Current assets 13000 12000

General Reserves 5000 3000 Shares in B Ltd. 10000

P/L Account 3000 2000 (3/4)

10% Debentures 10000 5000

S.creditors 5000 2000

43000 22000 43000 22000

Required to compile consolidated Balance Sheet on 31-12-2009.

Solution:

In case of partly owned subsidiary fi rm the H Co’s interests in the accumulated profi t or loss the subsidiary

fi rm is only to the extent of the ownership interest. The balance due to minority will be adjusted for the

minority interest.

Cost of Control

Amount paid for shares in S Ltd. / cost of acquisition

Of shares Rs.10000

Less: Paid up value in S Ltd. 7500

Share of General Reserve (3/4 of Rs.3000) 2250

Share of P/L Account (3/4 of 2000) 1500

_______ 11250

Capital Reserve 1250

Minority Interest

Paid up value 2500

General Reserve (1/4) 750

P/L Account (1/4) 500

Minority Interest 3750

231

Advanced Financial Accounting & Reporting

Consolidated Balance Sheet

Rs. Rs. Rs. Rs.

Share Capital 20000 Fixed assets

General Reserve 5000 H 20000

P/L Accounting 3000 S 10000

Capital Reserve 1250 -------- 30000

10% Debenture Current Assets

H 10000 H 13000

S 5000 S 12000

--------- 15000 --------- 25000

S/ Creditors

H 5000

S 2000

--------- 7000

Minority Interest 3750

55000 55000

(S Company Balance Sheet

(Net assets – Debentures – Creditors) = (22000 - 5000 - 2000) = 15000

= Net assets available for equity shareholders.

Minorities share in 15000 = (1/4) * 15000 = 3750

(including paid up value of share capital and accumulated profi ts)

4. Capital profit/ revenue profit: The date of acquisition of shares by the holding company may not

coincide with the closing of financial year i.e they may be acquired during the course of financial

year. However, the published statements will be compiled only with respect to the closing date of

financial year. In such a case, the date of acquisition of shares does not coincide with the date of

Balance Sheet and accordingly adjustments have to be made. The Profit and Loss of the subsidiary

company prior to the date of acquisition are capital in nature while post dated profits are revenue in

nature. From the accounting point of view the pre – acquisition profits will be adjusted for in the cost

of control extent of holding company’s ownership interest while the post acquisition profit will be

treated as revenue in nature and therefore in the closing Balance Sheet as shown in the Profit/Loss

Account of the holding company. For this purpose in the absence of any further information it is

perfumed that the subsidiary company earns uniformly throughout the year, for example, if the date

of acquisition is in the middle of first year 1/2 the profit of the subsidiary company will be capital in

nature, the other 1/2 as revenue , with respect to the minorities the treatment is identical for either

share in capital or revenue profit which are added on, to the minority interest. In some cases in the

analysis of profit additional adjustments have to be made before they are analysed into capital and

revenue profit. All accumulated profit except current year profit which has to be segregated into

capital and revenue will be treated as capital profit.

Group Financial Statements

232

5. Inter Company Transactions: The holding and subsidiary firm may have centered into the following

transaction and these common transactions will be eliminated while compiling the consolidated

Balance Sheet.

a) The holding or the subsidiary firm may have granted loans (short term) to each other.

b) They may have sold goods on credit in which case the inter company transactions will be

included in debtors and creditors.

c) The subsidiary or holding company may have drawn Bills of Exchange on each other in which

case the common transaction will be included in Bills Payable/ Bills Receivable.

In all the above cases where the companies were treated as separate entities, these transactions would

appear on the liabilities side on the Balance Sheet of one and on the assets side of the other’s Balance

Sheet. However, when the entire group is being treated as a single entity it is undesirable to include

common transaction and therefore they will be eliminated in the consolidated Balance Sheet from the

liabilities as well as assets side.

6. Contingent Liabilities: A contingent liability appears as a footnote. This is on account of a liability

which may or may not arise in the future. While preparing a consolidated Balance Sheet they may be

categorized as external current liabilities or internal current liabilities. External liabilities between the

holding and subsidiary firm and the outsiders. Internal current liabilities is on account of transactions

between the firms belonging to the same group. The external liabilities continue unchanged

for the same group while internal liabilities no longer appears as a footnote as it is generally

incorporated on the liability side.

Illustration:

The following are Balance Sheet of H & S Company as on 31-12-2009 (in Rs.)

H S H S

Share Capital@Rs. 10 20000 10000 Fixed Assets 30000 15000

each Current Assets 35000 25000

General Reserve 10000 5000 Shares in S Ltd.

(8000)

10000

P/L balance as 1/1999 5000 4000

12% Debenture 20000 10000

S. creditors 10000 5000

Profi t for the year 10000 6000

75000 40000 75000 40000

H Limited acquired shares in S Limited on 01-07-2009. S limited has a balance of Rs. 4000/- in General

Reserve on 01-01-2009. On the account fi re goods costing Rs. 2000 of S Limited were destroyed in

March 2009. The loss has been charged to the Profi t and Loss Account for the year.

Required to prepare a consolidated Balance Sheet.

233

Advanced Financial Accounting & Reporting

Solution

Working Notes:

1. Analysis of profi t (of S)

Particulars Capital Profi t Revenue Profi t

General Reserve 01-01-2009 4000 -

Profi t/ Loss Account 4000 -

Profi t for the year prior to transfer

General Reserve + Loss on fi re in March 4500 4500

(6000+1000+2000)/2 ------------ ------------

4500

Less: Loss on A/c of fi re in March 2000

------------ ------------

10500 4500

Less: Minority Interest (1/5) 2100 900

------------ ------------

8400 3600

------------ ------------

2. Cost of Control

Cost of acquiring of shares 10000

Less: Nominal value of shares 800*10 8000

Share capital Profi ts of H 8400

------------ 16400

------------

Capital Reserve 6400

------------

Minority Interest

Nominal value of share 200*10 2000

Share of capital profi t 2100

Share of revenue profi t 900

------------ 3000

------------

5000

Group Financial Statements

234

Rs. Rs. Rs. Rs.

Share Capital 20000 Fixed assets

General Reserve 10000 H 30000

P/L A/c S 15000

H 15000 45000

S 3600

12% Debentures 18600 Current Assets 35000

H 20000 H 25000

S 10000 S 60000

30000

Sundry Interest 15000

105000

7. Unrealized gains: If goods have been sold by holding company to subsidiary company or vice versa,

presumably they would be including a profit margin on the cost price. However, when the firms

are treated as a single entity, stock or inventory should be valued at cost i.e excluding profits. The

firm that has sold the goods must have credited the profit of account of the sales: therefore, profit

or selling company has to be reduced and the stock account of the company that has purchased the

goods also has to be reduced for which purpose the following entry is passed.

Profit & Loss A/c (selling company) Dr.

To stock company (purchasing company)

(with the company of profit included in the inter

company sales of goods that can be…..)

By making a deduction for the inter company sale of goods, the adjustments is made only in relation

to those goods that can still be traced in the inventories of the purchasing company. If the goods are

not traceable no adjustments is required. A finer accounting analysis can be performed by taking

into consideration extent of the ownership interest of the holding company in the subsidiary firm

accordingly making the above entry to the extent of ownership interest. As per decision of the

Institute Chartered Accountants, this method no longer followed and the total profit included in

inventories (irrespective of it belonging to majority or minority) is deducted from both sides of the

Balance Sheet.

8. Revaluation of assets and Liabilities:- The Holding company may revalue the Assets and Liabilities

of the subsidiary firm at the time of acquisition of shares in terms of market prices. In such a case

the rate of revaluation is, assumed to be the same date as acquisition of shares. The profit or loss on

revaluation is capital in nature and accordingly will be adjusted for in the analysis of profit under

capital profits. The date of acquisition of shares as considered earlier also may not coincide with date

of Balance Sheet in which case as stated earlier the current years profit has to be segregated between

capital and revenue. Since the date of revaluation of assets is the date of acquisition of shares, a

change in depreciation may be required on the revalued assets from the date of acquisition till the

closing of Balance Sheet. For, presumably the Balance Sheet of the subsidiary company has been

235

Advanced Financial Accounting & Reporting

made or complied in terms of its original values. Information with respect to revaluation has to be

explicitly stated by an agreement between the firms at the time of acquisition of majority share by the

holding company.

Preference Shares

The Holding or Subsidiary Company may have Preference shares at the time of consolidation. The

preference shares of the holding company continue as they are in the consolidated Balance Sheet. With

respect to the Subsidiary fi rm if preference share capital has been issued there are 2 possibilities.

• All preference shares are held by the outsiders i .e. other than holding company i.e which case the

paid up value of the preference shares of the Subsidiary company is added to the minority interest.

• It is possible that part whole of the preference. shares of the Subsidiary company is held by the

Holding Company. In such a case the cost of acquiring of the preference shares (shown in the

investment account in the assets side in the Balance Sheet of the holding company) is compared with

the paid up value (shown in Balance Sheet of Subsidiary firm) and the difference if any, adjusted in

the cost of control. (if preference shares are issued after date of acquisition the adjustments remain

the same )

Arrears of preference dividends may be payable or outstanding at the time of consolidation of Balance

Sheet and usually preference dividends are cumulative in nature. If the subsidiary company, has adequate

profi ts, it is reasonable to assume that these dividends will be paid. The minorities shares will be added

to Minority Interest while with respect to the holding company the treatment will differ in terms of the

divided being paid out of pre acquisition or post acquisition profi ts or both.

In case the dividends are paid out of pre-acquisition profi ts (capital profi t), the dividend due to the holding

company will be adjusted for in the cost of control. In case post acquisitions revenue profi ts are employed,

the dividend due to the holding company will be credited (added on) to the Profi t and Loss Account

of the holding company in the consolidated Balance Sheet. It is possible that a combination of both pre

and post acquisition profi t is employed for the purpose of making dividend payment in which case the

dividend paid out of the capital profi t will be adjusted for in the cost of control and the portion out of

revenue profi t will be adjusted for in the P/L Account of Holding company, the total being amount due

to the holding company with respect to minorities no distinction is made between capital and revenue

profi t for the purpose of making dividend payment and the dividend payable to them will be added to

minority interest.

Bonus Shares

The Subsidiary company may issue Bonus shares either at the time of acquisition of shares by the holding

company or after the acquisition of shares by the Holding company. For issuing bonus shares, the

accumulated profi ts in the Balance Sheet of the subsidiary company are employed. These profi ts may be

capital or revenue in nature or a combination of both. At the time of bonus issue the share of the Holding

company as well as the minorities increases proportionately (in terms of the ration of bonus issue) but the

proportion of their ownership remains the same as before. If bonus shares are issued out of capital profi ts

are adjusted accordingly and bonus shares transferred to cost of control. If bonus shares issued out of

revenue profi t of subsidiary company to that extent revenue profi t stand capitalized and will affect capital

reserve or goodwill as the case may be.

Group Financial Statements

236

DIVIDEND ON EQUITY SHARES

The Subsidiary company may declare dividend on its equity shares and the following are the possibilities

with respect to it.

a. Intention to propose dividend: In such a case since the proposal has not been approved in the

meeting the intention may be ignored and no adjustment is required (in terms of calculation) with

respect to this dividend intention.

b. Proposed dividend: It is possible that dividend has been proposed in a meeting on the closing date of

the financial year but no notification of this fact has been made in the books of the Holding company.

In such a case, the amount of dividend declared may be added to the profits of the Subsidiary company

(assuming this has been deducted) and then the analysis of profits is performed in the usual manner.

No adjustment is needed in the books of the Holding company.

c. Dividends Payable: In some cases, the dividends that have been declared by the Subsidiary firm

may have been adjusted for in both the books i.e. the Subsidiary and Holding company. In this case

adjustment is made in the books of the Subsidiary company. In the books of the Holding company the

dividend that are receivable fro the Subsidiary company will be credited to Profit and Loss Account

of the Holding company (in terms of income receivable on investments).It is possible that these

dividends have been paid by the subsidiary firm out of Capital profit, revenue profit, combination of

both profit

i) If dividend of subsidiary company have been declared totally out of capital profit, then it is

incorrect that this capital income should stand credited to the revenue P/L Account of the

holding company. Therefore one adjustment entry is made for remaining dividend from the

P/L Account of the holding company and they are transferred to cost of control.

P/L Account (H Ltd. ) Dr

To Cost of control/Investment Account

With the amount of dividend receivable from the Subsidiary firm

ii) If the dividend of the subsidiary firm have been declared out of Revenue profit then they should

be credited to the P/L A/c. of the Holding Company and of they are already included therein

as per our presumption, no adjustment is required.

iii) The dividend receivable by Holding Company may be partly out of capital profit or out of

revenue profit of Subsidiary company. The portion paid out of capital profit will be eliminated

form P/L Account of Holding company and transferred to cost of control with respect to the

portion of the dividend receivable out of revenue profit no adjustment is required. With respect

to the minorities irrespective of the dividend declared by the Subsidiary company being payable

out of capital profit or revenue profit will be added to minority interest.

d) Dividend paid: The Subsidiary company may have declared a dividend in the course of the financial

year and this fact has been adjusted for in both the books and in fact the cash liability has already

been met by subsidiary firm for the purpose of dividend payment. This implies there is no liability

outstanding with respect to payment of dividends therefore no addition on account dividends has to

be made to minority interest. With respect to Holding company has stated in point (iii) the dividend

must have been credited to P/L Account out of capital profit, revenue profit are a combination from

the subsidiary company’s books. The portion out of capital profit stated earlier will be transferred

from the P/L Account of the Holding company to the cost of control.

237

Advanced Financial Accounting & Reporting

Share Premium:

The share premium account may appear in the Balance Sheet of the Holding company at the time of

consolidation. It will continue as share premium account. However if the holding company has issued

some of its own shares to the subsidiary company the share premium due on this share will be adjusted

for in the cost of control. If share premium appears in the books of subsidiary company, it may be prior to

the acquisition of shares by the holding company in which case it is treated as capital profi t in the analysis

of profi t. However, the share premium arises after acquisition of share by H company it will continue as

share premium in the consolidated Balance Sheet.

Preliminary Expenses:

If the Holding company has preliminary expenses they continue as such. If subsidiary company has

preliminary expenses they may be treated as a capital loss in the analysis of profi t or clubbed with

preliminary expenses of Holding company.

Provision for Taxation:

Taxes are payable to outside agencies and provision for taxation with respect to holding and subsidiary

company will be shown as such in the consolidated Balance Sheet.

Sale of Share:

The holding company may sell some of the share of the subsidiary company that it holds as investment.

The P/L on such sale is transfer to cost of control. This changes the proportion of the Holding company

and minority interest and requires adjustment in calculation of cost of control, minority interest and an

analysis of profi t will have to be performed.

Purchase of shares in instalments:

The Holding company may acquire shares in the subsidiary fi rm not in once single instalment but in a

number of instalments. If the earlier dates of the acquisition may be ignored. If however, shares have been

acquired in major instalments, a step by step analysis of profi t after taking into consideration the dates of

acquisition will have to be performed in the analysis of profi t between capital and revenue.

Debentures:

The subsidiary and the holding may have issued debentures at time of consolidation of Balance Sheet.

These will be added and continued to appear in the debenture account in the consolidated Balance Sheet.

However, if some portion of these debentures are held by the holding company or subsidiary company,

this will be dedicated from the investment account on the asset side and the debentures account on the

liabilities side at the time of consolidation.

Goodwill:

A goodwill account may appear in the books of Subsidiary and Holding at the time of consolidation. The

aggregate goodwill be the total of these goodwill and will be adjusted for any goodwill or capital reserve

that appear in the cost of control.

Interim Dividend:

When a dividend is paid in between an accounting year i.e, prior to completion of fi nal accounts, it is

termed as interim dividend. The general presumption with respect to this dividend is that it has been

paid i.e, it has been adjusted for in the books of Holding and Subsidiary. No adjustment required with

respect to minorities however, with respect to the Holding company, if capital profi t have been employed

for making dividend payment to the extent (wholly or partly) it will go to the cost of control from the P/L

Account of Holding company.

Group Financial Statements

238

A. PRELIMINARIES OF CONSOLIDATION

Illustration 1: Analysis of Balances in Reserves

Following are the balances in various reserves of P. Ltd., subsidiary of V Ltd. as on the date of controlling

acquisition and the date of consolidation -

Accounts Date of Acquisition Date of Consolidation

General Reserve 60,000 1,20,000

Profi t and Loss Account 25,000 80,000

Capital Redemption Reserve 40,000 55,000

Securities Premium 45,000 45,000

Capital Reserve 5,000 25,000

Preliminary Expenses 5,000 1,000

Underwriting Commission 10,000 5,000

Additional information -

1. One year after the date of controlling acquisition, Pushpak Ltd. had issued Bonus Shares for Rs.60,000

utilizing the balances in Capital Reserve and Capital Redemption Reserve in full, and sourcing the balance from

General Reserve. The Director’s did not utilize the balance in Securities Premium for this purpose.

2. In the intervening period, Preference Share Capital had been redeemed at a Premium of Rs.12,000. For

statutory Compliance, a sum of Rs.40,000 had been transferred to Capital Redemption Reserve and a further

sum of Rs. 15,000 had been transferred upon redemption of Debentures, which were also redeemed at a

Premium of Rs.10,000.

3. To fi nance its redemption of Preference Capital, P Ltd. had issued Equity Capital at a Premium. The balance

of Rs.5,000 against Underwriting Commission is incurred in this regard.

4. The Company has been writing off balances in Underwriting Commission A/c and Preliminary Expenses

against balance in Securities Premium Account. The balance in Preliminary Expenses as on consolidation date

is the amount as on acquisition date not yet written off.

5. Pushpak Ltd. had declared Equity and Preference Dividend of Rs.20,000 out of its P&L A/c balance as on date

of acquisition.

How would the above balances as on date of consolidation be analyzed and classifi ed for the purposes of

consolidation?

Solution:

1. General Reserve

Balance as on Consolidation 1,20,000

Date of Acquisition 60,000 Acquisition to Consolidation

Less: Bonus Issue (60,000 - trfd. From Cap. Res. 15,000 (balancing fi gure) Rs.75,000

50,000 - trfd. from CRR 40,000)

Balance Capital Profi t 45,000 Revenue Reserve

2. Profi t and Loss A/c

Balance as on Consolidation 80,000

Date of Acquisition 25,000 Acquisition to Consolidation

Less: Dividend out of this 20,000 (balancing fi gure) Rs.75,000

Balance Capital Profi t 5,000 Revenue Profi t

239

Advanced Financial Accounting & Reporting

3. Capital Redemption Reserve

Balance as on Consolidation 55,000

Date of Acquisition 40,000 Acquisition to Consolidation

Less: Bonus Shares 40,000 (balancing fi gure) Rs.55,000

Balance Capital Profi t NIL

Redemption of Pref. Capital Redemption of Debentures

Rs.40,000 Rs. 15,000

Capital Redemption Res. Capital Redemption Res.

4. Securities Premium

Balance as on Consolidation 45,000

Date of Acquisition 45,000 Acquisition to Consolidation

Less: Premium on Redemption of Pref. Capital (12,000) Premium on Fresh Issue of Capital

Less: Premium on Redemption of Debentures (10,000) (balancing fi gure) Rs.36,000

Less: Underwriting Commission and Prelim (14,000) Securities Premium

Exp. written off (10,000 + 4,000)

Balance Capital Profi t 9,000

5. Capital Reserve

Balance as on Consolidation 25,000

Date of Acquisition 5,000 Acquisition to Consolidation

Less: Bonus Shares 5,000 (balancing fi gure) Rs.25,000

Balance Capital Profi t NIL Capital Reserve

6. Preliminary Expenses

Balance as on Consolidation 1,000

Date of Acquisition 5,000 Acquisition to Consolidation

Less: Written off against Securities Prem. 4,000 (balancing fi gure) Rs.NIL

Balance Capital Profi t 1,000 Preliminary Expenses

7. Underwriting Commission

Balance as on Consolidation 5,000

Date of Acquisition 10,000 Acquisition to Consolidation

Less: Written off against Securities Prem. 10,000 Rs.5,000

Balance Capital Profi t NIL Underwriting Commission

Summary

Accounts

(1)

Balance on DOC

(2)

Considered Capital Profi t

(3)

Balance considered as such

(4)

General Reserve 1,20,000 45,000 75,000

Profi t and Loss Account 80,000 5,000 75,000

Capital Redemption Reserve 55,000 NIL 55,000

Securities Premium 45,000 9,000 36,000

Capital Reserve 25,000 NIL 25,000

Preliminary Expenses 1,000 1,000 NIL

Underwriting Commission 5,000 NIL 5,000

Note: In the course of consolidation, the amounts in Col. (3) and (4) shall be apportioned to Holding Company

(P Ltd.) and Minority Interest (of V Ltd.) in the ration of their shareholding.

Group Financial Statements

240

Illustration 2: Analysis of Reserves – Adjustment for Abnormal Loss, Dividend, etc.

A Ltd. acquired 80% interest in B Ltd. on 01.07.2007. A Ltd. is in the process of preparing its Consolidated Financial

Statement as on 31.12.2008. The details of Profi t and Loss A/c balances of B Ltd. is as under —

• Balance on 01.01.2007 Rs. 6,000

• Profi t for 2007 Rs.10,000 (before Equity Dividend)

• Balance on 31.12.2008 Rs.33,800

In April 2007, B Ltd. lost stocks costing Rs.1,550 due to riots. The Insurance Company admitted a claim of Rs.650

only.

In August 2008, A Ltd. received Rs.9,600 as Dividend from B Ltd. in respect of the year ending 31.12.2007. B Ltd.

has proposed a dividend of Rs.15,000 for the year ending 31.12.2008.

During 2008, B Ltd. had purchased shares of M Ltd. cum-dividend for Rs.34,500. B Ltd. received a dividend of

Rs.7,500 on this investment, which was credited to its Profi t and Loss Account. A provision for outstanding

expenses of Rs.1,700 provided during the year was considered excessive. The balance in Profi t and Loss Account

as on 31.12.2008 is after providing for the expenses.

Analyse the balance in Profi t and Loss Account as Capital and Revenue for the purposes of Consolidation.

Solution:

Analysis of Profi t and Loss Account

Balance as given on 31.12.2008 33,800

Less: Pre-Acqn. Dividend from M Ltd. (7,500) (to credit Investment in Maya A/c)

Less: Proposed Dividend for 2008 (15,000)

Add: Excess Provision to be written back 1,700 (to debit Outstanding Expenses A/c)

Corrected Balance as at 31.12.2008 13,000

01.01.2007 Profi t for 2007 10,000 Dividend for 2007 Profi t for 2008

Rs.6,000 Add: Abnormal Loss 900 Rced. by A 9,600 for 80% Rs.9,000

Capital Profi t without Total Dividend = 9,600 + 80% = (bal. fi gure) Revenue

abnormal losses 10,900 (Rs. 12,000) (1,30-Opg. 60-

Pft for 2004 1,00 +

Dividend 1,20)

1.7.2007 to

1.7.2007

5,450

Less: Abnormal Loss 900)

Bal. Capital Profi t 4,550

1.1.2007 to

31.12.2007

5,450

Revenue

From Opg

Bal.

(bal. fi gure)

(Rs.2,000)

Capital

From Profi t

for 1.1.07 to

1.7.07

(Rs.4,550)

Capital

From Profi t

for 1.7.07

to 31.12.07

(Rs.5,450)

Revenue

Total Capital Profi t: 6,000 + 4,550 - 2,000 - 4,550 - Rs.4,000;

Total Revenue Profi t: 9,000 + 5,450 - 5,450 = Rs.9,000

Abnormal Loss = Stock Loss in Riots Rs.1,550 Less Insurance Claim received Rs.650 = Rs.900

Notes:

• It has been assumed that the Profi ts arose evenly throughout the year.

• Dividend declared for 2004 = Rs. 12,000, but profi t for 2007 is Rs. 1,00,000. So it is presumed that balance of

Rs.2,000 has been declared from the opening reserve.

241

Advanced Financial Accounting & Reporting

Illustration 3: Cost of Investment - Share Split

A Ltd. acquired 5,000 Shares of S Ltd. at Rs.48 per Share cum-Dividend constituting 62.50% holding in the latter.

Immediately after purchase, S Ltd. declared and distributed a dividend at Rs.4 per Share, which S Ltd. credited

to its Profi t and Loss Account.

One year later, S Ltd. declared a Bonus of 1 fully paid Equity Share of Rs.10 each for every 5 Shares held. Later

on, S Ltd. proposed to raise funds and made a Rights Issue of 1 Share for 5 held at Rs.36 per Share. A Ltd.

exercised its right.

After some time, at its AGM, S Ltd. had decided to split its Equity Share of Rs.10 into Two Equity Shares of Rs.5

each. The necessary resolutions were passed and share certifi cates issued to all its existing shareholders.

To increase its stake in S Ltd. to 80%, A Ltd. acquired suffi cient number of shares at Rs.30 each.

Ascertain the Cost of Control as on 31st December if Sreesha’s share in Capital Profi ts (duly adjusted for purchase

in lots) as on that date was Rs.3,15,000.

Solution: 1. Cost of Investment

Particulars Shares Rs.

Cost of First Acquisition (5,000 x Rs.48)

Less: Pre-Acquisition Dividend (5,000 * Rs.4 per Share)

5,000

N.A.

2,40,000

(20,000)

Corrected Cost of Investment

Add: Bonus Shares (1/5 * 5,000 Shares)

5,000

1,000

2,20,000

–

Cost after Bonus Shares

Add: Rights Shares (1/5 x 6,000 Shares x Rs.36)

6,000

1,200

2,20,000

43,200

Cost after Rights Issue before Share Split 7,200 2,63,200

Cost after share split (WN 1) (2 Sh. for 1 for 7,200 Sh = 7,200 x 2) Add:

Acquisition to increase holding to 80% (WN 2) (4,032 x Rs.30)

14,400

4,032

2,63,200

1,20,960

Balance on date of Consolidation 18,432 3,84,160

Notes:

• Share Split: In case of Share Split, the Cost of Acquisition will not undergo any change. Only the number

of Equity Shares and the face value will change. This is similar to adjustment for Bonus Issue. However, for

Bonus Issue, the face value and paid up value of the share will be the same as the original share. In share

split, the face value and paid up value will be lesser than that of the original shares.

• Calculation of Number of Shares to be acquired to increase stake to 80%

Particulars Shares

a. Shares held before acquisition

b. % of holding

c. Hence, Total Number of Shares of S Ltd. (a + b)

d. 80% of above (c x 80%)

e. Number of Shares to be acquired (d - a)

(14,400 - 62.50%)

(23,040 x 80%)

(18,432 - 14,400)

14,400

62.5%

23,040

18,432

4,032

2. Cost of Control

Particulars Rs.

Cost of Investment

Nominal Value of Equity Capital

Share in Capital Profi t

(A) (from 1 above)

(18,432 x Rs.5 per Share)

3,84,160

92,160

3,15,000

Total of Above (B) 4,07,160

Capital Reserve (if B < A) (B-A) 23,000

Group Financial Statements

242

Illustration 4: Cost of Control - For different Investment Costs

C Ltd. has acquired 50,000 Shares of Rs.10 each in A Ltd. constituting 62.5% of the latter’s Equity. On the same

day, Arghya Ltd. had also acquired 10,000 8% Preference Shares of Rs.20 each.

The balances in Reserves of A Ltd. are -

Capital Reserve Rs.60,000 (Fully Pre Acquisition)

Securities Premium Rs.15,000 (Fully Post Acquisition)

General Reserve Rs.78,000 (30% Pre Acquisition 70% Post Acquisition)

Profi t and Loss A/c Rs.90,000 (50% Pre Acquisition 50% Post Acquisition)

Ascertain the cost of control if total cost of investment is (a) Rs.7,50,000; (b) Rs.8,50,000; and (c) Rs.10,00,000.

Solution:

1. Determination of Capital Profi t

Reserve Account

Total Pre Acquisition Post Acquisition

Capital Profi t Revenue Profi t

Capital Reserve 60,000 60,000 —

Securities Premium 15,000 — 15,000

General Reserve 78,000 23,400

(30% x Rs.78,000)

54,600

(70% x Rs.78,000)

Profi t and Loss Account 90,000 45,000

(50% x Rs.90,000)

45,000

(50% x Rs.90,000)

Total Rs. 2,43,000 Rs. l,28,400 Rs. 1,14,600

Share of C Ltd. (62.5% of above) Rs.80,250 Rs.71,625

2. Cost of Control

Particulars Rs. Rs. Rs.

Cost of Investment

Nominal Value of Equity Capital

Nominal Value of Preference Capital Share in

Capital Profi t

(A)

(50,000 x Rs. 10)

(20,000 x Rs. 20)

7,50,000 8,50,000 10,00,000

5,00,000

2,00,000

80,250

5,00,000

2,00,000

80,250

5,00,000

2,00,000

80,250

Total of Above (B) 7,80,250 7,80,250 7,80,250

Goodwill (if A > B) (A-B) — 69,750 2,19,750

Capital Reserve (if B < A) (B-A) 30,250 — —

Illustration 5: Cost of Control - For Ex-Dividend and Cum-Dividend Acquisition

D Ltd. has made the following investments in S Ltd. a few years before –

1. 6,000 Equity Shares of Rs.10 each at Rs.1,50,000.

2. 200 12% Preference Shares of Rs.100 each at Rs.30,000.

3. 500 10% Debentures at Rs.95 per Debenture.

The Capital Profi ts of S Ltd. have been ascertained at Rs.96,000.

Determine the cost of control, under the following situations –

1. Shares were purchased Cum-Dividend and Equity Dividend was declared at 20% and the dividends were

(a) Credited to Profi t and Loss Account

(b) Credited to Investment Account

2. Shares were purchased Ex-Dividend and Equity Dividend was declared at 20% and the dividends were

(a) Credited to Profi t and Loss Account

(b) Credited to the Investment Accounts

243

Advanced Financial Accounting & Reporting

Solution:

1. Cost of Control

Particulars Cum-Dividend Ex-Dividend

Credited to P&L A/c Invt. A/c P&L A/c Invt. A/c

Cost of Investment

Equity Capital 1,50,000 1,50,000 1,50,000 1,50,000

Preference Capital 30,000 30,000 30,000 30,000

Total Cost of Investment 1,80,000 1,80,000 1,80,000 1,80,000

Adjustment for Dividend out of Pre–Acquisition Profi ts

Less: Only for Cum Dividend Purchase

Preference Dividend (12% x Rs.20,000) (2,400) – N.A. N.A.

Equity Dividend (20% x Rs.60,000) (12,000) – N.A. N.A.

Add: Only for Ex-Dividend Purchase

Preference Dividend (12% x Rs.20,000) N.A. N.A. – 2,400

Equity Dividend (20% x Rs.60,000) N.A. N.A. – 12,000

Corrected Cost of Investment (A) 1,65,600 1,80,000 1,80,000 1,94,400

Nominal Value of Equity Capital (6,000 x Rs.10) 60,000 60,000 60,000 60,000

Nominal Value of Pref. Capital (200 x Rs.100) 20,000 20,000 20,000 20,000

Share in Capital Profi t 96,000 96,000 96,000 96,000

Total of Above (B) 1,76,000 1,76,000 1,76,000 1,76,000

Goodwill (if A > B) (A - B) – 4,000 4,000 18,400

Capital Reserve (if B < A) (B - A) 10,400 – – –

Note: Investment in Debentures are not considered for determining Cost of Control since as per AS 21, Cost of

Control is required to be determined only to the extent of share in the Equity of the Subsidiary i.e. Shareholders

Networth. Debentures are excluded in computing Shareholders Networth and hence should not be considered

in the determining Cost of Control. Gain or Loss on elimination of mutually held Debentures in the consolidation

process will be adjusted against Group Reserves.

Illustration 6: Minority Interest

X Ltd. acquired 75% of the Equity Shares of Y Ltd. From the following Balance Sheet as at 31st December of Y Ltd. and

additional information furnished, determine Minority Interest in Y Ltd. as on Balance Sheet date

Liabilities Rs. Assets Rs.

Share Capital: Equity Capital (Rs.100) 20,00,000 Fixed Assets: (Net Block) 40,00,000

Reserves: Securities Premium 3,00,000 Current Assets: Stock in Trade 20,00,000

General Reserve 7,00,000 Debtors 12,00,000

Profi t and Loss Account 12,00,000 Other Current Assets 8,00,000

Current Liabs: Creditors

Bank Overdraft

14,00,000

24,00,000

Total 80,00,000 Total 80,00,000

When X Ltd. acquired shares, balances in Reserves of Y Ltd. were as under - (a) Securities Premium Rs.3,00,000;

(b) General Reserve Rs.1,00,000; (c) Profi t and Loss Account Rs.4,00,000.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = X

Subsidiary = Y

Acquisition: Not Available

Consolidation: 31st December

Holding Company = 75%

Minority Interest = 25%

Group Financial Statements

244

2. Analysis of Reserves and Surplus of Y Ltd.

(a) Securities Premium

Balance as per Balance Sheet Rs. 3,00,000

Balance on date of acquisition Acquisition to Consolidation

Rs. 3,00,000 (balancing fi gure) Rs.NIL

Capital Profi t Securities Premium

(b) General Reserve

Balance as per Balance Sheet Rs.7,00,000

Balance on date of acquisition Acquisition to Consolidation

Rs.1,00,000 (balancing fi gure) Rs.6,00,000

Capital Profi t Revenue Reserve (General Reserve)

Balance as per Balance Sheet Rs.12,00,000

Balance on date of acquisition Acquisition to Consolidation

Rs.4,00,000 (balancing fi gure) Rs.8,00,000

Capital Profi t Revenue Profi t (P&L A/c)

3. Analysis of Net Worth of Y Ltd.

Particulars

Total Share of

X Ltd.

Minority

Interest

100% 75% 25%

(a) Equity Share Capital

(b) Capital Profi ts Securities Premium

General Reserve

Profi t & Loss Account

Total

(d) Revenue Profi ts Profi t & Loss A/c

20,00,000 15,00,000

6,00,000

4,50,000

6,00,000

5,00,000

2,00,000

1,50,000

2,00,000

3,00,000

1,00,000

4,00,000

8,00,000

6,00,000

8,00,000

Minority Interest 10,50,000

Illustration 7: Minority Interest - Investment in Preference Capital

J Ltd. acquired 60% of the Equity Shares and 35% of Preference Shares of K Ltd. The Balance Sheet of K Ltd. as on 31st

December is as under —

Liabilities Rs. Assets Rs.

Share Capital: Equity Capital (Rs.100) 3,75,000 Fixed Assets: (Net Block) 5,50,000

Pref. Capital (Rs.100) 2,50,000 Current Assets: Stock In Trade 1,70,000

Reserves: Capital Reserve 37,500 Debtors 1,87,500

General Reserve 1,70,000 Other Current Assets 67,500

Profi t and Loss Account 42,500 Miscellaneous Expenditure:

Current Liabs: Creditors 1,25,000 Preliminary Expenses 25,000

Total 10,00,000 Total 10,00,000

When J Ltd. acquired shares, balances in Reserves of K Ltd. were as under – (a) Capital Reserve Rs.20,000;

(b) General Reserve Rs.45,000; (c) Profi t and Loss Account Rs.67,500; (d) Preliminary Expenses Rs.25,000.

Determine Minority Interest for the purpose of Consolidation.

245

Advanced Financial Accounting & Reporting

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = J Ltd.

Subsidiary = K Ltd.

Acquisition: Not Available

Consolidation: 31st December

Holding Company = 60%

Minority Interest = 40%

2. Analysis of Reserves and Surplus of J Ltd.

(a) Capital Reserve

Balance as per Balance Sheet Rs.37,500

Balance on date of acquisition Acquisition to Consolidation

Rs.20,000 (balancing fi gure) Rs.17,500

Capital Profi t Capital Reserve

(b) General Reserve

Balance as per Balance Sheet Rs.1,70,000

Balance on date of acquisition Acquisition to Consolidation

Rs.45,000 (balancing fi gure) Rs.1,25,000

Capital Profi t Revenue Reserve (General Reserve)

Balance as per Balance Sheet Rs.42,000

Balance on date of acquisition Acquisition to Consolidation

Rs.67,500 (balancing fi gure) (Rs.25,000)

Capital Profi t Revenue Profi t (P&L A/c)

(d) Preliminary Expenses

Balance as per Balance Sheet Rs.25,000

Balance on date of acquisition Acquisition to Consolidation

(Rs.25,000) (balancing fi gure) Rs.NIL

Capital Profi t Preliminary Expenses

3. Analysis of Net Worth of K Ltd.

Particulars

Total Share of

Manu Ltd.

Minority

Interest

100% 60% 40%

(a) Equity Share Capital

(b) Pref. Share Capital [35 : 65]

(b) Capital Profi ts Capital Reserve

General Reserve

Profi t & Loss Account

Preliminary Expenses

Total

(d) Revenue Profi ts Profi t & Loss A/c

3,75,000 2,25,000

87,500

1,29,000

21,000

1,50,000

(30,000)

1,50,000

1,62,500

86,000

14,000

1,00,000

(20,000)

2,50,000

20,000

90,000

1,35,000

(50,000)

2,15,000

35,000

2,50,000

(50,000)

Minority Interest 8,05,000

Group Financial Statements

246

Illustration 8: Elimination of Unrealized Profi ts – Stock Movement

From the following information determine the amount of unrealized profi ts to be eliminated and the

apportionment of the same, if Ca Ltd. holds 75% of the Equity Shares of D Ltd. -

1. Sales by C Ltd. to D Ltd. -

(a) Goods costing Rs.5,00,000 at a profi t of 20% on Sale Price. Entire stock were lying unsold as on the Balance

Sheet date.

(b) Goods costing Rs.7,00,000 at a profi t of 25% on Cost Price. 40% of the goods were included in closing stock

of D.

2. Sales by D Ltd. to C Ltd. -

(a) Goods sold for Rs.7,50,000 on which D made profi t of 25% on Cost. Entire stock were at C’s godown as

on the Balance Sheet date.

(b) Goods sold for Rs.9,00,000 on which D made profi t of 15% on Sale Price. 70% of the value of goods were

included in closing stock of C.

Solution:

Transaction Sale by C Ltd. (Molding) to D Ltd. (Subsidiary)

Nature of Transaction Downstream Transaction

Profi t on Transfer Cost Rs.5,00,000 x Profi t on Sale 20%

÷ Cost on Sale 80% = Rs.1,25,000

Cost Rs.70,0000 x Profi t on

Cost25% = Rs.l,75,000

% of Stock included in Closing Stock 100% 40%

Unrealized Profi ts to be eliminated

(transferred to Stock Reserve)

Rs. 1,25,000 x 100%

= Rs.1,25,000

Rs. 17,500 x 40%

= Rs.70,000

Share of Majority - Reduced from

Group Reserves

100% x Rs. 1,25,000

= Rs.1,25,000

100% x Rs.70,000

= Rs.70,000

Share of Minority (Unrealized Profi t on Downstream Transactions is fully adjusted against

Group Reserves. Minority Interest is not relevant)

Transaction Sale by D Ltd. (Subsidiary) to C Ltd. (Holding)

Nature of Transaction Upstream Transaction

Profi t on Transfer Sale Rs.7,50,000 x Profi t on Cost 25%

÷ Sale to Cost 125% = Rs. 1,50,000

Sale Rs.9,00,000* Profi t on Cost

15% = Rs.l,35,000

% of Stock included in Closing Stock 100% 70%

Unrealized Profi ts to be eliminated

(reduced from Closing Stock)

Rs. 15,0000 x 100%

= Rs.l5,000

Rs. 1,35,000 x 70%

= Rs.94,500

Share of Majority - Reduced from

Group Reserves

Share of Majority 75% x Unrealized

Profi ts Rs. 1,50,000

= Rs.l,12,500

Share of Majority 75% x

Unrealized Profi ts Rs.94,500

= Rs.70,875

Share of Minority - Reduced from

Minority Interest

Share of Minority 25% x Unrealized

Profi ts Rs. 1,50,000

= Rs.37,500

Share of Minority 25% x

Unrealized Profi ts Rs.94,500

= Rs.23,625

Illustration 9: Elimination of Unrealized Profi ts - Transfer of Assets

In each of the following cases, ascertain (a) Unrealized Profi ts to be eliminated; (b) Unrealized Profi ts adjusted

against Holding Company’s Reserve and Minority Interest; and (c) balance in Asset Account as appearing in the

Consolidated Balance Sheet –

247

Advanced Financial Accounting & Reporting

(a) A Machine costing Rs.3,50,000 has been sold by Z Ltd. to its subsidiary F Ltd. (FPL) for Rs.4,20,000. During

the year F Ltd. has charged depreciation of Rs.3,50,000 on the machinery. Z Ltd. holds 80% of the Equity

of F Ltd. Machinery Account balance as appearing in the books of Companies - Z Ltd. Rs.9,57,500; F Ltd.

Rs.6,85,000.

(b) C Ltd. sold 8 Workstations to its parent S Ltd. at Rs.25,000 each. The total cost of the Workstations to C

was Rs.9,75,000. S holds 70% of the Equity Capital in C. The balances in the Asset Account “Computer and

Peripherals” were – C Rs.2,50,000; S Rs.5,00,000. Depreciation at 30% was charged by S on the Workstations

purchased from C.

Solution:

Sold by Z Ltd. (Holding Co.) C Ltd. (Subsidiary Co.)

Purchased by F Ltd. (Subsidiary Co.) S Ltd. (Holding Co.)

Nature of transfer Downstream Transfer Upstream Transfer

Sale Price

Less: Cost to Seller

Rs.4,20,000

Rs.3,50,000

Rs.25,000 x 8 = Rs.2,00,000

Rs. 97,500

A. Profi t on Transfer Rs. 70,000 Rs. 1,02,500

B. Rate of Depreciation 35,000/4,20,000 - 8.33% 30%

C. Depn. on profi t element (AxB) 70,000 x 8.33% = Rs.5,831 1,02,500 x 30% = Rs.30,750

Unrealized Profi t to be eliminated (A - C) Rs.64,169 Rs.71,750

- Adjusted against Holding Co’s Reserves 100% x Rs.64,169 =

Rs.64,169

Share of Holding Co. 70% x

Rs.71,750 = Rs.50,225

- Adjusted against Minority Interest Unrealized profi ts on downstream

transfer are adjusted fully against

Group Reserves only

Share of Minority 30% x

Rs.71,750 = Rs.21,525

Consolidated Asset Balance (Holding Co.

bal. + Subsidiary Co. bal. Less Unrealized

Profi t)

9,57,500 + 6,85,000 - 64,169

= Rs.l5,78,331

2,50,000 + 5,00,000 - 71,750

= Rs.6,78,250

Illustration 10: Elimination of Mutual Owings

The following balances are extracted from the Balance Sheets of X Ltd. and Y Ltd. -

Particulars X Ltd. Y Ltd.

Bills Payable 7,50,000 4,50,000

Trade Creditors 5,00,000 7,00,000

Bills Receivable 3,50,000 5,00,000

Trade Debtors 8,00,000 7,00,000

Contingent Liability for Bills Discounted 2,00,000 1,50,000

Additional Information –

1. X Ltd. is wholly owned subsidiary of Y Ltd.

2. Creditors of X Ltd. include Rs.2,50,000 due to Y for goods supplied by it for Rs.3,00,000. Debtors of X however

shows a Debit balance of Rs.3,00,000 due from Y. Y had remitted Rs.50,000 by Demand Draft to X which was

not received by X on the Balance Sheet date.

3. Bills payable of Y include Rs.3,00,000 drawn in favour of X Ltd. X had discounted bills worth Rs.1,20,000

with its bankers.

Determine how the above given balances will be disclosed in the Consolidated Balance Sheet of X Ltd.

Group Financial Statements

248

Solution:

Particulars Bills

Payable

Bills

Receivable

Creditors Debtors Contingent

Liabilities

X Ltd. 7,50,000 3,50,000 5,00,000 8,00,000 2,00,000

Y Ltd. 4,50,000 5,00,000 7,00,000 7,00,000 1,50,000

Total before adj. Mutual Owings 12,00,000 8,50,000 12,00,000 15,00,000 3,50,000

Less: Mutual Owings

– For goods supplied – – (2,50,000) (3,00,000) –

– Bills drawn in favour of Upul (Only

to the extent not discounted is (1,80,000) (1,80,000) – – –

reduced) (30,000-12,000)

– Bills discounted (Only mutual bills

discounted is reduced)

– – – – (1,20,000)

Balance for Cons. Balance Sheet 10,20,000 6,70,000 9,50,000 12,00,000 2,30,000

Note: In addition to the above, in the Consolidated Balance Sheet, Rs.50,000 will be lown as “Remittance-in

Transit” under Current Assets after Trade Debtors and Bills Receivable.

Illustration 11: Consolidated Balance Sheet – Line to Line Addition

From the Balance Sheets and information given below, prepare Consolidated Balance Sheet of A Ltd. and K Ltd.

as at 31st December, 2008 -

Liabilities A K Assets A K

Equity Capital (Rs.10)

General Reserve

8% Debentures

Creditors

30,000

5,000

10,000

5,000

20,000

5,000

Fixed Assets

Investment in Shares of K

Current Asset: Stock in Trade

Debtors

Cash & Bank

20,000

16,000

8,000

4,000

2,000

15,000

–

10,000

7,000

3,000

Total 50,000 35,000 Total 50,000 35,000

A Ltd. holds 80% of Equity Shares in K since its incorporation. Prepare Consolidated Balance Sheet.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Co. = A

Subsidiary = K

Acquisition: K Incorporation

Consolidation: 31st December

Holding Company = 80%

Minority Interest = 20%

2. Analysis of General Reserves of K Ltd.

Balance as per Balance Sheet Rs.5,000

Balance on date of acquisition Acquisition to Consolidation

Rs.NIL (balancing fi gure) Rs.50,000

Capital Profi t Revenue Reserve

Note: Since A holds shares in K since its incorporation, the entire Reserve balance will be Revenue.

3. Analysis of Net Worth of K Ltd.

Particulars Total A 80% Minority 20%

(a) Equity Share Capital

(b) Capital Profi ts

20,000

NIL

5,000

16,000

–

4,000

–

1,000

Minority Interest 5,000

249

Advanced Financial Accounting & Reporting

4. Cost of Control

Particulars Rs.

Cost of Investment

Less: Nominal Value of Equity Capital

Less: Share of Capital Profi ts

16,000

(16,000)

NIL

Goodwill / Capital Reserve NIL

Note: If shares are purchased and held from the date of incorporation of subsidiary, there will not be any Goodwill or Capital

Reserve.

5. Consolidation of Reserves

Particulars Rs.

Balance as per Balance Sheet

Add: Share of Revenu Reerves

5,000

4,000

Consolidated Balance 9,000

6. Consolidated Balance Sheet of A Ltd. and its subsidiary K Ltd. as at 31st December

Liabilities Rs. Assets Rs.

Share Capital: Equity Capital (Rs.10)

Reserves: General Reserve

Minority Interest

Secured Loans:

8% Debentures (10,000 + 5,000) Current

Liabs:Creditors (5,000+5,000)

30,000

9,000

5,000

15,000

10,000

Fixed Assets (20,000 + 15,000)

Current Assets:

Stock (8,000 + 10,000)

Debtors (4,000 + 7,000)

Cash & Bank (2,000 + 3,000)

35,000

18,000

11,000

5,000

Total 69,000 Total 69,000

Illustration 12: Consolidated Balance Sheet – Investment in Debentures – Line Addition

The Balance Sheets of B Ltd. and S Ltd. as at 31st December are given below –

Liabilities B S Assets B S

Equity Capital (Rs.10) 60,00,000 30,00,000 Fixed Assets 60,00,000 35,00,000

General Reserve 10,50,000 10,00,000 Investment

Profi t and Loss Account 10,00,000 5,00,000 - in 24,000 Shares of S 26,00,000 –

8% Debentures (Rs.100) 20,00,000 10,00,000 - in 500 Debentures of S 6,00,000 –

Bills Payable 6,00,000 7,00,000 - in 1000 Debentures of B – 9,50,000

Creditors 9,00,000 8,00,000 Current/asset Stock in Trade 10,00,000 12,00,000

Debtors 15,00,000 10,00,000

Cash & Bank 3,00,000 3,50,000

Total 12,00,000 7,00,000 Total 120,00,000 70,00,000

The investments in S Ltd. were made on the same day when S’s General Reserve was Rs.5,00,000 and Profi t and

Loss Account balance showed Rs.2,00,000.

Prepare Consolidated Balance Sheet.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Co. = B

Subsidiary = S

Acquisition: Not Given

Consolidation: 31st December

Holding Company (240,000 ÷ 300,000) = 80%

Minority Interest = 20%

Group Financial Statements

250

2. Analysis of Reserves and Surplus of S Ltd.

(a) General Reserve

Balance as per Balance Sheet Rs. 10,00,000

Balance on date of acquisition Acquisition to Consolidation

Rs.5,00,000 (balancing fi gure) Rs.5,00,000

Capital Profi t Revenue Reserve

(b) Profi t and Loss A/c

Balance as per Balance Sheet Rs.5,00,000

Balance on date of acquisition Acquisition to Consolidation

Rs.20,000 (balancing fi gure) Rs.30,000

Capital Profi t Revenue Reserve

3. Analysis of Net Worth of S Ltd.

Particulars Total

80%

Minority

20%

(a) Share Capital Equity Share Capital

(b) Capital Profi ts General Reserve

Profi t and Loss Account

Total

(d) Revenue Profi ts Profi t and Loss Account

30,00,000 24,00,000

5,60,000

4,00,000

2,40,000

6,00,000

1,40,000

1,00,000

60,000

5,00,000

2,00,000

7,00,000

5,00,000

3,00,000

Minority Interest 9,00,000

4. Cost of Control

Particulars Rs.

Cost of Investment

Less: Nominal Value of Equity Capital

Less: Share of Capital Profi ts

26,00,000

(24,00,000)

(5,60,000)

Capital Reserve on Consolidation (3,60,000)

5. Gain or Loss on elimination of Intra-Group Debentures

Particulars Rs.

Cost of Investment B in S

S in B

6,00,000

9,50,000

Less: Total Cost of Investment

Nominal Value of Debentures

(50,000+ 10,00,000) 15,50,000

(15,00,000)

Loss on Elimination (Adjusted against Group Reserves) 50,000

6. Consolidation of Reserves and Surplus

Particulars Gen. Res. P&L A/c

Balance as per Balance Sheet

Add: Share of Revenue

Less: Loss on Elimination of Debentures

1,50,000

4,00,000

–

10,00,000

2,40,000

(50,000)

Consolidated Balance 19,00,000 11,90,000

251

Advanced Financial Accounting & Reporting

7. Consolidated Balance Sheet of B Ltd. and its subsidiary S Ltd. as at 31s1 December

Liabilities Rs. Assets Rs.

Share Capital: Equity Capital (Rs.10)

Reserves: General Reserve

Profi t and Loss A/c

C/R on Consolidation

Minority Interest

Secured Loans:

8% Debentures (2,000 + 1,00 - 1,500 Mutual)

Current Liabs: Bills Payable (600 + 700)

Creditors (900 + 800)

60,00,000

19,00,000

11,90,000

3,60,000

9,00,000

15,00,000

13,00,000

17,00,000

Fixed Assets (6,00 + 3,50)

Current Assets:

Stock (1,00 + 1,20)

Debtors (1,50 + 1,00)

Cash & Bank (30 + 35)

95,00,000

22,00,000

25,00,000

6,50,000

Total 1,48,50,000 Total 1,48,50,000

Group Financial Statements

252

B. BONUS SHARES

Illustration 13: Bonus issue - Before and After

On 31.03.2003, R Ltd. acquired 1,05,000 Shares of S Ltd. for Rs.12,00,000. The Balance Sheet of S Ltd. on that date

was as under - (Rs.000’s)

Liabilities Rs. Assets Rs.

1,50,000 Equity Shares of Rs.10 each fully paid

Pre-lncorporation Profi ts

Profi t & Loss Account

Creditors

1,500

105

Fixed Assets

Current Assets

1,050

645

Total 1,695 Total 1,695

On 31.03.2009, the Balance Sheets of the two Companies were as follows - (Rs.000’s

Liabilities R S Assets R S

Equity Shares of Rs.10 each fully paid

(before Bonus Issue)

4,500 1,500 Fixed Assets 7,920 2,310

1,05,000 Equity Shares in 1,200 –

Securities Premium 900 – S Ltd. at Cost

Pre-lncorporation Profi ts – 30 Current Assets 4,410 1,755

General Reserve 6,000 1,905

Profi t and Loss Account 1,575 420

Creditors 555 210

Total 13,530 4,065 Total 13,530 4,065

Directors of S Ltd. made a bonus issue on 31.03.2009 in the ratio of one Equity Share of Rs.10 each fully paid for

every two Equity Shares held on that date.

Calculate as on 31.3.2009 (i) Cost of Control/Capital Reserve ; (ii) Minority Interest; (iii) Consolidated Profi t and

Loss Account in each of the following cases: (1) Before issue of Bonus Shares; (2) Immediately after the issue of

Bonus Shares. It may be assumed that Bonus Shares were issued out of Post-Acquisition Profi ts by using General

Reserve.

Prepare a Consolidated Balance Sheet after the Bonus Issue.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = R Ltd.

Subsidiary = S Ltd.

Acquisition: 31.03.2003

Consolidation: 31.03.2009

Holding Company = 70%

Minority Interest = 30%

2. Analysis of Reserves and Surplus of S Ltd.

(a) Pre-lncorporation Profi ts = Rs. 30,000 – Capital Profi t

(b) General Reserve

Before Bonus Issue After Bonus Issue

As on 31.3.2009 19,05,000 As on 31.3.2009

Bonus Issue

Corrected Bal

19,05,000

7,50,000 (15 Lacs x 1/2)

As on 01.04.03 11,55,000

NIL

Capital

Tfr between 01.04.03 & 31.3.2009

19,05,000

Revenue

01.04.2003

NIL

Capital

Tfr between 1.4.03 & 3 1.3.09

11,55,000

Revenue

253

Advanced Financial Accounting & Reporting

As on 31.03.2009 Rs.4,20,000

As on 01.04.2003 60,000 Profi ts between 01.04.2003 & 31.03.2009 3,60,000

Capital Revenue

3. Analysis of Net Worth of S Ltd.

Particulars

Before Bonus Issue After Bonus Issue

Total R Minority Total R Minority

100% 70% 30% 100% 70% 30%

(a) Share Capital

Add: Bonus Issue

(b) Capital Profi ts

Pre Incorporation Profi ts

General Reserve

Profi t and Loss Account

(d) Revenue Profi ts: P & L A/c

15,00,000

–

10.50,000

63,000

13,33,500

2,52,000

4,50,000

27,000

5.71,500

1,08,000

15,00,000

7,50,000

15,75,000

63,000

8,08,500

2,52,000

6,75,000

27,000

3,46,500

1,08,000

15,00,000

30,000

NIL

60,000

22,50,000

30,000

NIL

60,000

90,000 90,000

19,05,000 11,55,000

3,60,000 3,60,000

Minority Interest 11,56,500 11,56,500

4. Cost of Control

Particulars Before Bonus Issue After Bonus Issue

Cost of Investment

Less: (a) Nominal Value of Share Capital

(b) Share in Capital Profi ts

12,00,000

(10,50,000)

(63.000)

12,00,000

(15.75,000)

(63,000)

Goodwill / Capital Reserve on Consolidation 87,000 (4,38,000)

5. Consolidation of Reserves & Surplus

Particulars

Before Bonus Issue After Bonus Issue

Gen. Res. P&L A/c Gen. Res. P&L A/c

Balance as per Balance Sheet of R Ltd.

Add: Share of Revenue

60,00,000

13,33,500

15,75,000

2,52,000

60,00,000

8,08,500

15,75,000

2,52,000

Consolidated Balance 73,33,500 18,27,000 68,08,500 18,27,000

6. Consolidated Balance Sheet of R Ltd. and its subsidiary S Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves & Surplus General Reserve

Profi t & Loss Account

Securities Premium

Capital Reserve on Consolidation

Minority Interest

Current Liabilities: [5,55,000 + 2,10,000]

45,00,000

68,08.500

18,27,000

9,00,000

4,38,000

11,56,500

7,65,000

Fixed Assets

[79,20,000 + 23,10,000]

Current Assets:

[44,10,000 + 17,55,000]

1,02,30,000

61,65,000

Total 1,63,95,000 Total 1,63,95,000

Group Financial Statements

254

Illustration 14: Bonus Issue - Unrealized Profi ts

On 31.03.2009 the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows (in Rs. Lakhs) -

Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Share Capital: Land and Buildings 2,718 –

Authorised

Issued and Subscribed:

15,000 6,000 Plant and Machinery

Furniture and Fittings

4,905

1,845

4,900

586

Equity Shares (Rs.10) Fully

Paid

12,000 4,800 Investments in shares in

S Ltd.

3,000 –

General Reserve 2,784 1,380 Stock 3,949 1,956

Profi t and Loss Account 2,715 1,620 Debtors 2,600 1,363

Bills Payable 372 160 Cash and Bank Balances 1,490 204

Sundry Creditors 1,461 854 Bills Receivable 360 199

Provision for Taxation 855 394 Sundry Advances 520 –

Proposed Dividend 1,200 –

21,387 9,208 21,387 9,208

The following information is also provided to you:

1. H Ltd. purchased 180 Lakhs shares in S Ltd. on 01.04.2008 when the balances to General Reserve and Profi t

and Loss Account of S Ltd. stood at Rs. 3,000 Lakhs and Rs.1,200 Lakhs respectively.

2. On 04.07.2008 S Ltd. declared a dividend @ 20% for the year ended 31.03.2008. H Ltd. credited the dividend

received by it to its Profi ts and Loss Account.

3. On 01.01.2008 S Ltd. issued 3 fully paid-up shares for every 5 shares held as Bonus Shares out of balances in

its General Reserve as on 31.03.2008.

4. On 31.03.2009 all the Bills Payable in S Ltd.’s Balance Sheet were acceptances in favour of H Ltd. But on that

date, H Ltd. held only Rs.45 Lakhs of these acceptances in hand, the rest having been endorsed in favour of

its Creditors.

5. On 31.03.2009 S Ltd.’s stock included goods which it had purchased for Rs.100 Lakhs from H Ltd. which

made a profi t @ 25% on cost.

Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31.03.2009 bearing in mind the

requirements of AS 21.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = H

Subsidiary = S

Acquisition: 01.04.2008

Consolidation: 31.03.2009

Holding Company = 60%

Minority Interest = 40%

Shareholding Pattern - % of Holding by H Ltd.

Date Particulars No. of Shares

01.04.2008

01.01.2009

31.03.2009

Original Purchase

First Bonus Issue (3/5 x 1,80,000)

Total Shares held by H Ltd. in S Ltd.

180

108

288

Total Shares outstanding in S Ltd. (Rs.4,800 Lakhs / Rs.10) 480

% of Holding (288 / 480) 60%

255

Advanced Financial Accounting & Reporting

2. Analysis of Reserves and Surplus of S Ltd. (Rs. Lakhs)

(a) General Reserves

Balance as on 31.03.2009 Rs. 1,380

Balance on 1.4.2008 (as oi. acqn. date) Rs.3,000 Transfer during 2008-09 (upto Consolidation

Less: Bonus Issue (108/60% x Rs. 10) Rs. 1,800 (balancing fi gure) Rs.180

Balance Capital Profi t Rs. 1,200 Revenue Reserve

(b) Profi t and Loss Account

Balance as on 31.03.2009 Rs. 1,620

Balance on 01.04.2008 (as on acqn. date) Rs. 1,200 Profi t for 2008-09 (upto Consolidation)

Less: Dividend (Rs.3000 x 20%) Rs. 600 (balancing fi gure) Rs.1020

Balance Capital Profi t Rs. 600 Revenue Profi t

3. Analysis of Net Worth of S Ltd. (Rs. Lakhs)

Particulars

Total H Minority

100% 60% 40%

(a) Equity Capital

(b) Capital Profi ts General Reserve

Profi t and Loss Account

Total Capital Profi ts

(d) Revenue Profi t Profi t and Loss Account

4,800 2,880

1,080

108

612

1,920

720

408

1,200

600

1,800

180

1,020

Minority Interest 3,120

4. Cost of Control

Particulars Rs.Lakhs

Cost of Investment

Less: Pre-Acquisition Dividend Received (Rs. 1,800 x 20%)

3,000

360

Adjusted Cost of Investment

Less: Nominal Value of Share Capital

Share in Capital Profi t of S Ltd.

2.880

1,080

2,640

(3,960)

Capital Reserve on Consolidation 1,320

5. Consolidation of Reserves and Surplus (Rs.Lakhs)

Particulars Gen. Res. P&LA/c

Balance as per Balance Sheet of H Ltd.

Less: Pre-Acquisition Dividend wrongly credited to P&L A/c

2,784 2,715

(360)

Adjusted Cost of Investment

Add: Share of Revenue from S Ltd.

2,784

108

2,355

612

Consolidated Balance

Less: Unrealized Profi t on Closing Stock (Rs. 100 x 25%/125%)

2,892 2,967

(20)

Adjusted Consolidated Balance 2,892 2,947

Group Financial Statements

256

6. Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.03.2009

Liabilities Rs.Lakhs Assets Rs.Lakhs

Share Capital: Authorised

Issued and Paid up

15,000 Fixed Assets

12,000 Land and Buildings 2,718

Reserves & Surplus Plant & Machinery (4,905 + 4,900) 9,805

C/R on Consolidation 1,320 Furniture and Fittings (1,845 + 586) 2,431

Profi t and Loss Account 2,947 Current Assets:

General Reserve 2,892 Stock (3,949 + 1,956 - 20 Unrealized Pft) 5,885

Minority Interest 3,120 Trade Debtors (2,600 + 1,363) 3,963

Current Liabilities: Cash and Bank (1,490 + 204) 1,694

Bills Payable (372 + 160 - 45 Mutual) (Set off) 487 Bills Receivable (360 + 199 - 45 Mutual) (Set off) 514

Sundry Creditors (1,461 +854) 2,315 Sundry Advances 520

Provision for Taxation (855 + 394) 1,249

Proposed Dividend 1,200

Total 27,530 Total 27,530

Illustration 15: Bonus Issue, Reverse Working for Bonus Amount - Investment in Debentures

Balance Sheet of P Ltd. and Q Ltd. as at 31.12.2008 is given below (Rs. in 000’s)-

Liabilities P Q Liabilities P Q

Equity Share Capital (Rs.10) 5,000 2,400 Goodwill 300 200

Securities Premium 200 140 Buildings 1,000 1,000

General Reserve 1,000 1,600 Machinery 4,000 2,440

Profi t & Loss Account 900 600 Investment in Shares:

8% Debentures 2,000 1,000 -1,92,000 Shares of Q Ltd. 1,500

Trade Creditors 800 400 Investments in Debentures:

Outstanding Expenses 300 150 - In Q Ltd. (Face Value Rs.4,00,000) 450

- In P Ltd. (Face Value Rs.2,00,000) 220

Sundry Debtors 1,500 1,000

Stock 1,000 1,000

Cash and Bank 200 100

Preliminary Expenses 100 50

Outstanding Income 150 280

Total 10,020 6,290 Total 10,200 6,290

1. When the Shares were acquired, Q Ltd. had Rs.2.2 Lakhs in General Reserve and Rs.1,00,000 in Securities

Premium, Rs.3,00,000 (Dr.) in Profi t and Loss Account.

2. Two years after the date of acquisition Bonus Shares at 1 to 1 were issued out of General Reserve.

3. One year after the Bonus issue, Rights Shares were issued at 10% Premium at 1 for 5 held and P Ltd.

purchased all the shares offered to it.

4. P Ltd. received Rs.1,92,000 dividend for the last year and Rs.96,000 interim dividend in the current year, i.e.

3 years after the Rights Issue.

5. For the current year 15% dividend (including Interim Dividend) has been proposed by Q Ltd., 10% by

P Ltd., but no effect has yet been given in the accounts.

6. On the same day referred to in (5) above, Bonus Dividend has been declared at 1 to 2, but no effect has yet

been given.

7. 50% of the shares originally purchased in Q Ltd. were paid for to the shareholders of Q Ltd. by 50,000 shares

of P Ltd. issued at 10% premium.

8. Debenture Interest of both the Companies falls due on 31st December, but payments are made 2 or 3 days after.

Prepare Consolidated Balance Sheet as at 31.12.2008.

257

Advanced Financial Accounting & Reporting

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = P

Subsidiary = Q

Consolidation: 31.12.2008 Holding Company = 80%

Minority Interest = 20%

Shares held as on 31.12.2008 1,92,000

Add: Second Bonus Issue (1,92,000 xl/2) 96,000

Actual Shareholding 2,88,000

DOA - 1 (Original First Bonus Issue DOA - 2 Rights Second Bonus Issue

Acquisition) (1 : 1 as at DOA-1) Issue (1 :2 as at DOA-2)

80,000 80,000 32,000 96,000

(balancing fi gure) [(1,92,000 - 32,000) ÷ 2] [1,92,000 x l ÷ (5 + 1)]

40,000 40,000

For Cash For Shares of P Ltd.

2. Analysis of Reserves & Surplus of Q Ltd.

(a) Securities Premium

Balance on 31.12.2008 Rs. 1,40,000

DOA-1 Rs. 1,00,000 Proceeds from Rights Issue Rs.40,000

Capital Profi t Capital

(b) General Reserve

Shares held as on 31.12.2008 16,00,000

Add: Second Bonus Issue (24,00,000 x 1 / 2) 12,00,000

Adjusted Balance 40,00,000

DOA-1 Rs.22,00,000 Additions upto Consolidation

Less: First Bonus (Rs. 10,00,000) (80,000 Shares/80% x Rs. 10) (balancing fi gure) Rs. 4,00,000

Less: Second Bonus (Rs. 12,00,000) Revenue Reserve

Capital Profi t Rs. NIL

Note: In the absence of information in this regard, it is presumed that the second bonus issue has been made out

of reserves as on the date of controlling acquisition.

Balance as on 31.12.2008 6,00,000

Less: Debenture Interest (10,00,000 x 8%) (80,000)

Add: Debenture Interest from P (2,00,000 x 8%) 16,000

Less: Proposed Dividend (24,00,000 x 15% – Interim 1,20,000) (2,40,000) (See Note)

Adjusted Balance 2,96,000

DOA - 1 Additions to P&L A/c

(Rs. 3,00,000) Debit balance given Rs. 5,96,000

Capital Profi t Revenue Profi t

Note: Interim Dividend received by Holding Company = Rs.96,000 for 80% holding. Hence, Total Interim

Dividend paid by Subsidiary = Rs.96,000 ÷ 80% = Rs. 1,20,000

Group Financial Statements

258

3. Analysis of Net Worth of Q Ltd.

Particulars Total P Minority

100% 80% 20%

(a) Equity Share Capital: (including Bonus Rs. 12,00,000)

(b) Capital Profi ts: Securities Premium Account

General Reserve

Profi t & Loss Account

Preliminary Expenses

(d) Revenue Reserves: General Reserve

(e) Revenue Profi ts: Profi t & Loss A/c

(f) Proposed Equity Dividend

36,00,000 28,80,000

(2,00,000)

32,000

3,20,000

4,76,800

1,92,000

7,20,000

(50,000)

8,000

80,000

1,19,200

48,000

1,00,000

NIL

(3,00,000)

(50,000)

(2,50,000)

40,000

4,00,000

5,96,000

2,40,000

Minority Interest 9,25,200

4. Cost of Control

Particulars Rs.

Cost of Investment

Less: (1) Nominal Value of Equity Capital

(2) Share in Capital Profi t of Q Ltd.

28,80,000

(2,00,000)

15,00,000

(26,80,000)

Capital Reserve on Consolidation (11,80,000)

5. Gain / Loss on Consolidation of Debentures

Particulars Rs.

Cost of Investment in Debentures:

Lavanya Ltd. in P Ltd.

Karunya Ltd. in Q Ltd.

Less: Face Value of Debentures (Rs.20,000 + Rs.40,000)

2,20,000

4,50,000 6,70,000

(6,00,000)

Loss on Consolidation of Debentures (Adjusted against Group Reserves) 70,000

6. Consolidation of Reserves & Surplus

Particulars

Securities

Premium

Gen. Res P&L A/c

Balance as per Balance Sheet of P Ltd.

Less: Proposed Dividend (Rs.50,00,000 x 10%)

Less: Debenture Interest Due (Rs.20,00,000 * 8%)

Add: Share of Dividend from Q Ltd. (Rs.2,40,000 x 80%)

Add: Share of Debenture Int from Q (Rs.4,00,000 x 8%)

2,00,000

–––

10,00,000

––––

9,00,000

(5,00,000)

(1,60,000)

1,92,000

32,000

Adjusted Balance

Add: Share of Reserves of Q Ltd.

Less: Loss on Elimination of Debentures on Consolidation

2,00,000

32,000

10,00,000

3,20,000

4,64,000

4,76,800

(70,000)

Consolidated Balance 2,32,000 13,20,000 8,70,800

259

Advanced Financial Accounting & Reporting

7. Consolidated Balance Sheet of P Ltd. and its Subsidiary Q Ltd. as at 31.12.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves and Surplus:

Securities Premium

General Reserve

Profi t & Loss Account

Capital Reserve

Secured Loans

8% Debentures (20,00,000 + 10,00,000 -

2,00,000 (held by Q) - 4,00,000

(held by P)

Debenture Interest accrued

Minority Interest:

Current Liabilities:

Sundry Creditors [8,00,000 + 4,00,000]

Outstanding Exp [3,00,000 + 1,50,000]

Proposed Dividend (P Ltd.)

50,00,000

23,2000

13,20,000

8,70,800

11,80,000

24,00,000

1,92,000

9,25,200

12,00,000

4,50,000

5,00,000

Fixed Assets:

Goodwill (3,00,000 + 2,00,000)

Building (10,00,000 + 10,00,000)

Machinery (40,00,000 + 24,40,000)

Current Assets:

Sundry Debtors (15,00,000 + 10,00,000)

Stock in Trade (10,00,000 + 10,00,000)

Cash in Hand (2,00,000 + 1,00,000)

Outstanding Income (1,50,000 + 2,80,000)

Misc. Expenditure (to the extent not

w/off)

Preliminary Expenses

5,00,000

20,00,000

64,40,000

25,00,000

20,00,000

3,00,000

4,30,000

1,00,000

Total 1,42,70,000 Total 1,42,70,000

Notes:

• It is presumed that the Companies have not accounted for the inter company owings in respect of Debenture interest

and proposed dividends.

• Interest due on Debenture has been shown under Secured Loans together with Debentures in accordance with Schedule

VI to the Companies Act, 1956.

Group Financial Statements

260

C. REVALUATION OF ASSETS

Illustration 16: Bonus Issue, Asset Revaluation, Interest not recorded

X Ltd. acquired 80,000 Shares of Rs.100 each in Y Ltd. on 30.09.2008. The summarized two Companies as on

31.03.2009 were as follows -

Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

Share Capital (Rs.100)

Capital Reserve

General Reserve

Profi t & Loss Account

Loan from Y Ltd.

Creditors

Bills Payable (including Rs.50,000

to X Ltd.)

3,00,00,000

–

30,00,000

38,20,000

2,10,000

17,90,000

–

1,00,00,000

55,00,000

5,00,000

18,00,000

7,00,000

1,70,000

Fixed Assets

Investments in Y Ltd.

Stock in Hand

Loan to X Ltd.

Debtors

Bank

Bills Receivable (including

Rs.5,000 from Y Ltd.)

1,50,00,000

1,70,00,000

40,00,000

–

25,00,000

2,00,000

1,20,000

1,44,70,000

–

20,00,000

2,00,000

1,08,00,000

2,00,000

–

Total 3,88,20,000 18,67,00,000 Total 3,88,20,000 18,67,00,000

Contingent Liability (X Ltd.): Bills discounted of Rs.60,000.

Additional information:

1. Y Ltd. made a bonus issue on 31.03.2009 of one share for every two shares held, reducing the Capital Reserve

equivalentlly, but the accounting effect to this has not been given in the above Balance Sheet.

2. Interest receivable for the year (Rs.10,000) in respect of the loan due by X Ltd. to Y Ltd. has not been credited

in the accounts of Y Ltd.

3. The credit balance in Profi t & Loss Account of Y Ltd. on 01.04.2008 was Rs.2,10,000.

4. The Directors decided on the date of the acquisition that the Fixed Assets of Y Ltd. were overvalued and

should be written down by Rs.5,00,000. Consequential adjustments on depreciation are to be ignored.

Prepare the Consolidated Balance Sheet as at 31.03.2009, showing your workings.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = X Ltd.

Subsidiary = Y Ltd.

Acquisition: 30.09.2008

Consolidation: 31.03.2009

Holding Company = 80%

Minority Interest = 20%

2. Analysis of Reserves and Surplus of Y Ltd.

(a) General Reserve

Balance as per B/s Rs.5,00,000

As on 01.04.2008 (Date of previous B/s) Rs.5,00,000 01.04.2008 to 31.03.2009 (upto Consolidation)

Assumed that entire balance is available on this date Rs. NIL (balancing fi gure)

Capital Profi t Revenue Reserve

(b) Profi t and Loss Account

Balance as on date of Consolidation Rs. 18,00,000

Add: Interest on Loan to X (Given) Rs. 10,000

Corrected Balance Rs. 18,10,000

Balance on 01.04.2008 Profi t for 2008-09 (balancing fi gure) Rs. 16,00,000

(Date of previous B/s)

Rs.2,10,000 Upto date of acquisition 01.04.2004 to Acquisition to Consolidation 30.09.2008

Capital Profi t 30.09.2008 Rs.l6,00,000 x 6/12 to 31.03.2009 Rs.l6,00,000 x 6/ 12

Capital Profi t Rs.8,00,000 Revenue Profi t Rs.8,00,000

Total Capital Profi ts: 2,10,000 + 8,00,000 = Rs.10,10,000; Total Revenue Profi ts: Rs.8,00,000

261

Advanced Financial Accounting & Reporting

Balance as on date of Consolidation Rs. 55,00,000 Remarks

Less: Bonus Issue (Rs. 1,00,00,000 x 1/2) Rs. 50,00,000 The entire balance is

Adjusted Balance Rs. 5,00,000 considered Capital Profi ts.

(d) Revaluation of Assets: Loss (Rs.5,00,000) = Capital Profi t

3. Analysis of Net Worth of Y Ltd.

Particulars Total X Ltd Minority

(a) Share Capital

Add: Bonus Issue [1/2 x 1,00,00,000]

(b) Capital Profi ts:

General Reserve

Profi t & Loss Account

Capital Reserve

Loss on Revaluation of Assets

(d) Revenue Profi ts:

Profi t & Loss A/c

100%

1,00,00,000

50,00,000

80%

1,20,00,000

12,08,000

6,40,000

20%

30,00,000

3,02,000

1,60,000

1,50,00,000

5,00,000

10,10,000

5,00,000

(5,00,000)

15,10,000

NIL

8,00,000

Minority Interest 34,62,000

4. Cost of Control

Particulars Rs.

Cost of Investment as per B/Sheet

Less: (1) Nominal Value of Equity Capital

(2) Share in Capital Profi t as calculated above

1,20,00,000

12,08,000

1,70,00,000

1,32,08,000

Goodwill on Consolidation 37,92,000

5. Consolidation of Reserves & Surplus

Particulars Gen. Res. P&LA/c

Balance as per Balance Sheet of X Ltd.

Add: Share of Revenue Reserve / Profi t from Y Ltd.

30,00,000

NIL

38,20,000

6,40,000

Consolidated Balance 30,00,000 44,60,000

6. Consolidated Balance Sheet of X Ltd. and its Subsidiary Y Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital 3,00,00,000 Fixed Assets

Reserves & Surplus Goodwill on Consolidation 37,92,000

General Reserve 30,00,000 Other Fixed Assets [1,50,00,000 + 1,44,70,000

- 5,00,000 (Revaluation Loss)]

2,89,70,000

Profi t and Loss Account 44,60,000 Current Assets

Minority Interest 34,62,000 Sundry Debtors [25,00,000 + 18,00,000] 43,00,000

Current Liabilities Stock in Trade [40,00,000 + 20,00,000] 60,00,000

Sundry Creditors [17,90,000 + 7,00,000] 24,90,000 Cash at Bank [2,00,000 + 2,00,000] 4,00,000

B/P [ 1,70,000 - 50,000 (Mutual Owings)] 1,20,000 B/R [1,20,000 - 50,000 (Mutual Owings)] 70,000

Total 4,35,32,000 Total 4,35,32,000

Contingent Liability for Bills Discounted Rs.60,000

Note: Fixed Assets have been revalued for the purpose of Consolidation and the depreciation on the revaluation loss has been

ignored as its specifi cally stated in the problem.

Group Financial Statements

262

Illustration 17: Invt in PSC, Revaluation of Asset & Stock Reserve - Upstream & Downstream.

G Ltd. acquired control in S Ltd. a few years back when S Ltd. had Rs.25,000 in Reserve and Rs.14,000 (Cr.) in

Profi t & Loss Account. Plant Account (Book Value Rs.66,000) of S Ltd. was revalued at Rs.62,000 on the date of

purchase. Equity Dividend of Rs.7,500 was received by G Ltd. out of pre-acquisition profi t and the amount was

correctly treated by G Ltd. Debenture Interest has been paid upto date.

Following are the Balance Sheets of G Ltd. and S Ltd. as at 31st December (Rs.000’s) -

Liabilities G S Assets G S

6% Preference Share Capital (Rs.100) 100 50 Goodwill 50 30

Equity Share Capital (Rs.10) 500 100 Land & Buildings 200 50

General Reserve 30 30 Plant & Machinery 105 100

Profi t & Loss Account 40 12 Stock in Trade 130 100

6% Debentures NIL 100 Sundry Debtors 90 50

Sundry Creditors 90 60 Bills Receivable 30 10

Due to S Ltd. 10 NIL Due from G Ltd., NIL 12

Bills Payable 20 25 Bank

Investments in S Ltd.

27 25

- 300 Preference Shares 28 NIL

- 7,500 Equity Shares 85 NIL

- Debentures (Face Value Rs.50,000) 45 NIL

Total 790 377 Total 790 377

Additional Information -

1. Cheque of Rs.2,000 sent by G Ltd., to S Ltd., was in transit.

2. Balance Sheet of S Ltd. was prepared before providing for 6 months dividend on Preference Shares, the fi rst

half being already paid.

3. Both the Companies have proposed Preference Dividend only, but no effect has been given in the

accounts.

4. Stock of G includes Rs.6,000 stock purchased from S on which S made 20% profi t on cost. Stock of S includes

Rs.10,000 purchased from G on which G made 10% profi t on selling price.

5. Since acquisition, S Ltd. has written off 30% of the book value of plant as on date of acquisition by way of

depreciation.

6. Bills Receivable of S Ltd. are due from G Ltd.

Prepare Consolidated Balance Sheet as at 31st December.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = G

Subsidiary = S

Acquisition: a few years back

Consolidation: 31sl December

Holding Company = 75%

Minority Interest = 25%

2. Analysis of Reserves & Surplus of S Ltd.

(a) General Reserve

Balance on date of consolidation (given) Rs.30,000

As on Date of Acquisition (given) From date of acquisition to date of consolidation

Rs. 25,000 Capital Profi t (balancing fi gure) = Rs.5,000 Revenue Reserve

263

Advanced Financial Accounting & Reporting

(b) Profi t & Loss Account

Balance on 31st December Rs. 12,000

Less: Proposed Preference Dividend (Rs.50.000 x 6% x 6 - 12) Rs. 1,500

Corrected Balance Rs. 10,500

As on date of acquisition Rs. 14,000 From date of acquisition to date of

Less: Equity Dividend for pre-acqn period Rs. 10,000 consolidation (balancing fi gure) =

(Reed, by G 7,500 - 75%) Rs. 4,000 Rs.6,500

Capital Profi ts Revenue Profi ts

• Loss on Revaluation of Machinery = 62,000 - 66,000 = (Rs.4,000) Capital Profi t

• Depreciation Gain on Revaluation Loss = 4,000 x 30% = Rs.1,200 Revenue Profi t

3. Analysis of Net Worth of S Ltd.

Particulars

Total

100%

G Ltd.

(75%)

Minority Int

(25%)

(a) Equity Share Capital

(b) Preference Share Capital

Profi t & Loss Account

Loss on Revaluation of Assets

(d) Revenue Reserves: General Reserve

(e) Revenue Profi ts: Profi t & Loss Account

Depreciation Gain on Revaluation

(f) Preference Dividend

1,00,000

50,000

25,000

4,000

(4,000)

75,000

30,000

18,750

3,750

5,775

900

25,000

20,000

6,250

1,250

1,925

600

25,000

5,000

6,500

1,200

7,700

1,500

Minority Interest before Stock Reserve Adjustment

Less: Stock Reserve on Unrealised Profi ts i.e. Share of Minority

Interest [6,000 x (20 - 120) x 25%]

55,025

250

Minority Interest 54,775

Note: Unrealized profi ts on upstream transaction (i.e. Subsidiary to Holding Company) alone is eliminated

from the Minority Interest, towards their share i.e. 25%. The balance of 75% (Holding Company’s Share) will be

reduced from the Reserves of G Ltd. Unrealized profi ts on downstream transaction, will be eliminated in full

against reserves of G Ltd.

4. Cost of Control

Particulars Rs.

Cost of Investment in S Ltd.

7,500 Equity Shares of S Ltd.

300 6% Preference Shares of S Ltd.

Less: (1) Nominal Value of Equity Capital

(2) Nominal Value of Preference Share Capital

(3) Share in Capital Profi t of S Ltd.

85,000

28,000

1,13,000

(1.23,750)

75,000

30,000

18,750

Capital Reserve on Consolidation (10,750)

5. Gain or Loss on Elimination of Mutually held Debentures

Particulars Rs.

Cost of Investment

Less: Nominal Value of Debentures

45,000

50,000

Gain on Consolidation - Added to Group Profi ts 5,000

Group Financial Statements

264

6. Consolidation of Reserves & Surplus

Particulars Gen. Res P&L A/C

Balance as per Balance Sheet of S Ltd.

Less: Proposed Preference Dividend (Rs. 1,00,000 x 6%)

Add: Share of Proposed Dividend from S Ltd. (Rs.30,000 x 6% x 6/12)

30,000

––

40,000

(6,000)

900

Adjusted Balance

Add: Share of Revenue Profi ts / Reserves of S Ltd.

30,000

3,750

34,900

5,775

Consolidated Balance

Less: Unrealised Profi ts on Closing Stock of G Ltd. - Upstream transaction -

Rs.6,000 x (20 - 120) x G Ltd.’s Share 75%

Less: Unrealised Profi ts on Closing Stock of S Ltd. - Downstream transaction

Rs. 10,000 x 10% - Fully adjusted against G Ltd.’s Reserves

Add: Gain on elimination of mutually held Debentures

33,750

–

40,675

(750)

(1,000)

5,000

Adjusted Consolidated Balance 33,750 43,925

7. Consolidated Balance Sheet of G Ltd. and its Subsidiary S Ltd. as at 31st December

Liabilities Rs. Assets Rs.

Share Capital:

Equity Share Capital (Rs.10)

6% Preference Share Capital (Rs.100)

Reserves & Surplus

General Reserve

Profi t & Loss Account

Capital Reserve on Consolidation

Minority Interest

6% Debentures (1,00,000 - 50,000 held

by G in S)

Current Liabilities

Creditors [90,000 + 60,000]

Bills Payable [20,000 + 25,000 - 10,000

(Mutual Owings)]

Proposed Preference Dividend (G Ltd.)

5,00,000

1,00,000

33,750

43,925

10,750

54,775

50,000

1.50.000

35,000

6,000

Fixed Assets

Goodwill (50,000+ 30,000)

Land & Buildings (2,00,000 + 50,000)

Plant & Mcy. (105000 + 100000 - 4000

(Revln. Loss) + 1200 (Depn. Gain)l

Current Assets

Stock in Trade [1,30,000 + 1,00,000 -

2,000 (Stock Reserve)]

Trade Debtors [90,000 + 50.000]

Bills Receivable [30,000 + 10,000 - 10,000

(Mutual Owings)]

Cash at Bank [27,000 + 25,000]

Cheque in Transit

80,000

2,50,000

2,02,200

2,28,000

1,40,000

30,000

52,000

2,000

Total 9,84,200 Total 9,84,200

Illustration 18: Asset Revaluation, Pre-acquisition Dividend

On 01.01.2006, H Ltd. acquired 8000 Shares of Rs.10 each of G Ltd. at Rs.90,000. The Balance Sheet of H Ltd., and

G Ltd., as at 31.12.2008 are given below-

Liabilities H Ltd. G Ltd. Assets H Ltd. G Ltd.

Equity Share Capital (Rs.10) 1,00,000 1,00,000 Fixed Assets 60,000 1,10,000

General Reserve 40,000 26,000 Investments 1,00,000 15,000

Profi t & Loss Account 36,000 35,000 Debtors 25,000 20,000

Creditors 71,000 48,000 Stock 30,000 40,000

Bank 32,000 24,000

Total 2,47,000 2,09,000 Total 2,47,000 2,09,000

1. At the time of acquiring shares, G Ltd. had Rs.24,000 in General Reserve and Rs. 15,000 (Cr.) in P & L A/c.

2. G Ltd. paid 10% dividends in 2006, 12% in 2007, 15% in 2008 for 2005, 2006 and 2007 respectively. All

dividends received have been credited to the Profi t & Loss Account of H Ltd.

3. Proposed dividend for both the Companies for 2008 is 10%.

265

Advanced Financial Accounting & Reporting

4. One bonus share for fi ve fully paid shares held has been declared by G Ltd. out of pre-acquisition reserve

on 31.12.2008. No effect has been given to that in the above accounts.

5. On 01.01.2006, Building of G Ltd. which stood at Rs.50,000 was revalued at Rs.60,000 but no adjustment has

been made in the books. Depreciation has been charged @ 10% p.a. on reducing balance method.

6. In 2008, H Ltd. purchased from G Ltd., goods for Rs.10,000 on which G Ltd. made a profi t of 20% on Sales.

25% of such goods are lying unsold on 31.12.2008.

Prepare the Consolidated Balance Sheet as at 31.12.2008.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = H Ltd.

Subsidiary = G Ltd.

Acquisition: 01.01.2006

Consolidation: 31.12.2008

Holding Company = 80%

Minority Interest = 20%

Note: Number of Shares in G Ltd. after Bonus Issue = 10,000 + l/5in Bonus = 12,000 Shares. Holding by Ganpat

in G Ltd. - Originally Acquired 8,000 Shares + Bonus at 1/5* = 9,600 Shares, out of 12,000 Shares = 80%.

2. Analysis of Reserves and Surplus of G Ltd.

(a) General Reserve

Balance as on date of Consolidation Rs. 26,000

Less: Bonus Issue (l/5th of Rs. 1,00,000) Rs. 20,000

Adjusuted Balance Rs. 6,000

As on date of acquisition 01.01.2006

Less: Bonus Issue

Balance Capital Profi t

Rs. 24,000

Rs. 20,000

Rs. 4,000

Transfer between 01.01.2006 and

31.12.2008 (acquisition to consolidation)

(balancing fi gure) Rs.2,000

Revenue Reserve

(b) Profi t & Loss Account

Balance as on date of Consolidation Rs. 35,000

Less: Proposed Dividend for 2008 (10% of Rs. 1,00,000) Rs. 10,000

Adjusted Balance Rs. 25,000

Bal.on date of acquisition 1.1.06

Less: Pre-Acqn Dividend 2005 (10%)

Balance Capital Profi t

Rs. 15,000

Rs. 10,000

Rs. 5,000

Profi ts for 2006, 2007 & 2008

(balancing fi gure) Rs.20,000

Revenue

Gain on Revaluation = Rs. 60,000 - Rs. 50,000 = Rs.10,000 - Capital Profi t

Depreciation Loss on Revaluation Gain

For 2006 - Rs.l 0,000 x 10% Rs. 1,000

For 2007 - Rs. 1,000 x 90% Rs. 900

For 2008 - Rs. 900 x 90% Rs. 810 (Rs.2,710) Revenue Profi t

Alternatively, Depreciation gain can be derived as under -

Year Depreciation on Rs.50,000

already provided

Depreciation on 60,000

(Required)

Additional

Depreciation

2006

2007

2008

Rs.50,000 x 10% = Rs.5,000

Rs. 5,000 x 90% = Rs.4,500

Rs. 4,500 x 90% = Rs.4,050

Rs.60,000 x 10% = Rs.6,000

Rs. 6,000 x 90% = Rs.5,400

Rs. 5,400 x 90% = Rs.4,860

(1,000)

(900)

(810)

Total Additional Depreciation to be provided (Revenue Profi t) (2,710)

Group Financial Statements

266

3. Analysis of Net Worth of G Ltd.

Particulars

Total

100%

H Ltd.

80%

Minority

20%

(a) Equity Share Capital (including Bonus Issue) Rs. 1,00,000 + 20%

(b) Capital Profi ts: General Reserve

Profi t & Loss Account

Gain on Revaluation of Assets

(d) Revenue Profi ts: Profi t & Loss Account

Depreciation Gain on Revaluation

(e) Proposed Dividend 10% of Rs. 1,00,000

1,20,000

4,000

5,000

10,000

96,000

15,200

1,600

13,832

8,000

24.000

3,800

400

3,458

2,000

19,000

2,000

20,000

(2,710)

17,290

10,000

Minority Interest before Stock Reserve Adjustment

Less: Stock Reserve on Closing Stock (10,000 x 25% x 20%) x 20%

33,658

(100)

Minority Interest taken to B/Sheet 33,558

4. Cost of Control

Particulars Rs.

Cost of Investment in G Ltd.

Less: Dividend out of Pre-acquisition profi ts (of 2005) of G (Rs.80,000 x 10%)

90,000

8,000

Adjusted Cost of Investment

Less: (1) Nominal Value of Equity Capital

(2) Share in Capital Profi t of G Ltd.

96,000

15,200

82,000

1,11,200

Capital Reserve on Consolidation (29,200)

5. Consolidation of Reserves & Surplus

Particulars Gen. Res P&L A/c

Balance as per Balance Sheet of H Ltd.

Less: Dividend out of Pre-acquisition Profi ts (Rs.80,000 x 10%)

Less: Dividend Proposed for 2008 by H (Rs. 10% x 1,00,000)

Add: Share of Proposed Dividend of G Ltd. for 2008 (80% x Rs. 10000)

40,000

–––

36,000

(8,000)

(10,000)

8,000

Adjusted Balance

Add: Share of Revenue Profi ts/Reserves of G Ltd.

40,000

1,600

26,000

13,832

Consolidated Balance

Less: Unrealised Profi t on Closing Stock [20% x Rs. 10,000 x 25%] x 80%

41,600

–

39,832

(400)

Adjusted Consolidated Balance 41,600 39,432

6. Consolidated Balance Sheet of H Ltd. and its Subsidiary G Ltd. as at 31.12.2008

Liabilities Rs. Assets Rs.

Share Capital: 1,00,000 Fixed Assets: (60000 + 110000 + 10000 1,77,290

Equity Share Capital (Rs.100 each) (Revaln Gain) - 2710 (Depn. Loss)

Reserves & Surplus Investments: [1,00,000 + 15,000 - 25,000

General Reserve 41,600 90,000 (Held by H Ltd. in G Ltd.)]

Profi t and Loss Account 39,432 Current Assets

Capital Reserve on Consolidation 29,200 Debtors [25,000 + 20,000] 45,000

Minority Interest 33,558 Stock [30000 + 40000 - 500 (Reserve)] 69,500

Current Liabilities Bank [32,000 + 24,000] 56,000

Sundry Creditors [71,000 + 48,000] 1,19,000

Proposed Dividend: Ganpat Ltd. 10,000

Total 3,72,790 Total 3,72,790

267

Advanced Financial Accounting & Reporting

D. INVESTMENT IN PREFERENCE CAPITAL

Illustration 19: Bonus Issue, Pre-acquisition Dividend, Preference Dividend

The following are the Balance Sheets of Sky Ltd. and Star Ltd. as on 31.03.2009 -

Liabilities Sky Star Assets Sky Star

Share Capital: Fixed Assets: Goodwill 60,000 40,000

Equity Shares of Rs.10 each 5,00,000 2,00,000 Machinery 1,00,000 60,000

12% Pref. Shares of Rs.100 each 1,00,000 50,000 Vehicles 1,80,000 70,000

Reserves: General Reserve 1,00,000 60,000 Furniture 50,000 30,000

Profi t & Loss A/c 1,50,000 90,000 Investment: Shares of Sea (Cost) 3,80,000 –

Current Liabilities & Provisions: Current Assets: Stock 70,000 1,40,000

Creditors 60,000 70,000 Debtors 1,00,000 1,65,000

Income Tax 70,000 60,000 Bank Balance 40,000 25,000

Total 9,80,000 5,30,000 Total 9,80,000 5,30,000

The following further information is furnished:

1. Sky Ltd. acquired 12,000 Equity Shares and 400 Preference Shares on 01.04.2008 at a cost of Rs.2,80,000 and

Rs.1,00,000 respectively.

2. The Profi t & Loss Account of Star Ltd. had a credit balance of Rs.30,000 as on 01.04.2008 and that of General

Reserve on that date was Rs.50,000.

3. On 01.07.2008, Star Ltd. declared dividend out of its pre-acquisition profi t, 12% on its Share Capital; Sky Ltd.

credited the receipt of dividend to its Profi t & Loss Account.

4. On 01.10.2008 Star Ltd. issued one Equity Share for every three shares held, as Bonus Shares, at a face value

of Rs.100 per share out of its General Reserve. No entry has been made on the books of Sky Ltd. for the

receipt of these bonus shares.

5. Star Ltd. owed Sky Ltd. Rs.20,000 for purchase of goods from Sky Ltd. The entire stock of goods is held by

Sea Ltd. on 31.03.2009. Ocean Ltd. made a profi t of 25% on cost.

Prepare a Consolidated Balance Sheet as at 31.03.2009.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = Sky Ltd.

Subsidiary = Star Ltd

Acquisition: 01.04.2008

Consolidation: 31.03.2009

Holding Company = 80%

Minority Interest = 20%

Shareholding Status: Shares held on 31.03.2009 = 1,200+ 1/3 x 1,200 (Bonus) = 1,600 out of 2,000 = 80%.

Note: Share distribution pattern can be determined as under –

Date Particulars Held by Sky Ltd. % of Holding Total Shares

01.04.2008 Opening Balance 1,200 NIL 1,500

01.10.2008 Bonus Shares (1 /3 x 1,200) 400 80% 500

31.03.2009 Closing Balance 1,600 80%

(1,600/2,000)

2,000 (From Balance

Sheet Given)

2. Analysis of Reserves & Surplus of Star Ltd.

(a) General Reserve

Balance on 31.03.2009 Rs.60,000

Balance on 01.04.2008 (acquisition) 50,000 Transfer during 2008-09 60,000

Less: Bonus Issue (1/3 x 1,500 Shares x Rs. 100) 50,000 (bal. fi g) Revenue Reserve

Capital Profi t Nil

Group Financial Statements

268

(b) Profi t & Loss Account

Balance on 31.03.2009 Rs.90,000

Balance on 01.04.2008 (acquisition) 30,000 Profi t for 2008-09 Rs. 84,000

Less: Dividend on pre-acquisition profi t Less: Preference Dividend Rs. 6,000

(12% x 15,000 shares x Rs. 10 each) (18,000) Rs.78,000

Less: Preference dividend (50,000 x 12%) (6,000) Revenue Profi t

Balance Capital Profi ts Rs. 6,000

3. Analysis of Net Worth of Star Ltd.

Particulars Total Sky Ltd Minority

100% 80% 20%

(a) Share Capital:

(b) Capital Profi ts:

(d) Revenue Profi t:

(e) Preference Dividend

Equity

Preference

General Reserve

Profi t & Loss Account

of Star Ltd. for the year

2,00,000 1,60,000

40,000

4,800

48,000

62,400

4,800

40,000

10,000

1,200

12,000

15,600

1,200

50,000

Nil

6,000

60,000

78,000

6,000

Minority Interest 80,000

4. Cost of Control

Particulars Rs.

Cost of Investment: Equity Shares of Sea Ltd.

Preference Shares of Sea Ltd.

1,00,000

2,80,000

Total Cost of Investment

Less: Dividend out of Pre-acquisition profi ts

Preference Shares (40,000 Shares x Rs.100 each x 12%)

In Equity Shares (15,000 Shares x Rs.10 each x 12%)

4,800

14,400

3,80,000

(19,200)

Corrected Cost of Investment

Less: (1) Nominal Value of Equity Share Capital

(2) Nominal Value of Preference Share Capital

(3) Share in Capital Profi t of Star Ltd.

1,60,000

40,000

4,800

3,60,800

(2,04,800)

Goodwill on Consolidation 1,56,000

5. Consolidation of Reserves & Surplus

Particulars Gen. Res P&L A/c

Balance as per Balance Sheet of Sky Ltd.

Add: Share of Revenue Profi ts/ Reserves of Star Ltd.

Add: Share of Preference Dividend from Star Ltd.

Less: Dividend out of Pre-acquisition Profi ts (Rs.4,800 + Rs. 14,400)

Less: Preference Dividend payable for the current year by Sky Ltd.

Less: Stock Reserve on Closing Stock (20,000 x 25 /125)

1,00,000

48,000

–

1,50,000

62,400

4,800

(19,200)

(12,000)

(4,000)

Adjusted Consolidated Balance 1,48,000 1,82,000

269

Advanced Financial Accounting & Reporting

6. Consolidated Balance Sheet of Sky Ltd. and its Subsidiary Star Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital 5,00,000 Fixed Assets

12% Pref. Share Capital 1,00,000 Goodwill (Purchased as per B/s) 1,00,000

Reserves and Surplus: Goodwill on Consolidation 1,56,000

General Reserve 1,48,000 Machinery (1,00,000 + 60,000) 1,60,000

P & L Account 1,82,000 Vehicles (1,80,000+ 70,000) 2,50,000

Minority Interest: 80,000 Furniture (50,000 + 30,000) 80,000

Current Liabilities: Current Assets, Loans & Advances

Creditors (60,000 + 70,000 - 20,000) 1,30,000 Stock (70,000 + 1,40,000 - Stock Res 4,000) 2,06,000

Income Tax (70,000 + 60,000) 1,30,000 Debtors (1,00,000 + 1,65,000 - 20,000 mutual) 2,45,000

Preferance Dividend Payable Sky Ltd. 12,000 Bank Balance (40,000 + 25,000) 65,000

Total 12,62,000 Total 12,62,000

Notes:

• Stock Reserve i.e. unrealized profi ts on Closing Stock have been eliminated in full against Holding Company’s

Profi ts, as it arose from downstream transaction (i.e. Holding to Subsidiary).

• Inter Company Owings have been eliminated in full.

Illustration 20: Bonus Issue Not Recorded / Debenture Interest

The following are the Balance Sheets of K Ltd. and P Ltd. as at 31.12.2005 - (Rs.000’s)

Liabilities K P Assets K P

Authorized Issued & Paid-up Capital: Fixed Assets: 1,015 809

Equity Shares of Rs.100 each 800 400 Investments: In P Ltd.

12% Preference Shares of Rs.100 each — 200 3,000 Equity Shares 450

Reserves & Surplus: 1,500 Preference Shares 180

General Reserve 360 200 25 10% Debentures

(Face Value)

Profi t & Loss Account 240 140 Current Assets: 260 480

Secured Loans:

10% Debentures of Rs.1,000 each 50

Current Liabilities & Provisions:

Proposed Dividends on:

- Equity Shares 120 60

- Preference Shares — 24

Debenture Interest accrued — 5

Trade Creditors 410 210

Total 1,930 1,289 Total 1,930 1,289

1. K Ltd. acquired its interest in P Ltd. on 01.01.2008, when the balance to the General Reserve Account of

P Ltd. was Rs.1,80,000.

2. The balance in the Profi t & Loss Account of P Ltd. as at 31.12.2008 was arrived at as under –

Rs. Rs.

Balance on 01.01.2008

Add: Current Profi ts (including Dividends)

40,000

2,04,000

Deduct: Transfer to: General Reserve

Proposed Dividends

20,000

84,000

2,44,000

1,04,000

Balance as on 31.12.2008 1,40,000

Group Financial Statements

270

3. Balance to the P & L Account of P Ltd. as on 01.01.2008 was after providing for dividends on Preference

Shares and 10% dividends on Equity Shares for the year ended 31.12.2008, these dividends were paid in

cash by P Ltd. in May 2008.

4. No entries have been made in the books of K Ltd. for debenture interest due or for proposed dividends of P

Ltd. for the year ended 31.12.2008.

5. Mutual indebtedness of Rs.24,000 is refl ected in the balances shown in the Balance Sheets.

6. In October 2008, P Ltd. issued fully paid up Bonus Shares in the ratio of one share for every four shares held

by utilizing its General Reserve. This was not recorded in the books of both the Companies.

From the above information, you are required to prepare the Consolidated Balance Sheet of K Ltd., and its

subsidiary P Ltd. as at 31.12.2008.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = K Ltd.

Subsidiary = P Ltd.

Acquisition: 01.01.2008

Consolidation: 31.12.2008

Holding Company = 75%

Minority Interest = 25%

2. Analysis of Reserves and Surplus of P Ltd.

(a) General Reserve

Balance on 31.12.2008 Rs. 2,00,000

Less: Bonus Issue (Rs.4,00,000 x 1 / 4) Rs. 1,00,000

Adjusted Balance Rs. 1,00,000

Balance on 01.01.2008 (acquisition) Rs. 1,80,000 Transfer during 2008 Rs.20,000

Less: Bonus Issue Rs. 1,00,000 (balancing fi gure) Revenue Profi t

Balance Capital Profi t Rs. 80,000

(b) Profi t and Loss Account

Balance on 31.12.2008 Rs. 1,40,000

Balance on 01.01.2008 Rs. 40,000 Profi t for 2008 Rs. 1,00,000

Capital Profi t (balancing fi gure) Revenue Profi t

3. Analysis of Net Worth of P Ltd.

Particulars

Total K Ltd. Minority

100% 75% 25%

(a) Share Capital:

(b) Capital Profi ts

(d) Revenue Profi ts:

(e) Proposed Dividend:

Equity (including Bonus Rs. 1,00,000)

12% Preference Share Capital

General Reserve

Profi t & Loss Account

General Reserve

P & L Account

Equity Dividend

12% Preference Dividend

5,00,000 3,75,000

1,50,000

90,000

15,000

75,000

45,000

18,000

1,25,000

50,000

30,000

5,000

25,000

15,000

6,000

2,00,000

80,000

40,000

1,20,000

20,000

1,00,000

60,000

24,000

Minority Interest 2,56,000

271

Advanced Financial Accounting & Reporting

4. Cost of Control

Particulars Rs.

Cost of Investment: Equity Shares

Preference Shares

4,50,000

1,80,000

Total Cost of Investment 6,30,000

Less: (1) Nominal Value of Equity Capital

(2) Nominal Value of Preference Capital

(3) Share in Capital Profi t of P Ltd.

3,75,000

1,50,000

90,000 6,15,000

Goodwill on Consolidation 15,000

Note: It has been presumed that K Ltd. has correctly recorded the receipt of pre-acquisition dividend to its

investment account. If it is presumed that Pre-acquisition dividend have been wrongly taken to P & L Account,

Capital Reserve on Consolidation will be Rs.33,000. Balance in P & L will be reduced by Rs.48,000.

5. Consolidation of Reserves & Surplus

Particulars Gen. Res. P&LA/c

Balance as per Balance Sheet of K Ltd.,

Add: Share of Dividends declared for 2007 (75% of Rs.84,000)

Add: Share of Debenture Interest [(25,000/50,000) x Rs.5,000]

3,60,000 2,40,000

63,000

2,500

Adjusted Balance

Add: Share of Revenue Profi ts / Reserves of Prasad Ltd.

3,60,000

15,000

3,05,500

75,000

Consolidated Balance 3,75,000 3,80,500

6. Consolidated Balance Sheet of K Ltd. and its subsidiary P Ltd. as at 31.12.2008

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital 8,00,000 Fixed Assets: Goodwill on Consolidation 15,000

Reserves and Surplus: Other Fixed Assets

General Reserve 3,75,000 (10,15,000 + 8,09,000) 18,24,000

Profi t & Loss Account 3,80,500

Secured Loans: 10% Debentures 25,000 Current Assets: [2,60,000 + 4,80,000 7,16,000

[50,000 - 25,000 (Held by K)] 24,000 (Mutual Owings)]

Minority Interest: 2,56,000 .

Current Liabilities:

Creditors [4,10,000 + 2,10,000 - 5,96,000

24,000 (Mutual)]

Proposed Dividends: Equity 1,20,000

Debenture Interest Accrued [Rs.5,000 -

Rs.2,500 (Held by K)]

2,500

Total 25,55,000 Total 25,55,000

Group Financial Statements

272

F. ACQUISITION IN LOTS

Illustration 21: Purchase in Lots - Before Controlling Acqn. - Loss of Stock post-acquisition

The following are the Balance Sheets of L Ltd. and M Ltd. as at 31.03.2009 -

Liabilities L Ltd. M Ltd. Assets L Ltd. M Ltd.

Equity Share Capital (Rs.10)

Profi t & Loss Account Sundry

Creditors

80,000

22,000

3,000

1,00,000

30,000

8,000

Shares in Monu Ltd

Cash

Other Assets

98,000

7,000

–

4,000

1,34,000

Total 1,05,000 1,38,000 Total 1,05,000 1,38,000

1. Net Profi t during 2008-09 included above were: L Ltd. Rs.18,000; M Ltd. Rs.12,000.

2. During 2008-09, M Ltd. credited Rs.3,000 to its P & L Account in settlement of a claim of loss of stock (costing

Rs.5,400 - included in opening stock) by fi re on 30.06.2008.

3. Rs. 250 p.m. expenses incurred by L Ltd. on behalf of M Ltd. has been debited to the Profi t & Loss Account

of L Ltd. and left unrecorded for in the books of M Ltd.

4. Both the Companies have proposed a dividend of 10% which is yet to be recorded.

5. On 01.04.2008, L Ltd., was formed and on the same day it acquired 4,000 Shares of M Ltd. at Rs.55,000.

6. On 31.07.2008, 10% dividend was received from M Ltd. and also Bonus Share at 1:4 was received. The

dividend was credited to Profi t & Loss Account.

7. On 31.8.2008, L Ltd. purchased another 3,000 Shares of M Ltd. at Rs.43,000.

Draft a Consolidated Balance Sheet for the above Group.

Solution:

1. Basic Information

Company Status Date of Acquisition Holding Status

Holding Company = L Ltd.

Subsidiary = M Ltd.

Lot 1 = 4,000 Shares = 01.04.2008

Bonus 1,000 Shares = 31.07.2008

Lot 2 = 3,000 Shares = 31.08.2008

Holding Company = 80%

Minority Interest = 20%

Date of Consolidation = 31.03.2009

Notes:

• As per M’s B/Sheet, number of Shares = 10,000, which is after Bonus Issue of 1:4. Hence, Number of Shares

prior to Bonus Issue = 10,000 Less l/5lh = 8,000 Shares.

• Lot 14,000 Shares do not constitute controlling acquisition. Hence, Date of Control = 31.08.2008. Shares held

by Lalu Ltd. = 8,000 Shares out of 10,000 = 80% Holding.

2. Analysis of Profi t & Loss Account of M Ltd.

Note:

1. Normal Operating Profi t of M for 2008-09 = 12,000 (given) + 2,400 (abnormal loss item) = Rs. 14,400.

2. Presuming this to be earned uniformly, the Revenue Profi ts after date of controlling acquisition i.e. the

period from 31.08.2008 to 31.03.2009 (i.e. 7 months) = Rs. 14,400 x 7/12 = Rs.8,400. Hence, amount relatable

to pre-acquisition period = Rs. 14,400 - Rs.8,400 = Rs.6,000.

P & L balance on 31.03.2009 Rs. 30,000

Bal.in P&L last year Rs. 46,000 Profi t from 31.08.2008 to 31.03.2009 8,400

Less: Bonus Issue 20,000 (Rs.80,000 x 1 /4) (See Note 2 above)

Less: Dividend 8,000 (Rs.80,000 x 10%) Less: Expenses by L Ltd. (Rs.250 x 7) (1,750)

Less: Stock Loss 2,400 Less: 2008-09 Dividend (1,00,000x10%) (10,000)

15,600 (30,000- 14,400) (Rs.3,350)

2008-09 Pft (Note 2) 6,000 (Rs.l4,400 x 5/12) Revenue Profi t

Less: Exp. by L Ltd. (1,250) (Rs.250 x 5)

20,350 Capital Profi t

273

Advanced Financial Accounting & Reporting

Note:

• The Opening Balance in P&L A/c Rs.46,000 is derived by reverse working. From this balance, M Ltd. should

have declared bonus shares, paid dividend and written off the stock losses.

• The net balance of Capital and Revenue Profi ts = Rs.20,350 - Rs.3,350 = Rs.17,000. This is confi rmed with the

corrected balance of M’s P&L Account i.e. Balance as given = Rs.30,000 Less Expenses incurred by L Ltd.,

now recorded = Rs.3,000 Less Dividend for 2008-09 = Rs. 10,000; Net Balance = Rs.17,000.

3. Analysis of Net Worth of M Ltd.

Particulars

Total

100%

L Ltd.

(80%)

Minority

20%

(a) Equity Share Capital

(b) Capital Profi ts: Profi t & Loss Account

(d) Proposed Dividend

1,00,000

20,350

(3,350)

10,000

80,000

16,280

(2,680)

8,000

20,000

4,070

(670)

2,000

Minority Interest 25,400

4. Computation of Pre-acquisition Dividend of L Ltd.

Particulars Total 1st Lot 2nd Lot

% of Holding on 31.03.2009 80% 50% 30%

Share of dividend Rs.8,000 Rs.5,000 Rs.3,000

Period of holding during 2008-09 – 12 Months 7 Months

To be Credited to P&L A/c Rs.6,750 Rs.5,000 Rs.1,750

(3,000x7/12)

To be Credited to Investment A/c (Pre-acquisition Dividend) Rs. 1,250 NIL Rs. 1,250

(3,000x5/12)

5. Cost of Control

Particulars Rs.

Cost of Investment in M Ltd.

Less: Dividend out of Pre-acquisition Profi ts (2007-08) of M Ltd. (Rs.8,000 x 50%)

Less: Dividend out of Pre-acquisition Profi ts (2008-09) Working Note - 4 above

98,000

(4,000)

(1,250)

Adjusted Cost of Investment 92,750

Less: Nominal Value of Equity Capital

Share in Capital Profi t of M Ltd.

80,000

16,280 96,280

Capital Reserve on Consolidation (3,530)

6. Consolidation of Profi t and Loss Account

Particulars Rs.

Balance as per Balance Sheet 22,000

Less: Proposed Dividend (Rs.80,000 x 10%) (8,000)

Add: Expenses incurred on behalf of M Ltd. by L Ltd. (Rs.250 x 12 months) 3,000

Less: Dividend out of Pre-acquisition Profi ts (2007-08) (Rs.8,000 x 50%) (4,000)

Add: Share of Proposed Dividend for FY 2008-09 (WN4) 6,750

Adjusted Balance 19,750

Less: Share of Revenue Loss of M Ltd. (2,680)

Consolidated Balance 17,070

Group Financial Statements

274

7. Consolidated Balance Sheet of L Ltd. and its Subsidiary M Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves & Surplus

Profi t and Loss Account

Capital Reserve on Consolidation

Minority Interest

Current Liabilities:

Sundry Creditors [3,000 + 8,000]

Proposed Dividend [shareholders of L Ltd.]

80,000

17,070

3,530

25,400

11,000

8,000

Other Assets

Current Assets: Cash [7,000 + 4,000]

1,34,000

11,000

Total 1,45,000 Total 1,45,000

Illustration 35: Purchase in Lots - Before Controlling Acqn. - Ex-Dividend & Ex-Bonus

The Balance Sheets of G Ltd. and M Ltd. as on 31.03.2009 are as follows -

Liabilities G M Assets G M

Share Capital (Rs.100 Shares)

Profi t & Loss Account

Creditors

1,60,000

50,000

2,00,000

60,000

16,000

Investment: Shares in Maurya

Debtors

Stock in Trade

Cash at Bank

Cash in Hand

–

1,96,000

14,000

–

1,20,000

80,000

70,000

6,000

Total 2,10,000 2,76,000 Total 2,10,000 2,76,000

Particulars of Gupta Ltd. -

1. This Company was formed on 1.4.2008.

2. It acquired the shares of M Ltd. as under –

Date of Acquisition No. of Shares Cost Rs.

1.4.2007 800 1,10,000

31.7.2007 600 86,000

3. The shares purchased on 31.07.2008 are ex-dividend and ex-bonus from existing holders.

4. On 31.07.2008 dividend at 10% was received from Maurya and was credited to Profi t & Loss Account.

5. On 31.07.2008 it received Bonus Shares from Maurya in the ratio of One Share on every Four Shares held.

6. Gupta incurred an expenditure of Rs.500 per month on behalf of Maurya Ltd. and this was debited to the

Profi t and Loss Account of Gupta Ltd, but nothing has been done in the books of Maurya Ltd.

7. The balance in Profi t & Loss A/c as on 31.03.2009 included Rs.36,000 being the net profi t made during the year.

8. Dividend proposed for 2008-08 at 10% was not provided for yet.

Particulars of Maurya Ltd. -

1. The balance in the Profi t & Loss A/c as on 31.03.2009 is after the issue of Bonus Shares made on 31.07.2008.

2. The Net Profi t made during the year is Rs.24,000 including Rs.6,000 received from Insurance Company

in settlement of the claim towards loss of stock by fi re on 30.06.2008 (Cost Rs.10,800 included in Opening

Stock)

3. Dividend proposed for 2008-09 at 10% was not provided for in the accounts.

Prepare the Consolidated Balance Sheet as at 31.03.2009.

Solution: 1. Basic Information

Company Status Dates of Acquisition Holding Status

Holding Company = Gupta

Subsidiary = Maurya

Lot 1 800 Shares 01.04.2008

Lot 2 600 Shares 31.07.2008

Holding Company = 80%

Minority Interest = 20%

Consolidation: 31.03.2009

Shareholding Status: 800 (Lot 1 on 01.04.2007) + 600 (Lot 2 on 31.07.2008) + 200 (Bonus Issue l/4th x 800 shares)

= 1,600 Shares out of Total 2,000 Shares = 80%

275

Advanced Financial Accounting & Reporting

2. Analysis of Profi t & Loss Account of M Ltd.

Balance on 31.03.2009 Rs.60,000

Balance on 01.04.08 36,000 Profi t for 2008-09 (Upto consolidation) 24,000

(60,000 - 24,000) Less: Expenses incurred by G Ltd. (Rs.500 x 12) (6,000)

Less: Dividend adjusted (2,000) Add: Abnormal Item - Loss of Stock Rs. 10,800

(20,000 Less 18,000) Less: Insurance Claim Rs.6,000 4,800

Balance Capital Profi t 34,000 Profi t for the year before Dividend 22,800

01.04.2008 to 31.07.2008

(upto acquisition)

01.07.2008 to 31.03.2009

(upto consolidation)

Rs.22,800x4/12= 7,600 Rs.22,800 x 8/12 = 15,200

Less: Abnormal Item 4,800 Less: Dividend 10% x 2,00,000 6,800

Profi t after stock loss 2,800 restricted to profi ts available

Less: Balance Dvd Rs.4,800 Revenue Profi t NIL

(20,000 - 15,200) adj. (2,800)

to the extent of Profi t

Balance Capital Profi t NIL

3. Analysis of Net Worth of M Ltd.

Particulars

Total

100%

G Ltd.

80%

Minority

20%

(a) Equity Share Capital

(b) Capital Profi ts: Profi t & Loss Account

(d) Proposed Dividend

2,00,000

34,000

NIL

20,000

1,60,000

27,200

–

16,000

40,000

6,800

–

4,000

Minority Interest 50,800

4. Cost of Control

Particulars Rs.

Cost of Investment in M Ltd.

Less: Dividend out of Pre-acquisition profi ts (2007-08) (800 Shares x Rs. 10 x 10%)

FY 2007-08 Rs.2,000 x 80% x 1,000 Shares * 1,600 Shares

1,96,000

(8,000)

(1,000)

Adjusted Cost of Investment

Less: (1) Nominal Value of Equity Capital

(2) Share in Capital Profi t of M Ltd.

1,87,000

(1,60,000)

(27,200)

Capital Reserve on Consolidation (200)

Note: Out of the Dividend for the year declared, Rs.2,000 is from Profi ts prior to the date of acquisition. Holding Company’s

share of pre-acquisition dividend Rs.800 (Rs.2,000 x 80% x 800 Shares ÷ 1,600 Shares) (to the extent of 1,000 Shares

including bonus of 200 Shares only) should be adjusted against Investment Account. The balance dividend should be

credited to Profi t and Loss Account only because –

• For the fi rst lot of 800 Shares, dividends for the preceding year 2007-08 alone should be reduced from

Investment Account.

• Second Lot of 600 Shares were purchased ex-dividend and ex-bonus and therefore the entire dividend

received on them should be credited to Profi t and Loss Account.

Group Financial Statements

276

5. Consolidation of Profi t and Loss Account

Particulars Rs.

Balance as per Balance Sheet of G Ltd.

Less: Proposed Dividend (Rs. 1,60,000 x 10%)

Add: Expenses incurred by M Ltd., (Rs.500 x 12)

Less: Dividend out of Pre-acquisition Profi ts (FY 2007-08 8,000 + FY 04-05 1,000)

Add: Share of Proposed Dividend for FY 2007-08 (1,600 Shares x Rs. 10 x 10%)

50,000

(16,000)

6,000

(9,000)

16,000

Adjusted Balance as at 31.3.2008

Add: Share of Revenue Profi ts of M Ltd.,

47,000

–

Consolidated Balance 47,000

6. Consolidated Balance Sheet of G Ltd. and its Subsidiary M Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves and Surplus:

Profi t & Loss A/c

Capital Reserve on Consolidation

Minority Interest:

Current Liabilities: Trade Creditors

Proposed Dvnd.

1,60,000

47,000

200

50,800

16,000

Fixed Assets

Current Assets

Trade Debtors

Stock in Trade

Cash at Bank

Cash in Hand (14,000 + 6,000)

NIL

1,20,000

80,000

70,000

20,000

Total 2,90,000 Total 2,90,000

Illustration 22: Purchase in Lots – Treatment of Pre-acquisition Dividend

Following are the Balance Sheets of M Ltd. and N Ltd. as at 31.03.2009 -

Liabilities M Ltd. N Ltd. Assets M Ltd. N Ltd.

Equity Share Capital of Rs.100 6,00,000 1,00,000 Land & Building 2,00,000 1,00,000

each fully paid Machinery 2,80,000 50,000

General Reserve 50,000 30,000 7000 Shares in N 1,00,000 –

Profi t & Loss Account 80,000 40,000 Stock in Trade 70,000 40,000

Sundry Creditors 1,00,000 40,000 Debtors 1,50,000 20,000

Bills Payable 10,000 15,000 Bills Receivable 10,000 –

Cash at Bank 30,000 15,000

Total 8,40,000 2,25,000 Total 8,40,000 2,25,000

Prepare Consolidated Balance Sheet as at 31st March, 2009 from the following additional Information -

1. All the Bills Receivable of M Ltd. including those discounted were accepted by N Ltd.

2. When M Ltd. had acquired 600 Shares in N Ltd., the latter had Rs.20,000 in General Reserve and Rs.5,000

Credit Balance in Profi t and Loss Account.

3. At the time of acquisition of further 100 Shares by N Ltd., the latter had Rs. 25,000 General Reserve and

Rs. 28,000 Credit Balance in Profi t and Loss Account, from which 20% dividend was paid by N Ltd.

4. The dividends received by M Ltd. on these shares were credited to Profi t & Loss Account.

5. Stock of N Ltd. includes goods valued at Rs.20,000 purchased from M Ltd. which has made 25% profi t on

cost.

6. For the fi nancial year ending 31.03.2009, M Ltd. had proposed a dividend of 10% and N Ltd. has proposed

a dividend of 15%, but no effect has yet been given in the above Balance Sheets.

277

Advanced Financial Accounting & Reporting

Solution:

1. Basic Information

Company Status Date of Acquisition Holding Status

Holding Company = M Ltd.

Subsidiary = N Ltd.

Lot 1 = 600 Shares = DOA - 1

Lot 2 = 100 Shares = DOA - 2

Holding Company = 70%

Minority Interest = 30%

Date of Consolidation = 31.03.2009

2. Analysis of Reserves & Surplus of Kaurava Ltd.

(a) General Reserve as per B/s = Rs.30,000

As on DOA-1

(Lot 1 date)

Rs.20,000

Capital

For the period DOA-1 to DOA-2 (Lot 2 date)

Rs.25,000 - Rs.20,000 = Rs.5,000

For 600 Shares (Lot 1): Revenue

For 100 Shares (Lot 2): Capital

From DOA-2 to B/s Date

(upto Consolidation)

Rs.5,0000) (bal. fi gure)

Revenue

Total Capital Profi ts = Rs.20,000; Total Revenue Reserves = Rs. 10,000 (See Note)

Note: Addition to Reserves of Rs.5,000 between DOA-1 and DOA-2 have been considered as Revenue Reserves in full, only

for the purpose of determining the share of Minority Interest. After allocating for Minority Interest, the revenue portion of

Rs.500 (i.e. 10% Shares x Rs.5,000) will be added to Capital Profi ts.

(b) Profi t & Loss Account

P & L A/c Balance as per B/s = Rs. 40,000

Less: Proposed Dividend = 1,00,000 x 15% = Rs. 15,000

Adjusted Balance of N Ltd.’s Profi ts = Rs. 25,000

As on DOA-1

(Lot 1 date)

Rs.5,000

Capital

For the period DOA-1 to DOA-2 (Lot 2 date)

Rs.28,000 - Rs.5,000 = Rs.23,000

Less: Dividend out of this = Rs.20,000

Net Balance = Rs. 3,000

For 600 Shares (Lot 1): Revenue

For 100 Shares (Lot 2): Capital

From DOA-2 to B/s Date

(upto Consolidation)

Rs.17,000 (bal. fi gure)

Revenue

Total Capital Profi ts = Rs.5,000; Total Revenue Reserves = Rs.5,000 (See Note)

Note: Addition to P&L A/c Rs.3,000 between DOA-1 and DOA-2 have been fully considered as Revenue only for the

purpose of determining the share of Minority Interest. After allocating for minority Interest, the revenue portion of Rs.300

(i.e. 10% Shares x Rs.3,000) will be added to Capital Profi ts.

3. Analysis of Net Worth of N Ltd.

Particulars Total M Ltd. Minority

% of share Holding on Consolidation Date 100% 70% 30%

(a) Equity Share Capital

(b) Capital Profi ts: General Reserve

Profi t & Loss Account

Add: Capital Items [Res Rs.5000 + P&L A/c Rs.3,000] x 10%

Net Share in Capital Profi t

Less: Capital Item included in Revenue [Rs.5,000 x 10%]

Net Share in Revenue Reserves

(d) Revenue Profi ts: Profi t & Loss A/c

Less: Capital Item included in Revenue [Rs.3,000 x 10%]

Net Share in Revenue Profi t

(e) Proposed Dividend

1,00,000

20,000

5,000

70,000

17,500

800

30,000

7,500

3,000

6,000

4.500

25,000

10,000

18,300

7,000

(500)

20,000 6,500

14,000

(300)

15,000 13,700

10,500

Total Minority Interest 51,000

Group Financial Statements

278

4. Cost of Control

Particulars Rs.

Cost of Investment in Equity Shares of N Ltd.

Less: Dividend out of Pre-acquisition profi ts of N Ltd. (Only for Lot

2 - 1000 Shares) - (Rs. 10,000 x 20%)

1,00,000

2,000

Adjusted Cost of Investment

Less: (1) Nominal Value of Equity Capital

(2) Share in Capital Profi t of N Ltd.

70,000

18,300

98,000

88,300

Goodwill on Consolidation 9,700

5. Consolidation of Reserves & Surplus

Particulars Gen. Res P&L A/c

Balance as per Balance Sheet of M Ltd.

Less: Dividend out of Pre-acquisition Profi ts (Rs.20,000 x 10%)

Less: Proposed Dividend (Rs.6,00,000 x 10%)

Add: Share of Dividend from N Ltd. (Rs. 15,000 x 70%)

50,000

–––

80,000

(2,000)

(60,000)

10,500

Adjusted Balance

Add: Share of Revenue Profi ts/Reserves of N Ltd.

50,000

6,500

28,500

13,700

Consolidated Balance

Less: Unrealised Profi ts on Closing Stock Rs.20,000 x 25 / 125

56,500

–

42,200

(4,000)

Adjusted Consolidated Balance 56,500 38,200

6. Consolidated Balance Sheet of M Ltd. and its Subsidiary N Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves & Surplus

General Reserve

Profi t & Loss Account

Minority Interest

Current Liabilities

B/P [ 10,000 + 15,000 - 10,000 (Mutual)]

Trade Creditors [1,00,000 + 40,000]

Proposed Dividend (M Ltd.)

6,00,000

56,500

38,200

51,000

15,000

1,40,000

60,000

Fixed Assets

Goodwill on Consolidation

Land & Building (2,00,000 + 1,00,000)

Plant & Machinery (2,80,000 + 50,000)

Current Assets

Stock in Trade [70,000 + 40,000 - 4,000

(Stock Reserve)]

Trade Debtors [1,50,000 + 20,000]

B/R [10,000 - 10,000 (Mutual Owings)]

Cash at Bank [30,000 + 15,000]

9,700

3,00,000

3,30,000

1,06,000

1,70,000

NIL

45,000

Total 9,60,700 Total 9,60,700

Notes:

• Balance Sheet items have been consolidated on line-by-line addition basis.

• Stock Reserve i.e. unrealized profi ts on Closing Stock have been eliminated in full from Group reserves as it relates to

downstream transaction (i.e. Holding to Subsidiary).

• Inter-Company Owings have been eliminated in full.

Illustration 23: Purchase in Multiple Lots - Asset sold by Holding Co. to Subsidiary Co.

Z Ltd. acquired 60% of shares of P Ltd. as on 30th June, 2005. As on 31st December, 2007, Balance Sheet of P

Ltd. shows a balance in General Reserves Rs.2,00,000 and in Profi t and Loss Account Rs.20,000. Subsequently

Hema Ltd. purchased another 10% shares of P Ltd. on 30th September, 2008. Finally Z Ltd. purchased

another 20% Shares as on 30th November, 2008. Given below the Balance Sheets of Z Ltd. and P Ltd. as on

31st December, 2008 -

279

Advanced Financial Accounting & Reporting

Liabilities Z Ltd. P Ltd. Assets Z Ltd. P Ltd.

Share Capital 10,00,000 6,00,000 Fixed Assets 16,00,000 10,00,000

General Reserve

P & L Account

4,00,000

2,00,000

1,00,000

(-) Accumulated Depreciation

Net Block

4,00,000 2,00,000

12,00,000 8,00,000

Loans 3,00,000 4,00,000 Investments 6,00,000 2,00,000

Sundry Creditors 4,00,000 2,00,000 Current Assets

Provision for Tax 1,00,000 80,000 Stock 4,00,000 3,00,000

Proposed Dividend 2,00,000 1,20,000 Debtors 3,00,000 2,00,000

Cash & Bank 1,00,000 1,00,000

Total 26,00,000 16,00,000 Total 26,00,000 16,00,000

Other Information’s:

1. The initial of investment in P Ltd. was made by Z Ltd. for Rs.3,00,000. The second phase of Investment was

made by Z Ltd. for Rs. 80,000 and the last phase of investment was made for Rs.1,50,000.

2. P Ltd. declared and paid Bonus Shares at one for every two Shares held. For this purpose the book closure

date was 15th July to 31st July, 2008.

3. Z Ltd. sold a machinery costing Rs.4,00,000 to P Ltd. on 15th September, 2008 on which the former made a

profi t of Rs.1,00,000. P Ltd. charged depreciation at 20% on the plant on time proportion basis.

Prepare a Consolidated Balance Sheet for Z Ltd. and its subsidiary P Ltd. as on 31.12.2008.

Solution:

1. Basic Information

Company Status Date of Acquisition Holding Status

Holding Company = Z Ltd.

Subsidiary = P Ltd.

Lot 1 = 60% Shares = 30.06.2008

Lot 2 = 10% Shares = 30.09.2008

Lot 3 = 20% Shares = 30.11.2008

Holding Company = 90%

Minority Interest = 10%

Date of Consolidation = 31.12.2008

2. Analysis of Reserves & Surplus of P Ltd.

(a) General Reserve

Balance on 31.12.2008 Rs. 1,00,000

Balance on 1.1.2008 2,00,000 Transfer during 2008 Rs. 1,00,000

Less: Bonus Issue 2,00,000 (balancing fi gure)

Capital Profi t Nil

Capital Profi t for

Revenue Reserve for

Total Holdings by Z Ltd.

Upto 30.6.08

6 Months

100000 x 6/12

Rs.50,000

90%

1.7.08 to 30.9.08

3 Months

100000 x 3/12 =

Rs. 25,000

30%

60%

90%

l.l0.05 to 30.11.08

2 Months

100000 x 2/12 =

Rs.16,667

20%

70%

90%

1.12.08 to 31.12.08

1 Month

00000 x 1/12 =

Rs. 8,333

–

90%

Total Capital Profi ts: Rs. 50,000; Total Revenue Profi ts: Rs. 50,000

Note: Additions to General Reserve Account are fully considered as revenue only for the purpose of determining Minority

Interest. After allocating the Minority Interest the respective Capital Portion will be transferred to Capital Profi ts.

Group Financial Statements

280

(b) Profi t & Loss Account

Balance on 31.12.2008 Rs. 1,00,000

Balance on 1.1.2008 20,000 Profi t earned during 2008 (b/f) Rs.80,000

Capital Profi t Add: Depreciation on Machinery Rs.29,167

(Rs.5 Lakhs x 3.5 Months / 12 x 20%) Rs.1,09,167

Upto 30.6.08 1 1.7.08 to 30.9.08 1.10.08 to 30.11.08 1.12.08 to 31.12.08

6 Months 3 Months 2 Months 1 Month

109167 x 6/12 = 109167 x 3/12 = 109167 x 2/12 = 109167 x 1/12 =

Rs.54,584 Rs.27,292 Rs.18,195 Rs.9,096

Less: Depreciation – Rs.4,167 Rs. 16,667 Rs.8,333

– (29167 x 0.5/3.5) (29167 x 2.0/3.5) (29167 x 1.0/3.5)

Rs. 54,584 Rs.23,125 Rs.1,528 Rs.763

Capital Profi t for 90% 30% 20% –

Revenue Profi t for – 60% 70% 90%

Total Holdings by Z Ltd. 90% 90% 90%

Total Capital Profi ts: Rs. 54,584 + Rs.20,000 = Rs.74,584; Total Revenue Profi ts: Rs. 25,416

Note:

• Profi ts are assumed to have been evenly spread out throughout the year.

• Additions to the P&L A/c after 30.06.2008 are fully considered as revenue only for the purpose of determining Minority

Interest. After allocating the Minority Interest the respective Capital Portion will be transferred to Capital Profi ts.

3. Computation of amount to be transferred from Revenue Profi ts to Capital Profi ts

Period

% of holding

considered as Capital

P&L A/c General Reserve

30.6.2008-30.9.2008

30.9.2008-30.11.2008

30%

20%

23,125 x 30% = Rs.6,938

1,528 x 20% = Rs. 306

25,000 x 30% = Rs. 7,500

16,667 x 20% = Rs. 3,333

Rs.7,244 Rs. 10,833

4. Analysis of Net Worth of S Ltd.

Particulars

Total Z Ltd. Minority

100% 90% 10%

(a) Equity Share Capital

(b) Capital Profi ts:

Add:

Less:

(d) Revenue Profi ts:

Less:

(e) Proposed Dividend

General Reserve

Profi t & Loss Account

Capital Items (7,244 + 10,833)

General Reserve

Capital Item included in Revenue

Profi t & Loss Account

Capital Item included in Revenue

6,00,000

50,000

74,584

5,40,000

1,12,126

18,077

60,000

12,458

5,000

2,542

12,000

1,24,584

50,000

1,30,203

45,000

(10,833)

25,416

34,167

22,874

(7,244)

1,20,000

15,630

1,08,000

Minority Interest 92,000

281

Advanced Financial Accounting & Reporting

5. Cost of Control

Particulars Rs.

Cost of Investment in Equity Shares of P Ltd.

Less: Pre-acquisition Dividend

5,30,000

(65,000)

Adjusted Cost of Investment

Less: (1) Nominal Value of Equity Capital

(2) Share in Capital Profi t of P Ltd.

5,40,000

1,30,203

4,65,000

6,70,203

Capital Reserve on Consolidation (2,05,203)

6. Computation of Pre-acquisition Dividend

Particulars Pre-Acquisition Dividend Post Acquisition Dividend

Lot 1 - 60% - Acqd. on 30.6.2008

Lot 2 - 80% - 01.07.08 to 30.09.08

Lot 3 - 90% - 30.09.08 to 30.11.08

1,20,000 x 6/12 x 60% = Rs.36,000

1,20,000 x 3/12 x 80% = Rs.24,000

1,20,000 x 2/12 x 90% = Rs. 18,000

1,20,000 x 6/12 x 60% = Rs.36,000

1,20,000 x 3/12 x 20% = Rs. 6,000

1,20,000 x 1/12 x 10% = Rs. 1,000

Total Rs.65,000 Rs.43,000

7. Consolidation of Reserves and Surplus

Particulars P&L A/c Gen. Res.

Balance as per Balance Sheet of Z Ltd.

Add: Proposed Dividend from P Ltd.

Add: Share of Revenue Profi ts / Reserves of P Ltd.

Less: Unrealized Profi t on Machinery sold

Profi t on Sale of Machinery

Less: Depreciation on Profi t (1,00,000 x 20% x 3.5/12)

1,00,000

(5,833)

2,00,000

43,000

15,630

(94,167)

4,00,000

–

34,167

–

Consolidated Balance 1,64,463 4,34,167

8. Consolidated Balance Sheet of Z Ltd. and its subsidiary P Ltd. as at 31.12.2008

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves and Surplus.

– General Reserve

– Profi t & Loss Account

– Capital Reserve on Consolidation

Minority Interest:

Loan Funds : (3,00,000 + 4,00,000)

Current Liabilities:

Sundry Creditors (4,00,000 + 2,00,000)

Provision for Tax (1,00,000 + 80,000)

Proposed Dividend (Hema Ltd.)

10,00,000

4,34,167

1,64,463

2,05,203

92,000

7,00,000

6,00,000

1,80,000

2,00.000

Fixed Assets: (12,00,000 + 8,00,000 -

Unrealised Profi ts 94,167)

Investments

(6,00,000 - 5,30,000 - 2,00,000)

Current Assets

Sundry Debtors (3,00,000 + 2,00,000)

Stock in Trade (4,00,000 + 3,00,000)

Cash at Bank (1,00,000 + 1,00,000)

19,05,833

2,70,000

5,00,000

7,00,000

2,00,000

Total 35,75,833 Total 35,75,833

Note: Unrealised Profi t on Sale of Machinery has been eliminated fully from Group Reserves as it relates to Downstream

Activity (i.e. Holding to Subsidiary).

Group Financial Statements

282

G. CHAIN HOLDINIG

Illustration 24 : Chain Holding - Multiple Subsidiaries - 100% Subsidiary

P Ltd. purchases its raw materials from H Ltd. and sells goods to Q Ltd. In order to ensure regular supply of

raw materials and patronage for fi nished goods, P Ltd. through its wholly owned subsidiary, G Ltd. acquires on

31.03.2009, 51% of Equity Capital of H Ltd. for Rs.15 Crores and 76% of Equity Capital of Q Ltd. for Rs.30 Crores.

G Ltd. was fl oated by P Ltd. in 2000 from which date it was wholly owned by P Ltd.

The following are the Balance Sheets of the four companies as at 31.3.2009 (Rs.Crores) -

Particulars P Ltd. G Ltd. H Ltd. Q Ltd.

SOURCES OF FUNDS

1. Shareholders Funds: Equity (Fully paid) Rs.10 each

Reserves and Surplus

100 25 25 35

2. Loan Funds: Secured Loans

Unsecured Loans

–

25 50 15 35

Total Sources of Funds 125 75 40 70

APPLICATION OF FUNDS:

1. Fixed Assets: Cost

Less: Depreciation

2. Investments at Cost in Fully paid Equity Shares of:

Giri Ltd.

Hari Ltd.

Pari Ltd.

Other Companies (Market Value Rs.116 Crores)

3. Net Current Assets: Current,Assets

Less: Current Liabilities

––15

25 – 8 13

5––– –

––––

5 74 – –

105

1 96

200

143

95 1 32 57

Total Application of Funds 125 75 40 70

There are no inter-company transactions outstanding between the Companies. Prepare Consolidated Balance

Sheet as at 31.03.2009.

Solution:

1. Basic Information (for Consolidation on 31.03.2005)

Company Status Dates Holding Status

Holding Company = P

Subsidiary = G

Sub-Subsidiary 1 = H

Sub-Subsidiary 2 = Q

Acquisition:

P in G 2001

G in H: 31.03.2009

G in Q: 31.03.2009

a. G Ltd.

b. H Ltd.

c. Q Ltd.

Holding

(P)100%

(G) 51%

(G) 76%

Minority

Nil

49%

24%

2. Analysis of Reserves and Surplus of Subsidiary Companies

Giri Ltd. is wholly owned subsidiary from the beginning and therefore the entire amount of Reserves represents

Revenue Portion. H Ltd. and Q Ltd. were acquired only on 31.03.2009 which is also the date of consolidation and

hence, entire balance in Reserves and Surplus represents Capital Profi ts.

283

Advanced Financial Accounting & Reporting

3. Analysis of Net Worth of Subsidiaries (Rs. Crores)

Particulars P Ltd. Minority Interest

100%

G Ltd. H Ltd. Q Ltd.

H Ltd.

49%

Q Ltd.

24%

(a) Share Capital

Less: Minority Interest

Holding Co’s Share

5.00

NIL

10.00

4.90

15.00

3.60 4.90 3.60

5.00 5.10 11.40

(b) Capital Profi ts Reserves & Surplus

Tfr of G Share in H & Q

Less: Minority Interest

Holding Co’s Share

–

7.65

15.20

15.00

(7.65)

[15 x 51%]

20.00

(15.20)

[20 x 76%]

7.35 4.80

22.85

–

7.35

(7.35)

[15 x 49%]

4.80

4.80 [20 x

24%]

22.85 NIL NIL

c) Revenue Profi ts: Reserves & Surplus 20.00 NIL NIL NIL NIL

Minority Interest 12.25 8.40

4. Cost of Control

Particulars Rs. Crores

Cost of Investment: P Ltd. in G Ltd.

G Ltd. in H Ltd.

G Ltd. in Q Ltd

5.00

15.00

30.00

Total Cost of Investment

Less: (a) Nominal Value of Share Capital in: - G Ltd.

- H Ltd.

- Q Ltd.

(b) Share in Capital Profi ts of G Ltd.

5.00

5.10

11.40

50.00

(21.50)

(22.85)

Goodwill on Consolidation 5.65

5. Consolidated Balance Sheet of P Ltd. and its subsidiaries G, H and Q, as at 31.03.2009

Liabilities Rs.Crores Assets Rs.Crores

Share Capital: Equity Capital

Reserves and Surplus:

(75.00 + 20.00 Share in Revenue of

G Ltd.)

Minority Interest: (a) H Ltd.

(b) Q Ltd.

Secured Loans (15 + 5 + 20)

Unsecured Loans (10 + 50 + 10 + 15)

Current Liabilities: (10 + 64 + 143)

25.00

95.00

12.25

8.40

40.00

85.00

217.00

Fixed Assets: Goodwill on Consolidation

Other Fixed Assets Cost (60 + 15 + 30) 105

Less: Depreciation (35 + 7 + 17) 59

Investments: Other Co’s [MV Rs.l 16 Crores]

Current Assets, Loans & Advances:

(105 + 1 +96 + 200)

5.65

46.00

29.00

402.00

Total 482.65 Total 482.65

76%

Group Financial Statements

284

Illustration 25: Chain Holding - Direct & Indirect Method — Abnormal Loss, Dividend

You are given the following Balance Sheets as on 31.12.2008 (Rs.000s)

Liabilities A Ltd. B Ltd. C Ltd. Assets A Ltd. B Ltd. C Ltd.

Share Capital (Rs.100)

General Reserve

Securities Premium

Profi t & Loss A/c

Creditors

A Ltd. Balance

2,000

600

200

250

300

1,000

300

180

200

800

200

NIL

120

140

Fixed Assets

Current Assets

Investments

B Ltd. Balance

C Ltd. Balance

Preliminary Expenses

1,500

450

1,300

NIL

900

300

580

NIL

970

300

NIL

Total 3,350 1,780 1,290 Total 3,350 1,780 1,290

A Ltd. had acquired 8000 Shares in B Ltd. at a total cost of Rs.11,00,000 on 01.07.2007. On 01.01.2008, A Ltd.

purchased respectively 1,000 and 5,000 Shares in C Ltd. at Rs.116 per Share.

Particulars about General Reserve and the Profi t & Loss Account are as given below (Rs.000’s)

Particulars A Ltd. BLtd. CLtd.

General Reserve: As on 1.1.2007 550 250 200

Profi t & Loss A/c: As on 1.1.2007 50 40 20

Profi t for 2007 170 100 100

Dividend paid in August 2008 in respect of 2007 10% 12% 10%

A Ltd. and B Ltd. have credited the dividends received by them to their Profi t & Loss Accounts. Increase in

Reserves were made in 2008. On 31.12.2008, C Ltd. sold goods costing Rs.20,000 to B Ltd. for Rs.25,000, these were

immediately sold for Rs.28,000 to A Ltd. Prepare the Consolidated Balance Sheet of the Group as at 31.12.2008.

Solution: 1. Basic Information

Company Status Dates Holding Status

Holding Company = A Ltd.

Subsidiary = B Ltd.

Sub-Subsidiary = C Ltd.

Acquisition:

A in B: 01.07.2007

A in C: 01.01.2008

B in C: 01.01.2008

Consolidation 31.12.2008

a. Holding Co.

b. Minority Int.

B Ltd.

(A Ltd.) 80%

–

20%

C Ltd.

(A) 12.5%

(B) 62.5%

25%

Note: The Shareholding Pattern is analysed as under–

Co. Held by A Ltd Held by B Ltd Total Holdings Minority Int. Total Shares

B Ltd. 8,000 (80%) acquired

on 01.07.2007 N.A. 8,000 (80%) 2,000 (20%) 10,000

(100%)

C.Ltd. 1,000 (12.5%) acquired

on 01.01.2008

5,000 (62.5%) acquired

on 01.01.2005 6,000 (75%) 2,000 (25%) 8,000

(100%)

2. Analysis of Reserves and Surplus of Subsidiary Companies

(a) General Reserve

B Ltd. C Ltd.

31.12.2008 3,00,000 31.12.2008 2,00,000

1 1 01.01.2007

Rs.2,50,000

Capital

Tfr in 2007

NIL

Capital

1 Tfr in 2008

Rs.50,000

Revenue

01.01.2007

Rs.2,00,000

Capital

Tfr in 2007

NIL

Capital

Tfr in 2008

NIL

Revenue

(b) Profi t & Loss Account C Ltd.

Balance as given on 31.12.2008 Rs. 1,20,000

1.1.2007

Rs.20,000

Capital

Profi t for 2007

Rs. 1,00,000

Capital

Dividend for 2007

Rs.8 Lacs x 10% = (Rs.80,000)

Capital

Profi t for 2008

(b/f) Rs.80,000

Revenue

Total Capital Profi t: 20,000 + 1,00,000 - 80,000 = Rs.40,000; Total Revenue Profi t: Rs.80,000

285

Advanced Financial Accounting & Reporting

B Ltd.

Balance as given on 31.12.2008 1,80,000

Less: Pre-Acquisition Dividend from C Ltd. (80,000 x 5 / 8) 50,000

Adjusted Balance 1,30,000

01.01.2007

Rs.40,000

Capital

Profi t for 2007

Rs. 1,00,000

Dividend for 2007

Rs.10 Lacs x 12% = (Rs. 1,20,000)

Profi t for 2008

Rs.1,10,000

Revenue (bal. fi gure)

1.1.2007 to

1.7.2007

Rs.50,000

Capital

1.7.2007 to

31.12.2007

Rs.50,000

Capital

From Opg

Bal.

(bal. fi gure)

(Rs.20,000)

Capital

From Profi t

for 1.1.07 to

1.7.07

(Rs.50,000)

Capital

From Profi t

1.1.07 to

31.12.07

(Rs.50,000)

Revenue

Total Capital Profi t: 40,000 + 50,000 - 20,000 - 50,000 = Rs.20,000;

Total Revenue Profi t: 1,10,000 + 50,000 - 50,000 = Rs.1,10,000

Note: • It has been assumed that the Profi ts arose evenly throughout the year.

• Dividend declared for 2007 = Rs. 1,20,000, but profi t for 2007 is Rs. 1,00,000. So it is presumed that Rs.20,000

declared from opening reserve.

(d) Preliminary Expenses: C Ltd. = (Rs.20,000) – Capital Profi t

3. Analysis of Net Worth of Subsidiary Companies

Particulars

Indirect Method Direct Method

A Ltd.

80% 12.5%

B Ltd. 62.5% C Ltd.

Minority Interest A Ltd.

80% 12.5%

B Ltd. 62.5% C Ltd

Minority Interest

B Ltd. CLtd Bharat India

20% 25% 20% 25%

(a) Share Capital

Less: Minority Interest

10,00,000

(2,00,000)

8,00,000

(2,00,000)

2,00,000 2,00,000 10,00,000

(2,00,000)

8,00,000

(2,00,000)

2,00,000 2,00,000

8,00,000 6,00,000 8,00,000 6,00,000

(b) Capital Profi ts

Securities Premium

General Reserve

Profi t & Loss Account

Preliminary Expenses

Transfer of B’s Share in

C (62.50% x Rs. 2,20,000)

Less: Minority Interest

50,000

2,50,000

20,000

–

2,00,000

40,000

(20,000)

91,500 55,000

50,000

2,50,000

20,000

2,00,000

40,000

(20,000)

64.000 55,000

3,20,000

1,37,500

2,20,000

(1,37,500)

3,20,000 2,20,000

NOT

APPLICABLE

4,57,500

91,500)

82,500

(55,000)

3,20,000

(64,000)

2,20,000

(55,000)

3,66,000 27,500 2,56,000 1,65,000

Less: Minority Interest

50,000

10,000

NIL

NIL 10,000

32,000

NIL

20,000

50,000

10,000

NIL

NIL 10,000

32,000

NIL

20,000

40,000 NIL 40,000 NIL

(d) Revenue Profi t

Transfer of B’s Share in

C (62.50% x Rs. 80,000)

Less: Minority Interest

1,10,000

50,000

80,000

(50,000)

1,10,000

50,000

80,000

(50,000)

1,60,000

(32,000)

30,000

(20,000)

1,60,000

(32,000)

30,000

(20,000)

1,28,000 10,000 1,28,000 10,000

Minority Interest Before Adjustment

Less: Stock Reserve (28,000 - 20,000) * 20%

3,33,500

1,600

2,75,000

–

3,06,000

1,600

2,75,000

–

Minority Interest after Stock Reserve 3,31,900 2,75,000 3,04,400 2,75,000

Note: In B Ltd. as the entire stock was immediately sold, no Stock Reserve arises.

25%

20%

25%

Group Financial Statements

286

4. Cost of Control

Particulars Indirect Method Direct Method

Cost of Investment: A Ltd. in B Ltd.

A Ltd. in C Ltd.

B Ltd. in C Ltd.

11,00,000

1,16,000

5,80,000

11,00,000

1,16,000

5.80.000

Total Cost of Investment

Less: Pre acquisition Dividend

From B to A [20,000 + 50,000) x 80%]

From C to A [80,000 x 12.5%]

From C to B [80,000 x 62.5%]

56,000

10,000

50,000

17,96,000

(1,16,000)

56,000

10,000

50,000

17,96,000

(1,16,000)

Adjusted Cost of Investment

Less: (a) Nominal Value of Capital: B Ltd.

C Ltd.

(b) Share in Capital Profi t of: B Ltd.

C Ltd.

8,00,000

6,00,000

16,80,000

(14,00,000)

(3,93,500)

8,00,000

6,00,000

16,80,000

(14,00,000)

(4,21,000)

3,66,000

27,500

2,56,000

1,65,000

Capital Reserve on Consolidation (1,13,500) (1,41,000)

5. Consolidation of Reserves & Surplus

Particulars

Indirect Method Direct Method

Gen. Res. P&L A/c Gen. Res. P&L A/c

Balance as per Balance Sheet of A Ltd.

Less: Pre Acquisition Dividend

From B to A [20,000 + 50,000) x 80%]

From C to A [80,000 x 12.5%]

6,00,000

––

2,50,000

(56,000)

(10,000)

6,00,000

––

2,50,000

(56,000)

(10,000)

Adjusted Balance

Add: Share of Revenue Reserves/Profi ts from: B Ltd.

C Ltd.

6,00,000

40,000

NIL

1,84,000

1,28,000

10,000

6,00,000

40,000

NIL

1,84,000

1,28,000

10,000

Consolidated Balance

Less: Stock Reserve (28000 - 25000) + (25000 - 20000) x 80%

6,40,000 3,22,000

(6,400)

6,40,000 3,22,000

(6,400)

Adjusted Consolidated Balance 6,40,000 3,15,600 6,40,000 3,15,600

6. Consolidated Balance Sheet of A Ltd. anc its Subsidiaries B Ltd. and C Ltd. as at 31.12.2008

Liabilities Indirect Direct Assets Indirect Direct

Equity Share Capital 20,00,000 20,00,000 Fixed Assets 33,70,000 33,70,000

Reserves & Surplus (1500 + 900 + 970)

Securities Premium 2,00,000 2,00,000

General Reserve 6,40,000 6,40,000 Invts: (1300000 + 580000 84,000 84,000

Profi t & Loss Account 3,15,600 3,15,600 -1796000 Inter Co)

C/R on Consolidation 1,13,500 1,41,000 Current Assets (450000 +

Minority Interest 300000 + 300000 - 8000 10,62,000 10,62,000

(a) B Ltd. 3,31,900 3,04,400 (Stock Res.) + 20000

(b) C Ltd. 2,75,000 2,75,000 (Chq in Transit)

Current Liabilities:

(300 + 200 + 140) 6,40,000 6,40,000

Total 45,16,000 45,16,000 Total 45,16,000 45,16,000

Notes:

• Stock Reserve i.e. unrealized profi ts on Closing Stock have been eliminated to the extent of Holding Company’s Share

in P& L and balance in Minority Interest.

• Inter Company Owings have been eliminated in full.

287

Advanced Financial Accounting & Reporting

Illustration 26: Chain Holding - Direct & Indirect Method

Balance Sheets of 3 Companies A Ltd., B Ltd., and C Ltd. as at 31.12.2008 is given below -

Liabilities A Ltd. B Ltd. C Ltd. Assets A Ltd. B Ltd. C Ltd.

Share Capital 2,50,000 2,00,000 1,20,000 Fixed Assets 56,000 1,10,000 75,000

Reserves 36,000 20,000 14,400 Investments at Cost

Profi t & Loss A/c 32,000 4,000 10,200 - In Shares of B Ltd. 1,70,000 — —

Chand Balance 6,600 — — - In Shares of C Ltd. 36,000 1,06,000 —

Arun Balance — 14,000 — Stock in Trade 24,000 — —

Sundry Creditors 14,000 10,000 — Sundry Debtors

B Ltd.

36,600

16,000

32,000 63,000

A Ltd. — — 6,600

Total 3,38,600 2,48,000 1,44,600 Total 3,38,600 2,48,000 1,44,600

Additional Information:

1. Share Capital of all the Companies is divided in to Shares of Rs.100 each.

2. A Ltd. held 1,500 Shares of B Ltd. and 300 Shares of C Ltd., B Ltd. held 800 shares of C Ltd.

3. All investments were made on 30.06.2008.

4. On 01.01.2008, B Ltd.’s books showed a Reserves Balance of Rs.18,000 and Profi t & Loss Account stood at

Rs.2,000 (Cr.). On the same date, books of C Ltd. refl ected the following balances: Reserves - Rs.12,000; and

P&L A/c - Rs.1,680 (Cr.).

5. Dividends have not been declared by any Company during the year, nor are any proposed.

6. B Ltd. sold goods costing Rs.8,000 to A Ltd. at the price of Rs.8,800. These goods were still unsold on

31.12.2008.

7. A Ltd. remitted Rs.2,000 to B Ltd. on 30.12.2008, but the same was not received by B Ltd. as at the Balance

Sheet date.

Prepare Consolidated Balance Sheet of the Group.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = A Ltd.

Subsidiary = B Ltd.

Sub-Subsidiary = C Ltd.

Acquisition: 30.06.2008

Consolidation: 31.12.2008 a. Holding Co.

b. Minority Int.

B Ltd.

(A Ltd.) 75%

–

25%

C Ltd.

(A Ltd.) 25%

(B Ltd.) 67%

Note: Shareholding Pattern is as under-

Company Held by A Ltd. Held by B Ltd. Total Holdings Minority Interest Total No. of Shares

Balu 1,500 (75%) N.A. 1,500 (75.00%) 500 (25.00%) 2,000 (100%)

Chand 300 (25%) 800 (66.67%) 1,100 (91.67%) 100 ( 8.33%) 1,200 (100%)

2. Analysis of Reserves and Surplus of Subsidiory Companies

(a) General Reserve

B Ltd. C Ltd.

On B/s date Rs.20,000 On B/s date Rs.14,400

1.1.08 Rs.18,000

Prev B/s Capital

Tfr in 2008 Rs.2,000 1.1.08 Rs.12,000

Prev B/s Capital

Tfr in 2007 Rs.2,400

1.1.08 to DOA

Rs.1,000

Capital

DOAtoDOC

Rs.1,000

Revenue

1.1.08 to DOA

Rs.1,200

Capital

DOAtoDOC

Rs.1,200

Revenue

Capital Profi t-Rs.19,000; Revenue Reserve-Rs. 1,000 Capital Profi t-Rs.13,200; Revenue Reserve -Rs.1,200

Group Financial Statements

288

(b) Profi t & Loss Account

B Ltd. C Ltd.

On B/s date Rs.20,000 On B/s date Rs.10,200

1.1.08 Rs.2,000

Prev B/s Capital

Pft in 2008 Rs.2,000 1.1.08 Rs.1,600

Prev B/s Capital

Pft in 2008 Rs.8,520

1.1.08 to DOA

Rs.1,000

Capital

DOA to DOC

Rs.1,000

Revenue

1.1.08 to DOA

Rs.4,260

Capital

DOA to DOC

Rs.4,260

Revenue

Capital Profi t-Rs.3,000; Revenue Reserve-Rs.1,000 Capital Profi t-Rs.5,940; Revenue Reserve - Rs.4,260

Note: It has been assumed that the Profi ts arose evenly throughout the year.

3. Analysis of Net Worth of Subsidiary Companies

Particulars

Indirect Method Direct Method

A Ltd.

75% 25%

B Ltd. 66.67% C Ltd.

Minority Interest A Ltd.

75% 25%

B Ltd. 66.67% C Ltd.

Minority Interest

B Ltd. C Ltd. B Ltd. C Ltd.

25% 8.33% 25% 8.33%

(a) Share Capital

Less: Minority Interest

2,00,000

(50,000)

1,20,000

(10,000) 50,000 10,000

2,00,000

(50,000)

1,20,000

(10,000) 50,000 10,000

1,50,000 1,10,000 1,50,000 1,10,000

(b) Capital Profi ts

General Reserve

Profi t & Loss Account

Transfer of B Ltd.’s Share in

C Ltd. (66.67% x Rs. 19,140)

Less: Minority Interest

19,000

3,000

13,200

5,940

8,690

450

960

1,595

100

355

19,000

3,000

13,200

5,940

5,500

450

960

1,595

100

355

22,000

12,760

19,140

(12,760)

22,000 19,140

NOT

APPLICABLE

34,760

(8,690)

6,380

(1,595)

22,000

(5,500)

19,140

(1,595)

26,070 4,785 16,500 17,545

Transfer of B Ltd.’s Share in

C Ltd. (66.67% x Rs. 1,200)

Less: Minority Interest

1,000

800

1,200

(800)

1,000

800

1,200

(800)

1,800

(450)

400

(100)

1,800

(450)

400

(100)

1,350 300 1,350 300

(d) Revenue Profi ts

Transfer of B Ltd.’s Share in

C Ltd. (66.67% x Rs. 4,260)

Less: Minority Interest

1,000

2,840

4,260

(2,840)

1,000

2,840

4,260

(2,840)

3,840

(960)

1,420

(355)

3,840

(960)

1,420

(355)

2,880 1,065 2,880 1,065

Minority Interest

Less: Stock Reserve

(8,800 - 8,000) * 25%

60,100

200

12,050 56,910

200

12,050

Minority Interest to CBS 59,900 12,050 56,710 12,050

8.33%

25%

8.33%

289

Advanced Financial Accounting & Reporting

4. Cost of Control

Particulars Indirect Method Direct Method

Cost of Investment: A Ltd. in B Ltd.

A Ltd. in C Ltd.

B Ltd. in C Ltd.

1,70,000

36,000

1,06,000

1,70,000

36,000

1,06,000

Total Cost of Investment

Less: (a) Nominal Value of Share Capital: B Ltd.

C Ltd.

(b) Arun’s Share in Capital Profi t of: B Ltd.

C Ltd.

1,50,000

1,10,000

3,12,000

(2,60,000)

(30,855)

1,50,000

1,10,000

3,12,000

(2,60,000)

(34,045)

26,070

4,785

16,500

17,545

Goodwill on Consolidation 21,145 17,955

5. Consolidation of Reserves & Surplus

Particulars

Indirect Method Direct Method

Gen. Res. P&L A/c Gen. Res. P&L A/c

Balance as per Balance Sheet of A Ltd.

Add: Share of Revenue Reserves/Profi ts from B Ltd.

C Ltd.

36,000

1,350

300

32,000

2,880

1,065

36,000

1,350

300

32,000

2,880

1,065

Consolidated Balance

Less: Stock Reserve (Rs.8,800 - Rs. 8,000) x 75%

37,650 35,945

(600)

37,650 35,945

(600)

Adjested Consolidated Balance 37,650 35,345 37,650 35,345

6. Consolidated Balance Sheet of A Ltd. and its subsidiaries B Ltd. and C Ltd. as at 31.12.2008

Liabilities Indirect Direct Assets Indirect Direct

Equity Share Capital 2,50,000 2,50,000 Fixed Assets

Reserves & Surplus Goodwill on Consolidation 21,145 17,955

General Reserve 37,650 37,650 Other FA (56 + 110 + 75) 2,41,000 2,41,000

Profi t & Loss Account 35,345 35,345 Current Assets

Minority Interest Stock (24,000 - 800 Resve) 23,200 23,200

(a) B Ltd. 59,900 56,710 Drs (36600 + 32000 + 63000) 1,31,600 1,31,600

(b) C Ltd. 12,050 12,050 Cheque in Transit 2,000 2,000

Current Liabilities:

Crs (14,000 + 10,000) 24,000 24,000

Total 4,18,945 4,15,755 Total 4,18,945 4,15,755

Notes:

• Stock Reserve i.e. unrealized profi ts on Closing Stock have been eliminated to the extent of holding company’s share in

P & L A/c and balance adjusted towards Minority Interest.

• Inter Company Owings have been eliminated in full.

Illustration 27: Triangle Holding - Trfr of Shares by Holding Company to its Subsidiary

K Ltd. acquired 15,000 Equity Shares out of 20,000 Equity Shares of Rs.10 each of G Ltd. on 01.04.2008 for

Rs.2,40,000. As on 01.07.2008, it transferred 5,000 Shares to its Subsidiary M Ltd. for Rs.90,000. Balance Sheets of

K Ltd., M Ltd., and G Ltd. as on 31.03.2009 were as follows - (Rs.000’s)

Group Financial Statements

290

Liabilities K Ltd. M Ltd. G Ltd. Assets K Ltd. M Ltd. G Ltd.

Share Capital (Rs 10 each) 1,000 500 200 Fixed Assets 1,000 500 300

General Reserve 500 200 40 Investments

Profi t & Loss A/c 100 40 20 - In Sonu Ltd. 400 – –

14% Loans 100 100 100 - In Tinu Ltd. 160 90 –

Sundry Creditors 150 80 40 - Others 100 50 20

Proposed Dividends 200 100 40 Inventories 100 50 50

Debtors 100 200 40

Loan to Sonu Ltd. 100 - -

Loan to Tinu Ltd. 50 50 -

Cash & Bank 40 80 30

Total 2,050 1,020 440 Total 2,050 1,020 440

K Ltd. acquired 60% shares of M Ltd. on 01.04.2008. As on that date, balances in M Ltd.’s General Reserve and P

& L were Rs.1,00,000 and Rs.10,000 respectively.

As on 01.04.2008, G Ltd.’s books showed General Reserve Rs.10,000 and Profi t and Loss Account Rs.2,000.

Interest on Inter-Corporate Loans within the group has not been accounted for.

Prepare Consolidated Balance Sheet of K Ltd. and its Subsidiary M Ltd. and G Ltd. as on 31.03.2009.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = K Ltd. Acquisitions 1.04.2008 M Ltd. G Ltd.

Subsidiary = M Ltd. Consolidation: 31.03.2009 a. Holding Co. (K Ltd.) 60% (K Ltd.) 50%

Sub-Subsidiary = G Ltd. – (M Ltd.) 25%

b. Minority Int. 40% 25%

Note: Shareholding Pattern is as under–

Company Held by K Ltd. Held by M Ltd. Total Holdings Minority Interest Total number of shares

Sonu Ltd. 30,000 (60%) – 30,000 (60%) 20,000 (40%) 50,000

Tinu Ltd. 10,000 (50%) 5,000 (25%) 15,000 (75%) 5,000 (25%) 20,000

3. Analysis of Reserves and Surplus of G Ltd.

(a) General Reserve

Balance on 31.3.2009 Rs. 40,000

Balance on 1.4.2008 10,000 Transfer during 2008-09 Rs.30,000

(Acquisition date) Capital Profi t (bal. fi g) Revenue Reserve

(b) Profi t & Loss Account

Balance on 31.03.2009 Rs. 20,000

Less: Loan Interest (Rs. 1,00,000 x 14%) Rs. 14,000

Corrected Balance Rs. 6,000

Balance on 1.4.2008 Rs.2,000 Profi t for 2008-09 Rs.4,000

(Acquisition date) Capital Profi ts (balancing fi gure) Revenue Profi ts

291

Advanced Financial Accounting & Reporting

4. Analysis of Reserves & Surplus of M Ltd.

(a) General Reserve

Balance on 31.3.2009 Rs.2,00,000

Balance on 1.4.2008 1,00,000 Transfer during 2008-09 1,00,000

(Acquisition date) Capital Profi t (bal. fi g) Revenue Reserve

(b) Profi t & Loss Account

Balance on 31.03.2009 Rs. 20,000

Add: Dividend from G Ltd. (40,000 x 25% x 9/12) Rs. 7,500

Add: Loan Interest receiced from G Ltd. (50,000 x 14%) Rs. 7,000

Less: Loan Interest (Rs. 1,00,000 x 14%) Rs. 14,000

Adjusted Balance Rs. 40,500

Balance on 1.4.2008 Rs.10,000 Profi t for 2008-09 Rs.30,500

(Given Acqn Date) Capital Profi t (balancing fi gure) Revenue Profi t

Total Capital Profi ts: Rs. 10,000; Total Revenue Profi ts: Rs.30,500

Note: Proposed Dividend from G Ltd. is considered only to the extent of period of holding by M Ltd. The balance dividend

for 3 months will be reduced from Cost of Investments as it relates to pre-acquisition period.

5. Computation of Minority Interest

Particulars

K Ltd. Minority Interest

60% 50% M Ltd. G Ltd.

M Ltd. 25% G Ltd. 40% 25%

(a) Share Capital

Less: Minority Interest

5,00,000

(2,00,000)

2,00,000

(50,000) 2,00,000 50,000

3,000

7,500

1,000

10,000

3,00,000 1,50,000

(b) Capital Profi ts General Reserve

Profi t & Loss A/c

Transfer of M’s Share in G (12000 x 25% x 9/12)

Less: Minority Interest

1,00,000

10,000

2,000

1,10,000

2,250

12,000

(2,250)

1,12,250

(44,900)

9,750

(3,000) 44,900

42,250

12,500

40,000

67,350 6,750

Transfer of M’s Share in G (30,000 x 25% x 9/12)

Less: Minority Interest

1,00,000

5,625

30,000

(5,625)

1,05,625

(42,250)

24,375

(7,500)

(d) Revenue Profi ts:

Transfer of M’s Share in G (4,000 x 25% x 9/12)

Less: Minority Interest

63,375 16,875

30,500

750

4,000

(750)

31,250

(12,500)

3,250

(1,000)

(e) Proposed Dividend:

Less: Minority Interest

18,750 2,250

1,00,000

(40,000)

40,000

(10,000)

60,000 30,000

Total Minority Interest 3,39,650 71,500

For G Ltd.: Capital Reserve, Revenue Reserve & Revenue Profi ts are to be considered only from the period of holding of M Ltd.

40%

25%

Group Financial Statements

292

4. Cost of Control

Particulars Rs.

Cost of Investment in Equity Shares K Ltd. in M Ltd.

K Ltd. in G Ltd.

M Ltd. in G Ltd.

4,00,000

1,60,000

90,000

Total Cost of Investment

Less: Dividend out of Pre-acquisition profi ts in M Ltd. (40,000 x 25% x 3/12)

Less: Unrealized Profi t on sale of Investment by K to M

[90,000 - (240000/15,000 x 5,000)

2,500

10,000

6,50,000

12,500

Adjusted Cost of Investment

Less: Nominal Value of Equity Capital: M Ltd.

G Ltd.

Share in Capital Profi t: M Ltd.

G Ltd.

3,00,000

1,50,000

67,350

“6,750

6,37,500

(5,24,100)

Goodwill on Consolidation 1,13,400

5. Consolidation of Reserves and Surplus

Particulars Gen. Res. P&L A/c

Balance as per Balance Sheet of K Ltd.

Add: Proposed Dividends From G Ltd. (Rs.40,000 x 50/100)

From M Ltd. (Rs. 1,00,000 x 60/100)

Add: Interest on Loans [Rs. 1,00,000 to M + Rs.50,000 to G) x 14%]

Add: Share of Revenue Profi ts / Reserves: M Ltd.

G Ltd.

Less: Unrealized Profi t on Sale of Investment to M

5,00,000

63,375

16,875

1,00,000

20,000

60,000

21,000

18,750

2,250

(10,000)

Consolidated Balance 5,80,250 2,12,000

6. Consolidated Balance Sheet of K Ltd. and its subsidiaries M Ltd. & G Ltd. as at 31.03.2009

Liabilities Rs. Assets Rs.

Share Capital: Equity Share Capital

Reserves and Surplus:

General Reserve

Profi t & Loss Account

Minority Interest: (a) M Ltd.

(b) G Ltd.

Loan Funds: (1,00,000 + 1,00,000

+ 1,00,000 - 1,50,000 - 50,000)

Current Liabilities

Creditors (1,50,000 + 80,000 + 40,000)

Proposed Dividend

10,00,000

5,80,250

2,12,000

3,39,650

71,500

1,00,000

2,70,000

2,00,000

Fixed Assets

Goodwill on Consolidation

Others (10,00,000 + 5,00,000 + 3,00,000)

Investments (1,00,000 + 50,000 + 20,000)

Current Assets, Loans & Advances:

Debtors (1,00,000 + 2,00,000 + 40,000)

Inventories (1,00,000 + 50,000 + 50,000)

Cash & Bank (40,000 + 80,000 + 30,000)

1,13,400

18,00,000

1,70,000

3,40,000

2,00,000

1,50,000

Total 27,73,400 Total 27,73,400

Notes:

• Interest on Loan taken from Others (Outsiders) is assumed to have been paid.

• Inter Company Owings have been eliminated in full.

• Under Direct Method, Capital Profi ts in M Ltd. will be Rs.66,000; Minority Interest in M will be Rs.3,38,750 and

Goodwill on Consolidation will be Rs.l,12,500.

293

Advanced Financial Accounting & Reporting

Illustration 28: Chain Holding /Unrealized Profi ts on Upstream Transaction

A Ltd. is a holding Company and B Ltd. and C Ltd. are subsidiaries of A Ltd. Their Balance Sheets as on 31.12.2008

are given below-

Liabilities A Ltd. B Ltd. C Ltd. Assets A Ltd. B Ltd. C Ltd.

Share Capital 1,00,000 1,00,000 60,000 Fixed Assets 20,000 60,000 43,000

Reserves 48,000 10,000 9,000 Investments in:

Profi t & Loss A/c 16,000 12,000 9,000 - Shares of B Ltd. 95,000 — —

C Ltd. Balance 3,000 — — - Shares of C Ltd. 13,000 53,000 —

Sundry Creditors 7,000 5,000 — Stock in Trade 12,000 — —

A Ltd. Balance — 7,000 — B Ltd. Balance 8,000 — —

Sundry Debtors 26,000 21,000 32,000

A Ltd. Balance — — 3,000

Total 1,74,000 1,34,000 78,000 Total 1,74,000 1,34,000 78,000

The following particulars are given:

1. The Share Capital of all Companies is divided into shares of Rs.10 each.

2. A Ltd. held 8,000 shares in B Ltd. and 1,000 shares of C Ltd.

3. B Ltd. held 4,000 shares of C Ltd.

4. All these investments were made on 30.6.2006.

5. On 31.12.2007, the position was as shown below: (Amount in Rs.)

Particulars Reserve P&LA/c Creditors Fixed Assets Stock Debtors

B Ltd.

C Ltd.

8,000

7,500

4,000

3,000

5,000

1,000

60,000

43,000

4,000

35,500

48,000

33,000

6. 10% Dividend is proposed by each Company.

7. The whole of stock in trade of B Ltd. as on 30.06.2008 (Rs.4,000) was later sold to A Ltd. for Rs.4,400 and

remained unsold by A Ltd. as on 31.12.2008.

8. Cash in transit from B Ltd. to A Ltd. was Rs.1,000 as at the close of business. You are required to prepare the

Consolidated Balance Sheet of the group as at 31.12.2008.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = A Ltd. Acquisition: 30.06.2007 B Ltd. C Ltd.

Subsidiary = B Ltd. Consolidation: 31.12.2008 a. Holding Co. (A) 80% (A) 16.67%

Sub–Subsidiary = C Ltd. – (B) 66.66%

b. Minority Int. 20% 16.67%

Note: The Shareholding Pattern is as under

Company Held by A Held by B Total Holdings Minority Interest Total No. of Shares

B Ltd. 8,000 (80%) N. A. 8,000 (80%) 2,000 (20%) 10,000 (100%)

C Ltd. 1,000 (16.67%) 4,000 (66.67%) 5,000 (83.33%) 1,000 (16.67%) 6,000 (100%)

Group Financial Statements

294

2. Analysis of Reserves and Surplus of Subsidiary Companies

(a) General Reserve

B Ltd. C Ltd.

Balance on 31.12.2008 Rs. 10,000 31.12.2006 Rs. 9,000

1.1.08 Prev. B/s

8,000 Capital

Tfr in 2008 Rs.2,000 1.1.08 Prev. B/s

7,000 Capital

Tfr in 2008 Rs.1,500

1.1.06 to DOA

Rs.1,000

Capital

DOA to DOC

Rs.1,000

Revenue

1.1.08 to DOA

Rs.750

Capital

DOA to DOC

Rs.750

Revenue

Capital Profi t - Rs.9,000; Revenue Reserve - Rs.1,000 Capital Profi t - Rs.8,250; Revenue Reserve - Rs.750

(b) Profi t & Loss Account

B Ltd. C Ltd.

Balance on 31.12.2008 12,000

Less: Proposed Dividend (10%* 100000) (10,000)

Add: Dividend from C Ltd. 2,000

(6/12 x 6,000 x 66.67%)2,000

Adjusted Balance 4,000

Balance on 31.12.2008 9,000

Less: Proposed Dividend (10x60,000) 6,000

Adjusted Balance 3,000

1.1.08 Prev. B/s

4,000 Capital

Profi t in 2008 NIL 1.1.08 Prev. B/s

3,000 Capital

Profi t in 2008

NIL Revenue

3. Analysis of Net Worth of Subsidiary Companies (Indirect Method)

Particulars

A Ltd. Minority Interest

80% 16.67% B Ltd. C Ltd.

B 66,67% C 20% 16.67%

(a) Share Capital

Less: Minority Interest

Holding Co’s Share

1,00,000

(20,000)

60,000

(10.000) 20,000

4,100

300

–

2,000

10,000

1,875

125

–

1,000

80,000 50,000

(b) Capital Profi ts

General Reserve

Profi t & Loss Account

Trfr. B’s share in C (66.67% x Rs.l 1,250)

Less: Minority Interest

Holding Co’s Share

9,000

4,000

8,250

3,000

13,000

7.500

11,250

(7,500)

20,500

(4,100)

3,750

(1,875)

16,400 1,875

Trfr. B’s share in C (66.67% x Rs.750)

Less: Minority Interest

Holding Co.’s Share

1,000

500

750

(500)

1,500

(300)

250

(125)

1,200 125

(d) Revenue Profi ts NIL NIL

(e) Proposed Dividend

Less: Minority Interest

Holding Co’s Share

10,000

(2,000)

6,000

(1,000)

8,000 5,000

Minority Interest Before Stock Reserve Adjustment

Less: Share of Minority Interest of B in

Unrealized Profi ts (4,400 - 4,000) x 20%

26,400

(80)

13,000

–

Minority Interest 26,320 13,000

20%

16.67%

20%

295

Advanced Financial Accounting & Reporting

4. Cost of Control

Particulars Rs.

Cost of Investment: A Ltd. in B Ltd.

A Ltd. in C Ltd.

B Ltd. in C Ltd.

95,000

13,000

53,000 1,61,000

Less: Dividend out of Pre-acqn. Pfts (For 01.01.2005 to 30.06.2005)

From B Ltd. (8000 Shares x Rs.10 x 10% x 6/12]

From C Ltd. (5000 Shares x Rs.10 x 10% x 6/12)

4,000

2,500 6,500

Adjusted Cost of Investment

Less: (a) Nominal Value in Share Capital of: B Ltd.

C Ltd.

(b) Share in Capital Proffi ts B Ltd.

C Ltd.

80,000

50,000

1,54,500

(1,30,000)

(18,275)

16,400

1,875

Goodwill on Consolidation 6,225

5. Consolidation of Reserves and Surplus

Particulars Gen. Res. P & L A/c

Balance as per Balance Sheet of A Ltd.

Less: Proposed Dividend (Rs. 1,00,000 x 10%)

Add: Share of Proposed Dividend (01.07.2008 to 31.12.2008) from

B (8000 Shares x Rs.10 x 10% x 6/12)

C (1000 Shares x Rs.10 x 10% x 6/12)

48,000

–

––

16,000

(10,000)

4,000

500

Adjusted Balance

Add: Share of Revenue from B Ltd.

C Ltd.

48,000

1,200

125

10,500

NIL

Consolidated Balance

Less: Stock Reserve [Rs.4,400 - Rs.4,000] x 80%

49,325

–

10,500

(320)

Corrected Consolidated Balance 49,325 10,180

6. Consolidated Balance Sheet of A Ltd. and its Subsidiaries B and C as at 31.12.2008

Liabilities Rs. Assets Rs.

Share Capital: Equity Capital 1,00,000 Fixed Assets:

Reserves and Surplus: Goodwill on Consolidation 6,225

General Reserve 49,325 Other Assets (20,000 + 60,000 + 43,000) 1,23,000

Profi t & Loss Account 10,180 Current Assets

Minority Interest: (a) B 26,320 Stock in Trade (12,000 - 400 Stock Reserve) 11,600

(b) C 13,000 Sundry Debtors [26,000 + 21,000 + 32,000] 79,000

Current Liabilities: Cash-in-transit (8,000 + 3,000 - 7,000 - 3,000) 1,000

Sundry Creditors (7,000 + 5,000) 12,000

Intercompany Borrowings NIL

Proposed Dividend 10,000

Total 2,20,825 Total 2,20,825

Note: Under Direct Method,

(a) Capital Profi t will be: (1) B Ltd. - Rs. 10,400; & (2) C Ltd. - Rs.9,375

(b) Minority Interest will be: (1) B Ltd. - Rs.24,820; & (2) C Ltd. - Rs. 13,000.

Group Financial Statements

296

Illustration 29: Chain Holdings - Multiple Subsidiaries

Following are the Balance Sheets of R Ltd., S Ltd, T Ltd. and U Ltd. as at 31.12.2008 -

Particulars R Ltd. S Ltd. T Ltd. U Ltd.

Liabilities

Share Capital (Rs.100 Face Value) 5,00,000 4,00,000 2,00,000 6,00,000

General Reserve 2,00,000 40,000 25,000 1,00,000

Profi t & Luss Account 1,00,000 40,000 25,000 32,000

Sundry Creditors 30,000 10,000 5,000 8,000

Total 8,30,000 4,90,000 2,55,000 7,40,000

Assets

Investments:

3,000 Shares in S Ltd. 3,50,000 – – –

1,000 Shares in T Ltd. 1,10,000 – – –

500 Shares in T Ltd. – 50,000 – –

Shares in U Ltd. at Rs.120 3,60,000 1,80,000 60,000 –

Fixed Assets – 2,00,000 1,50,000 7,00,000

Current Assets 10,000 60,000 45,000 40,000

Total 8,30,000 4,90,000 2,55,000 7,40,000

Balance in General Reserve A/c and P & L Account, when shares were purchased in different Companies were -

Particulars R Ltd. S Ltd. T Ltd. U Ltd.

General Reserve Account

Profi t & Loss Account

1,00,000

60,000

20,000

10,000

5,000

60,000

6,000

Prepare the Consolidated Balance Sheet of the Group as at 31.12.2008.

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = R Ltd.

Subsidiary = S Ltd.

Sub-Subsidiary 1 = T Ltd.

Sub-Subsidiary 2 = U Ltd.

Acquisition: Various dates

Consolidation 31.12.2008 a. S

b. T

c. U

Holding

(R)75%

(R)50%+(S)25%

(R)50%+(S)25%+(T)8.3%

Minority

25%

16.7%

Note: The Slareholding Pattern is as under -

Company Held by R Held by S Held by T

Total

Holdings

Minority

Interest

Total

S Ltd. 3,000 (75%) N.A. — 3,000

(75%)

1,000

(25%)

4,000

(100%)

T Ltd. 1,000(50%) 5,000 (25%) N.A. 1,500

(75%)

500

(25%)

2,000

(100%)

U Ltd. 3.6 Lacs/120 =

3,000 (50%)

1.8 Lacs/ 120 =

1,500(25%)

0.6 Lacs/ 120 =

5.00 (8.33%)

5,000

(83.33%)

1,000

(16.67%)

6,000

(100%)

2. Analysis of Reserves & Surplus of Subsidiary Companies

(a) Saran Ltd

General Reserve Profi t & Loss Account

Balance on 31.12.08 40,000 Balance on 31.12.08 40,000

DOA 20,000

Capital

Transfer between

DOA & DOC

20,000

Revenue

DOA 20,000

Capital

Profi t between

DOA & DOC

20,000

Revenue

297

Advanced Financial Accounting & Reporting

(b) T Ltd.

General Reserve Profi t & Loss Account

Balance on 31.12.08 25,000 Balance on 31.12.08 25,000

DOA 10,000

Capital

Transfer between

DOA & DOC

15,000

Revenue

DOA 5,000

Capital

Profi t between

DOA & DOC

20,000

Revenue

General Reserve Profi t & Loss Account

Balance on 31.12.08 1,00,000 Balance on 31.12.08 32,000

DOA 60,000

Capital

Transfer between

DOA & DOC

40,000

Revenue

DOA 6,000

Capital

Profi t between

DOA & DOC

26,000

Revenue

3. Analysis of Net Worth of Subsidiary Companies

Particulars

Share of R Minority Interest

75% 50% 50% S T U

S T U

25% 25% 16.67%

(a) Share Capital

Less: Minority Interest

Holding Co.’s Share

4,00,000

(1,00,000)

2,00,000

(50,000)

6,00,000

(1,00,000) 1,00,000

15,406

8,646

50,000

5,125

4,583

1,22,002

11,002

4,445

3,00,000 1,50,000 5,00,000

(b) Capital Profi ts

General Reserve

Profi t & Loss Account

Trfr. T ’s share in U

(6,60,000 x 8.33%)

Trfr. Saran’s share in U

(6,60,000 x 25%)

Trfr. Saran’s share in T

(20,498 x 25%)

Less: Minority Interest

Holding Co.’s Share

20,000

10,000

5,000

60,000

6,000

40,000

NIL

16,500

15,000

5,498

NIL

66,000

(5,498)

(16,500)

56,500

5,125

20,498

(5,125)

44,002

NIL

61,625

(15,406)

15,373

(5,125)

44,002

(11,002)

46,219 10,248 33,000

General Reserve

Trfr. T’s share in U

(40,000 x 8.33%)

Trfr. S’s share in U

(40,000 x 25%)

Trfr. S’s share in T

(18,333 x 25%)

Less: Minority Interest

Holding Co.’s Share

20,000

NIL

10,000

15,000

3,333

NIL

40,000

(3,333)

(10,000)

30,000

4,583

18,333

(4,583)

26,667

NIL

34,583

(8,646)

13,750

(4,583)

26,667

(6,667)

25,937 9,167 20,000

25%

25% 8.33%

Group Financial Statements

298

(d) Revenue Profi ts

Profi t & Loss Account 20,000 20,000 26,000

Trfr. T’s share in U

(2,60,000 x 8.33%)

NIL 2,167 (2,167)

Trfr. S’s share in U

(2,60,000 x 25%)

6,500 NIL (65,000)

26,500 22,167 1,733

Trfr. S’s share in T 5,542 (5,542) NIL

(2,21,667x25%)

32,042 16,625 17,333

Less: Minority Interest

Holding Co’s Share

(8,010) (5,547) (4,333) 8,010 5,542 4,333

24,032 11,083 13,000

Minority Interest 1,32,062 65,250 1,41,782

4. Cost of Control

Particulars Rs.

Cost of Investments: R Ltd. in S Ltd.

R Ltd. in T Ltd.

R Ltd. in U Ltd.

S Ltd. in T Ltd.

S Ltd. in U Ltd.

T Ltd. in U Ltd.

3,50,000

1,10,000

3,60,000

50,000

1,80,000

60,000 11,10,000

(9,50,000)

(89,467)

Less: (a) Paid up Value of Share Capital - S Ltd.

- T Ltd.

- U Ltd.

(b) Share in Capital Profi ts of - S Ltd.

- T Ltd.

- U Ltd.

3,00,000

1,50,000

5,00,000

46,218

10,249

33,000

Goodwill on Consolidation 70,533

5. Consolidation of Reserves and Surplus

Particulars Gen. Res. P & L A/c

Balance as per Balance Sheet of R Ltd.

Add: Share of Revenue from - S Ltd.

- T Ltd.

- U Ltd.

2,00,000

25,938

9,167

20,000

1,00,000

24,031

11,083

13,000

Consolidated Balance 2,55,105 1,48,114

6. Consolidated Balance Sheet of Rajan and its subsidiaries Saran, Tripti and Upanya as at 31.12.2008

Liabilities Rs. Assets Rs.

Share Capital: Equity Capital 5,00,000 Fixed Assets:

Reserves & Surplus: P & L A/c 2,55,105 Goodwill on Consolidation 70,533

General Res. 1,48,114 Other Assets [NIL + 20,00 + 15,00 + 70,00] 10,50,000

Minority Interest: S Ltd. 1,32,062 Current Assets [1,00 + 6,00 + 4,50 + 4,00] 1,55,000

T Ltd. 65,250

U Ltd. 1,22,002

Curr. Liabs.: [3,00 + 1,00 + 50 + 80] 53,000

Total 12,75,533 Total 12,75,533

Note: Under Direct Method -

(a) Capital Profi t will be (1) S - Rs.3,00,000; (2) T - Rs. 1,12,500; (3) U - Rs.5,50,000.

(b) Minority Interest will be (1) S - Rs.12,66,562; (2) T - Rs.6,38,750; (3) U - Rs. 12,00,000.

299

Advanced Financial Accounting & Reporting

3.4 Preparation of Group Cash Flow Statement:

The actual cash paid for the subsidiary is shown under the heading ‘Acquisitions and Disposals’. It is

possible that the purchase consideration will include other forms of payments such as the issue of shares

or loan stock and there is no cash fl ow effect in these cases.

In exchange for the purchase consideration, the group acquires the individual net assets of the subsidiary

and goodwill is recognized on acquisition.

The net assets in the closing consolidated Balance Sheet will include those of the newly acquired subsidiary.

The preparation of the group cash fl ow statement must recognize that the movement from opening to

closing positions is increased in party by the net assets of the new subsidiary and the amounts relating to

that subsidiary are therefore excluded from the cash fl ow statement.

Foe example, additions to fi xed assets are represented by purchases during the year plus fi xed assets of

the acquired subsidiary. This is broken down as follows:

Opening + cash purchases + fi xed assets of – disposals- depreciation=closing

NBV for additions acquired subsidiary NBV

Only cash purchase for additions are included in the cash fl ow statement under ‘inventive activities’.

Problem:

A Ltd. acquires 80% of the shares of B Ltd. on 31st March 19x3. The fair values of B Ltd. assets at that

date are

Rs in ‘000

Tangible fixed assets 60

Stocks 20

Cash 10

The purchase consideration consists of 50,000 at Re.1 ordinary shares valued at par and Rs.50, 000 cash.

The summary consolidated Balance Sheet as at 31st December 19x2 and 19x3 the Profi t and Loss accounts

for the year are as follows:

Group Financial Statements

300

3.5 Statement of Cash Flows

“The information provided in a statement of cash fl ows, if used with related disclosures and information

in the other fi nancial statements, should help investors, creditors, and others to (a) assess the enterprise’s

ability to generate positive future net cash fl ows; (b) assess the enterprise’s ability to meet its obligations,

its ability to pay dividends, and its needs for external fi nancing; (c) assess the reasons for differences

between net income and associated cash receipts and payments; and (d) assess the effects on an enterprise’s

fi nancial position of both its cash and non-cash investing and fi nancing transactions during the period.” -

SFAS 95 Statement of Cash Flows, Financial Accounting Standards Board, US

LEARNING OBJECTIVES

After learning this Chapter, you will be able to understand that—

• When a company earns profit that may not be available in cash. Cash profit and accounting profit are

different.

• What is the meaning of ‘cash and cash equivalent’?

• How to classify cash flow from operational activities, financing activities and investment activities?

• How to reconcile cash balance of a company? and

Importance of Cash fl ows

Cash fl ows are crucial to business decisions. Cash is invested in the business and the rationality of such

investment is evaluated taking into account the future cash fl ows it is expected to generate. Economic

value of an asset is derived on the basis of its ability to generate future cash fl ows. Economic value of an

asset is given by the present value of future cash fl ows expected to be derived from the asset.

Profi t is an accounting concept. Profi t is derived on accrual assumption. Profi t and cash fl ows from

operational activities are not the same. Dividend decision is taken on the basis of profi t, although it is

to be paid in cash. Similarly, debt servicing capacity of a company is determined on the basis of cash

fl ows from operations before interest. Ploughing back of profi t is a much talked about source of fi nancing

modernisation, expansion and diversifi cation. Unless retained profi t is supported by cash, ploughing back

is not possible. Thus cash fl ows analysis is an important basis for making several management decisions.

Meaning of Cash and Cash Equivalent

A cash fl ow statement explains the reasons for change in the cash and cash equivalent between two fi nancial

statement dates. Before we introduce the technique of cash fl ow analysis, let us learn the meaning of the

term ‘cash and cash equivalent’.

Cash means cash in hand and balance of foreign currency. Cash equivalent implies bank balance and

other risk-free short term investments, and advances which are readily encashable. Cash equivalent

means short term highly liquid investments that are readily convertible into known amounts of cash and

which are subject to an insignifi cant risk of changes in value. An investment of short maturity, say three

months or less from the date of acquisition is generally considered as cash equivalent. Equity investments

are not considered as cash equivalent because of high market risk. Investments in call money market,

money market mutual funds, repo transactions, badla transactions, etc., are usually classifi ed as cash

equivalents.

301

Advanced Financial Accounting & Reporting

Types of Cash flow

Cash Flow Statement explains cash movements under three different heads, namely

• Cash flow from operating activities;

• Cash flow from investing activities;

• Cash flow from financing activities.

Sum of these three types of cash fl ow refl ects net increase or decrease of cash and cash equivalents.

Operating activities are the principal revenue - producing activities of the enterprise and other activities

that are not investing and fi nancing. Operating activities include all transactions that are not defi ned

as investing or fi nancing. Operating activities generally involve producing and delivering goods and

providing services.

Investment activities are the acquisition and disposal of long term assets and other investments not

included in cash equivalents.

Financing activities are activities that result in changes in the size and composition of the owners’ capital

(including preference share capital in the case of a company) and borrowings of the enterprise.

Elements of operating cash fl ow

Given below are elements of operating cash fl ow:

Description of elements of operating cash fl ow

• Cash receipts from sale of goods and rendering services.

• Cash receipts from royalty, fees, commissions and other revenue.

• Cash payments to suppliers for goods and services.

• Cash payments to and on behalf of employees.

• Cash receipts and cash payments by an insurance enterprise for premiums and claims, annuities

and other policy benefi ts.

• Cash payments and refunds of income taxes unless these are specifi cally identifi ed as cash fl ow from

fi nancing or investment.

• Cash receipts and payments relating to contracts held for dealing or trading purposes.

• Cash fl ow arising from dealing in securities when an enterprise holds securities for such purpose.

• Cash advances and loans made by fi nancial institutions including all contracts held for trading

purposes which may range from sale licence, export-import quota, any other operating contract.

This may not necessarily be a contract relating to derivative instruments.

Elements of cash fl ow from investment activities

Given below are eight elements of investment cash fl ow:

Elements of cash fl ow from investment activities:

1. Cash payments for acquisition of fi xed assets including intangibles.

2. Cash receipts from disposal of fi xed assets.

3. Cash payments to acquire shares, warrants or debt instruments of other enterprises and interests

in joint venture.

Group Financial Statements

302

This does not include an item covered in cash equivalents and items held for dealing or trading

purposes.

4. Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests

in joint venture.

This does not include an item covered in cash equivalents and items held for dealing or trading

purposes.

5. Cash advances and loans made to third parties.

This does not include loans and advances made by fi nancial institutions as these fall under operating

cash fl ow.

6. Cash receipts from repayments of advances and loans made to third parties. This does not include

loans and advances made by fi nancial institutions as these fall under operating cash fl ow.

7. Cash payments for future, forward, option and swap contracts.

This does not include contracts held for dealing or trading purposes or contracts which are classifi ed

as fi nancing activities.

8. Cash receipts from future, forward, option and swap contracts.

This does not include contracts held for dealing or trading purposes or contracts which are classifi ed

as fi nancing activities.

Classification of derivative transactions –

Derivative Transactions which are for Heading Speculative contracts

• Of Operating transactions like oil future, currency

forward relating to sale or purchase of goods or

services, commodity futures or options that relates

to raw materials and fi nished goods: Should be

classifi ed as operating cash fl ow.

• Of dealers - Operating activities.

• Of others - Investment activities.

• Of investment transactions like stock index futures

to protect value investment in shares, T- bill futures

or options to protect value of in vestment debt

instruments Should be classifi ed as investment cash

fl ow.

• Of fi nancing activities like swaps against foreign

currency loans and fl oating rate interest: Should be

classifi ed as fi nancing cash fl ow.

Elements of cash fl ow from fi nancing activities

Given below are fi ve elements illustrated cash fl ow from fi nancing activities:

Elements of cash fl ow from fi nancing activities

1. Cash proceeds from issuing shares or other equity instruments.

2. Cash payments to owners to acquire or redeem the enterprise’s shares.

3. Cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short term and

long term borrowings.

303

Advanced Financial Accounting & Reporting

4. Cash repayments of amounts borrowed.

5. Cash payments by a lease for the reduction of the outstanding liability relating to a fi nance lease.

Cash Flow from Operating Activities

Operating cash fl ows can be derived either in pursuance of a direct method or indirect method. Under direct

approach major classes of cash receipts and payments are disclosed. Whereas under indirect approach net

profi t or loss adjusted to derive operating cash fl ow. Although direct method is not appropriate, the SEBI

requires computation of cash fl ow from operating activities using indirect method.

Direct Method

Cash fl ow from operating activities is computed taking into account the following items:

Cash Receipts Cash Payments

• Cash sales and cash collection = Sales +

Opening Balance of Receivables — Closing

Balance of Receivables.

• Cash purchase of raw materials and spares

for manufacturing activities = [Raw material

consumed + Closing stock - Opening Stock] +

[Opening creditors - Closing creditors]

• Cash purchase of fi nished goods for trading

[Goods sold + Closing stock - Opening Stock]

+ [Opening creditors - Closing creditors].

• Payment to and on behalf of employees Wages

& Salaries + Closing outstanding balance

-Opening outstanding balance.

• Payment of expenses = Expenses incurred +

Opening balance of outstanding - Closing

balance of outstanding.

Notes:

(1) Figures of cash sales may be directly available from cash book. Then Cash collection can be derived

taking Credit sales + Opening balance of debtors - closing balance of debtors.

(2) Similarly figures of cash purchases can also be obtained from cash books.

(3) Interest and dividend are investment cash inflow and, therefore, to be excluded.

(4) Interest expense is financing cash outflow.

(5) Tax provision is not cash expense, advance tax paid should be treated as tax cash outflow.

Indirect Method

Under this method operating cash fl ow is derived indirectly by making adjustments for non-cash items,

cash fl ow of different types included in the profi t and working capital adjustments. Starting from profi t

before tax adjustments can be made to arrive at operating cash fl ow.

Group Financial Statements

304

Profi t Before Tax

Add: Depreciation and Amortisation being non-cash item

Interest - being fi nancing cash outfl ow

Lease rental of fi nance lease - being fi nancing cash outfl ow

Less : Interest and dividend received - being investment cash infl ow

Lease rental received of fi nance lease - being investment cash infl ow

Advance tax paid to the extent relates to operating cash fl ow (Tax paid for fi nancing cash fl ow and

investment cash fl ow should be separated)

Add/Less : Working Capital Adjustments

Increase in current assets like receivables, inventories (-)

Decrease in current assets like receivables, inventories (+)

Increase in current liabilities (+)

Decrease in current liabilities (-)

3.6 Illustrations on Cash Flow Statement

Given below is Profi t and Loss Account of ABC Ltd. and relevant Balance Sheet information :

Profi t and Loss Account of ABC Ltd. for the year ended 31-03-2010

Rs. in lacs

Revenue

Sales 4150

Interest and dividend 100

Stock adjustment 20

Total 4270

Expenditure

Purchases 2400

Wages and salaries 800

Other expenses 200

Interest 60

Depreciation 100

Total 3560

Profi t before tax 710

Tax Provision 200

Profi t after tax 510

Balance of Profi t & Loss Account 50

Profi t available for distribution 560

Appropriation

Transfer to General Reserve 200

Proposed dividend 300

Distribution tax 30

Total 530

Balance 30

305

Advanced Financial Accounting & Reporting

Relevant Balance Sheet information 31-03-2010 31-03-2009

Rs. in lacs Rs. in lacs

Debtors 400 250

Inventories 200 180

Creditors 250 230

Outstanding wages 50 40

Outstanding expenses 20 10

Advance tax 195 180

Tax provision 200 180

Assessed tax liability 180

Let us now study the technique of direct method of calculating operating cash fl ow:

Computation of cash fl ow from Operating

Activities

Direct Method

Cash Receipts

Cash sales & Collection from debtors

Sales+Opening Debtors - Closing Debtors 4150+250-400 4000

Cash Payments

Cash purchases & Payment to creditors

Purchases+ Opening Creditors - Closing creditors 2400+230-250 2380

Wages & salaries paid 800+40-50 790

Cash Expenses 200+10-20 190

Taxes paid - Advance tax 195

3555

Cash Flow from Operating Activities 445

Indirect Method

Profi t before tax 710

Add : Non-cash items : Depreciation 100

Add : Interest : Financing cash outfl ow 60

Less : Interest and Dividend : Investment

Cash infl ow -100

Less : Tax paid -195

Working Capital Adjustments

Debtors 250-400 -150

Inventories 180-200 -20

Creditors 250-230 20

Outstanding wages 50-40 10

Outstanding expenses 20-10 10

Cash Flow from Operating Activities 445

Group Financial Statements

Accounting Books Pdf

Thursday, January 19, 2017

Advanced Financial Accounting Reporting ICWAI

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