MCM604_Advanced Financial Accounting

External Reconstruction 93 In the Books India Ltd. (Transferee Company) Journal Entries Sl. No. Particulars LF Dr. Cr. 1 Business Purchase Account To Liquidator’s of Bharath Ltd. Account Dr. 5,00,000 (Being purchase consideration due) 5,00,000 2 Buildings Account Dr. 3,00,000 Plant Account Dr. 1,40,000 Current Assets Account Dr. 60,000 To Business Purchase Account 5,00,000 (Being assets taken over) 3 Amalgamation Adjustment Account Dr. 40,000 To Development Rebate Reserve Account 40,000 (Being development rebate considered) 4 Liquidator’s of Bharath Limited Account Dr. 5,00,000 To 8% Preference Share Account 3,00,000 To Equity Shares Account 2,00,000 (Being payment of purchase consideration) Balance Sheet of India Ltd. as on 31.3.2018 Note ` Particulars 2,00,000 A. Equity and Liabilities 3,00,000 Share Capital: Equity Share Capital Preference Share Capital CU IDOL SELF LEARNING MATERIAL (SLM)

94 Advanced Financial Accounting Reserves and Surplus 40,000 Development Rebate Reserve – Non-current Liabilities – Secured Loans – Unsecured Loans 5,40,000 Current Liabilities 3,00,000 Total 1,40,000 B. Assets – Non-current Assets 40,000 Fixed Asset 60,000 Building 5,40,000 Plant Investments Amalgamation Adjustment Account Current Assets, Loan and Advances Current Assets Total (b) External Reconstruction in the Nature of Purchase (Purchase Method) without Statutory Reserve Illustration - 2 The following is the Balance Sheet of X Co. Ltd. as on 31.03.2018 Liabilities Amount Assets Amount Share Capital (` 10 each) 1,20,000 Land & Building 1,00,000 Creditors 30,000 Stock 15,000 CU IDOL SELF LEARNING MATERIAL (SLM)

External Reconstruction 95 Bank overdraft 28,000 Debtors 22,000 P&L Account 1,000 Plant & Machinery 40,000 1,78,000 1,78,000 The company went into voluntary liquidation and the assets were sold to Y Co. Ltd. for ` 1,50,000 payable as to ` 60,000 in cash and ` 90,000 in the form of 12,000 Shares of ` 10 each of Y Co. Ltd. at ` 7.50 per share paid-up to the shareholders of X Co. Ltd. The Creditors and Bank Overdraft are not to be taken over. The expenses of liquidation were ` 2,000 to be paid by vendor company. In the books of X Co. Ltd. Prepare Realisation Account, Shareholder’s Account and Y Co. Account. Also pass opening entries in the books of Y Co. Solution: Mode of Payment of Purchase Consideration 1. 12,000 Equity Shares of `10 each 90,000 ` 7.50 per share paid up (12,000 × 7.5) 2. Cash 60,000 Purchase Consideration 1,50,000 In the Books of X Limited (Transferor Company) Ledger Accounts Realisation Account Particulars Amount Particulars Amount 30,000 To Land & Building 1,00,000 By Creditors 28,000 To Plant & Machinery 40,000 By Bank O/D 1,50,000 29,000 To Stock 15,000 By Y’s Co. A/c To Debtors 22,000 By Equity Shareholder’s A/c CU IDOL SELF LEARNING MATERIAL (SLM)

96 Advanced Financial Accounting To Cash A/c Creditors 30,000 Bank O/D 28,000 58,000 To Cash A/c (Expenses) 2,000 2,37,000 2,37,000 Equity Shareholder’s Account Particulars Amount Particulars Amount To P&L A/c 1,000 By Equity Share Capital A/c 1,20,000 To Realisation A/c 29,000 To Equity Share in Y Ltd. A/c 90,000 1,20,000 1,20,000 Y Co. Account Particulars Amount Particulars Amount To Realisation A/c 1,50,000 By Equity Shares in Y Ltd. A/c 90,000 By Cash A/c 60,000 1,50,000 1,50,000 In the Books of Y Limited (Transferee Company) Journal Entries Sl. No. Particulars LF Dr. Cr. 1. Business Purchase Account Dr. 1,50,000 To Liquidator’s of X Ltd. Account 1,50,000 (Being purchase consideration due) CU IDOL SELF LEARNING MATERIAL (SLM)

External Reconstruction 97 2. Land & Building Account Dr. 1,00,000 40,000 Plant and Machinery Account Dr. 15,000 22,000 Stock Account Dr. Debtors Account Dr. To Business Purchase Account 1,50,000 27,000 To Capital Reserve Account (Balancing figure) (Being assets and liabilities taken over) 3. Liquidator’s of X Ltd. Account Dr. 1,50,000 To Equity Share in Y Ltd. 90,000 60,000 To Cash Account (Being payment of purchase consideration) 6.6 Summary External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities to a newly formed company which is generally owned and named alike. External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities to a newly formed company which is generally owned and named alike. The pooling of interest method, all assets and liabilities of transferor company will be incorporated in the books of transferee company. In the case of purchase method, only assets and liabilities taken over by transferee company, will be incorporated in the books of transferee company. CU IDOL SELF LEARNING MATERIAL (SLM)

98 Advanced Financial Accounting 6.7 Key Words/Abbreviations z External Reconstruction: External reconstruction is similar to amalgamation in the nature of purchase z The Pooling of Interest Method: The pooling of interest method, all assets and liabilities of transferor company will be incorporated in the books of transferee company z Purchase Method: In the case of purchase method, only assets and liabilities taken over by transferee company will be incorporated in the books of transferee company. z Valuation Procedures External Reconstruction: Purchase consideration paid by the shares or debentures issued, showing face value, premium and discount on issue separately. 6.8 Learning Activity 1. What is External Construction? Explain about the objectives of External Construction. _________________________________________________________________ _________________________________________________________________ 2. Explain about the Pooling method and Purchase method. _________________________________________________________________ _________________________________________________________________ 3. Explain how to value an acquisition. _________________________________________________________________ _________________________________________________________________ CU IDOL SELF LEARNING MATERIAL (SLM)

External Reconstruction 99 6.9 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Explain the external reconstruction.. 2. What are the objectives of external reconstruction? 3. What are the difference between absorption and external reconstruction? 4. The books of S Ltd. contained the following balances as on March 31,2018: Particulars Debit Credit ` ` Equity share capital (of ` 10 each) 12,00,000 Creditors 14,00,000 Patents and trade marks 12,00,000 Plant and machinery 4,00,000 Stock 3,00,000 Debtors 5,00,000 Cash 12,500 Preliminary expenses 72,500 Profit and Loss Account 1,15,000 26,00,000 26,00,000 The patents and trade marks are considerably overvalued. The Company is also not in a position to raise any further capital. The following scheme of reconstruction has, therefore, been framed: (a) The company will go into voluntary liquidation. A new company S.S. Ltd. will be formed with an authorised capital of ` 20,00,000 to take over the assets and liabilities. (b) Liability will be discharged by the new Company to the creditors by payment of 25 paise in a rupee in cash and 50 paise in a rupee by issue of 9% debentures. CU IDOL SELF LEARNING MATERIAL (SLM)

100 Advanced Financial Accounting (c) 1,20,000 shares of ` 10 each (` 5 per share paid) will be issued to the shareholders of S Ltd., the balance ` 5 per share to be paid on allotment. (d) Expenses of liquidation amounting on ` 17,500 will be paid by S.S. Ltd. The scheme was approved by all concerned. You are required to: 1. Close the Ledger of S Ltd. 2. Give the journal entries to open the books of S.S. Ltd. 3. Prepare the opening Balance Sheet of S.S. Ltd. Ans: Purchase consideration: 16,50,000, In the Books of S Ltd., Realisation Accounts Total: 24,12,500, Shareholders’ Account Total: 12,00,000, Balance Sheet total: 19,00,000. 5. Balance Sheet of Bad-Luck Ltd. as on March 31, 2018: Balance Sheet Liabilities ` Assets ` 3,20,000 40,000 shares of ` 10 each, fully paid 4,00,000 Land and Buildings 1,30,000 Creditors 3,00,000 Plant & machinery 70,000 1,20,000 Stocks 500 Debtors 5,000 54,500 Cash 7,00,000 Preliminary expenses Profit and Loss Account 7,00,000 CU IDOL SELF LEARNING MATERIAL (SLM)

External Reconstruction 101 The following scheme of reconstruction was sanctioned by the Court: 1. The Company is to go into liquidation and a new company, Sound Venture Ltd. with an authorised capital of ` 8,00,000 is to be formed to take over the assets and liabilities. 2. Preferential creditors of ` 10,000 included in the above Balance Sheet are to be paid in full. 3. Unsecured creditors to receive either: (a) 50% of their claim in cash or (b) 6% debentures in the new company, equivalent to their claim, at par. 4. Shareholders in Bad-Luck Ltd. to be allotted one share of ` 10 each in the new company, ` 5 per share paid up for every existing share held by them. 5. Reconstruction costs amounting to ` 6,000 to be paid by Bad-Luck Ltd. from cash made available by the new Company, in addition to other purchase consideration mentioned above. Half of the unsecured creditors in value opted out for immediate cash payment for which purpose necessary cash was made available by the new Company which made a call of ` 5 each on the partly paid shares, allotted as aforesaid. The new Company valued all the assets (except land and buildings) taken over from Bad-Luck Ltd. at book value. Prepare the Balance Sheet of Sound Venture Ltd. giving effect to the above transactions. Ans: Purchase consideration: 4,33,500, Balance Sheet Total: 5,45,000 B. Multiple Choice/Objective Type Questions 1. One of the most detailed and justifiable ways to value a business is through the use of _______. [a] Multiples analysis [b] Comparison analysis [c] Discounted cash flows [d] None 2. _______ may generate economies of scale. [a] Horizontal mergers [b] Vertical mergers [c] Both [a] and [b] [d] None CU IDOL SELF LEARNING MATERIAL (SLM)

102 Advanced Financial Accounting Answers 1. [c], 2. [b] 6.10 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 6. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 7. https://www.ifrs.org/issued-standards/list-of-standards/ 8. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 9. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation 10. http://www.yourarticlelibrary.com/accounting/problems-accounting/amalgamation-and- external-reconstruction ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 103 UNIT 7 GROUP FINANCIAL STATEMENTS Structure: 7.0 Learning Objectives 7.1 Introduction 7.2 Meaning of Holding Company 7.3 Methods of Combination 7.4 Accounting Treatment 7.5 Practical Problems on Holding Company 7.6 Preparation of Group Cash Flow Statement 7.7 Summary 7.8 Key Words/Abbreviations 7.9 LearningActivity 7.10 Unit End Questions (MCQs and Descriptive) 7.11 References 7.0 Learning Objectives After studying this unit, you will be able to: z Learn the concept of Group Financial Statements z Learn the concept of Holding Company z Discuss the methods of combination Accounting Treatment CU IDOL SELF LEARNING MATERIAL (SLM)

104 Advanced Financial Accounting z Explain the preparation of Group Cash Flow Statement z Discuss the Statement of Cash Flows 7.1 Introduction According to Section (4)1 of the Companies Act, “A company is a subsidiary of another company if but only if: (a) the other company controls the composition of its Board of Directors or (b) the other company: (i) holds more than half in nominal value of its equity share capital or (ii) if it is a company formed before April 1, 1956 with both equity and preference shareholders having the same voting rights, the other company exercises or controls more than half its total voting power, or (iii) it is a subsidiary of any company which is that other company’s subsidiary. For example, if M Ltd. is a subsidiary of S Ltd., and if A Ltd. is a subsidiary of M Ltd., Company A becomes a subsidiary of S Ltd., by virtue of the above provisions. According to Accounting Standards 21, a subsidiary company is “an enterprise that is controlled by another enterprise (known as Parent enterprise)”. As per the Companies Act, 1956, a holding company is a company which: (a) holds directly or indirectly more than 50% of the nominal value of the equity share capital of another company, and thereby, secures a controlling interest in such a company; (b) exercises or controls more than 50% of the total voting rights of a company formed before April 1, 1956; and (c) controls the composition of the Board of Directors of another company because of its substantial holding or controlling interest in such a company. A holding company is one which holds either the whole of the share capital or a majority of the shares in another company. That other company (the shares of which are held by the holding company) is called the subsidiary company. According to Section 4(4) of the Companies Act, “A company shall be deemed to be the holding company of another, if and only if that other is its subsidiary”. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 105 7.2 Meaning of Holding Company Under the Companies Act, 2013, a holding company is any company which holds more than half of the equity share capital of other companies or controls the composition of the Board of Directors of other companies. Minority Interest It refers to the claim of the outside shareholders in the net assets of the subsidiary company. It is in other words the share of the outside shareholders in the Share Capital, Reserve, Profits etc., of the subsidiary company. Pre-acquisition Period It is the period before the shares are acquired by the holding company. Post-acquisition Period It is that period which commences on the date of acquisition and ends on the date on which the Final Accounts are prepared (after acquisition). Wholly-owned Subsidiary Company A wholly owned subsidiary is one whose shares are all held by the holding company. Suppose M Ltd. has 10,000 shares of ` 10 each and all these shares are acquired by S Ltd.; M Ltd. is a wholly-owned subsidiary of S Ltd. Partly owned-Subsidiary Company When a majority of the shares of the subsidiary company (and not all the shares) are held by the holding company, the subsidiary shall be a partly-owned one. If out of the 10,000 shares of M Ltd., 6,000 are held by S Ltd., M Ltd. will be a partly owned subsidiary of S Ltd. Unrealised Profit It refers to the Profit element in the stock remaining unsold as purchased from the holding company by the subsidiary company or vice versa. The entire unrealized profit should be eliminated. The elimination is done by deducting the unrealized profit from the Revenue Profits on the liabilities side of the Balance Sheet and from closing stock on the assets side of the Balance Sheet. CU IDOL SELF LEARNING MATERIAL (SLM)

106 Advanced Financial Accounting Contingent Liabilities These are expected liabilities and may or may not occur. Contingent liabilities are shown as a foot note after the Balance Sheet. 7.3 Methods of Combination Consolidation of Balance Sheets Consolidation of Balance Sheets refers to the combining of the separate Balance Sheets of the holding company and its subsidiary into a single Balance Sheet. The shareholders of a holding company are interested in the financial affairs of its subsidiary to the extent of their holdings in the subsidiary company. The steps involved in consolidation of Balance Sheets are listed below: 1. Elimination of Investment Account 2. Determination of Minority Interest 3. Determination of Cost of Control 4. Determining Capital and Revenue Profits 5. Elimination of Inter-company transactions 6. Treatment of Contingent Liabilities 7. Treatment of Unrealized Profits 8. Revaluation of Assets and Liabilities 9. Treatment of Issue of Bonus Shares 10. Treatment of Dividend CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 107 7.4 Accounting Treatment Steps to be Taken for Preparing the Consolidated Balance Sheet and Hints for its Preparation The following are the necessary steps to be taken in order to prepare the consolidated balance sheet. (i) Ascertain the degree or percentage of holding of shares of the subsidiary company. (ii) Ascertain the pre-acquisition and post-acquisition periods. (iii) Ascertain the pre-acquisition and post-acquisition profits and divide it between the holding company and the Minority. (iv) Calculate the Cost of Control. (v) Calculate the unrealized profit and eliminate it completely, i.e., deduct it from the profit as well as stock. (vi) Eliminate mutual obligation. (vii) Calculate Minority Interest. 7.5 Practical Problems on Holding Company Illustration – 1 Following are the Balance Sheets of H Ltd. and S Ltd. as at March 31, 2013. Particulars H Ltd. S Ltd. ` ` Liabilities Share Capital in shares of ` 100 each 5,00,000 2,00,000 General Reserve as on 01.04.2012 1,00,000 60,000 Bills Payable 40,000 – CU IDOL SELF LEARNING MATERIAL (SLM)

108 Advanced Financial Accounting Creditors 80,000 50,000 Profit & Loss Account 1,40,000 90,000 8,20,000 4,40,000 Assets 40,000 30,000 Goodwill 3,60,000 2,20,000 Fixed Assets 1,00,000 Stock 90,000 Debtors 20,000 75,000 1,500 shares in S Ltd. 2,40,000 Cash at Bank – 60,000 25,000 8,20,000 4,40,000 The Profit and Loss Account of S Ltd. showed a balance of ` 50,000 on April 1, 2012. A dividend of 16% was paid in January 2013 for the year 2011-12. This dividend was credited by H Ltd. to its Profit and Loss Account. H Ltd. acquired the shares on October 1, 2012. The Bills payable of S Ltd. were all issued in favour of H Ltd. which got the bills discounted. Included in the creditors of S Ltd. was ` 20,000 for goods supplied by H Ltd. Included in the stock of S Ltd. are goods of the value of ` 8,000 which were supplied by H Ltd. at a profit of 33 1/3% on cost. Prepare the consolidated Balance Sheet as on March 31, 2013. Solution: Working Notes 1. Percentage of Holding Number of shares in S Ltd. = 2000 (` 2,00,000 y ` 100) Shares held by H Ltd. = 1500, i.e., 1,500 u 100 or 75% 2,000 Shares held by Minority = 500 (2,000 – 1,500), i.e., 500 u 100 or 25% 2,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 109 2. Dividend Declared by S Ltd. 16 u ` 2,00,000 , i.e., ` 32,000 100 GHF JIKShares of H Ltd. 75 u ` 32,000 = ` 24,000 100 ` 8,000 FHG IKJMinority’s Share 25 u ` 32,000 = 100 3. Pre-acquisition (Capital Profits) `` Profit as on 01.04.2012 50,000 Less: Dividend declared out of the above 32,000 18,000 Add: General Reserve as on 01.04.2012 60,000 FGH KIJProfit for 6 months of 2012-13 36,000 ` 72,000 u 6 1,14,400 12 4. Post-acquisition (Revenue Profits) FHG KJIProfit between 01.10.2012 and 31.03.2013 ` 72,000 u 6 = ` 36,000 12 5. Pre-acquisition period 01.04.2012 to 30.09.2012 or 6 months Post-acquisition period 01.04.2012 to 31.03.2013 or 6 months ` 6. Profit earned during 2012-13 Balance of Profit as on 31.03.13 90,000 Less: Profit as on 01.04.2012 (` 50,000 – ` 32,000) 18,000 72,000 CU IDOL SELF LEARNING MATERIAL (SLM)

110 Advanced Financial Accounting 7. Cost of Control `` Price paid for acquiring 1,500 shares of S Ltd. 2,40,000 Less: Face value of shares acquired (1,500 u ` 100) 1,50,000 85,500 HFG JIKShares in Capital Profits 24,000 2,59,500 75 u 1,14,000 19,500 100 `` Dividend Receivable 40,000 30,000 70,000 Capital Reserve 8. Goodwill as shown in the Consolidated Balance Sheet 19,500 50,500 Balance of Goodwill: 1,40,000 H Ltd. 27,000 S Ltd. 1,67,000 24,000 Less: Capital Reserve 1,43,000 9. Unrealised Profit (URP) on stock: 2,000 ` 8,000 u 33 1 GF JI` 8,000 u 100 u 3 = ` 2,000 1,41,000 3 H K3 400 133 1 3 10. Profit as shown in the Consolidated Balance Sheet Balance of Profit of H Ltd. FHG KJIAdd: Share in Revenue Profits 75 u ` 36,000 100 Less: Dividend out of Capital Profits2 Less: Unrealised Profit CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 111 Liabilities Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. ` as on March 31, 2013 ` Assets Share Capital in shares of ` 100 each 50,500 Goodwill 5,00,000 General Reserve 1,00,000 Fixed Assets: Profit & Loss A/c 1,41,000 H Ltd. 3,60,000 2,20,000 Sundry Creditors: S Ltd. 5,80,000 H Ltd. 80,000 Stock: S Ltd. 50,000 H Ltd. 1,00,000 90,000 1,30,000 S Ltd. 1,90,000 Less: M/O 20,000 2,000 1,10,000 Less: URP 1,88,000 Bills Payable 40,000 Sundry Debtors: Minority Interest 87,500 H Ltd. 20,000 75,000 (See note below) S Ltd. 95,000 20,000 Less: M/O 75,000 Cash at Bank: 60,000 85,000 H Ltd. 25,000 S Ltd. 9,78,500 9,78,500 CU IDOL SELF LEARNING MATERIAL (SLM)

112 Advanced Financial Accounting Note: ` Minority Interest Face value of shares held by the Minority shareholders (500 × ` 100) 50,000 28,500 HFG KJIAdd: Share in Capital Profits 9,000 25 u ` 1,14,000 100 GHF KJIShare in Revenue Profits 25 u ` 36,000 100 87,500 Illustration – 2 Moon Ltd. acquired 12,000 shares in Star Ltd. for ` 1,70,000 on July 1, 2012. The Balance Sheets of the two companies on March 31, 2013 were as follows: Particulars Moon Star ` ` Liabilities 10,00,000 2,00,000 Share Capital in shares of ` 10 each General Reserve 4,20,000 1,50,000 Profit and Loss Account Sundry Creditors 2,60,000 85,000 Bills Payable Loan from Star Ltd. 1,90,000 42,000 Assets 80,000 60,000 Goodwill Land and Buildings 50,000 – 20,00,000 5,37,000 3,00,000 70,000 4,00,000 1,00,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 113 Plant and Machinery 5,00,000 1,00,000 Stock 2,00,000 40,000 Book Debts 3,00,000 85,000 Shares in Star Ltd. 1,70,000 – Loan to Moon Ltd. – 50,000 Bills Receivable 50,000 30,000 Cash and Bank 80,000 62,000 20,00,000 5,37,000 On July 1, 2012, the Profit and Loss Account of Star Ltd. stood at ` 40,000 out of which a dividend of 15% on the capital of ` 2,00,000 was paid in September 2012. At the same time, a bonus issue of one share fully paid for every two shares held was also made, out of general Reserve. Bills payable of Star Ltd. represent bills issued in favour of Moon Ltd., which company still held ` 40,000 of the bills accepted by Star Ltd. The entire closing stock of Star Ltd. represents goods supplied by Moon Ltd. at cost plus 20%. Moon Ltd. and Star Ltd. agreed that for service rendered Moon Ltd. should charge ` 500 p.m. from Star Ltd. Entries for this were not made when the Accounts were drawn up. Prepare the consolidated Balance Sheet as March 31, 2013. Solution: Consolidated Balance Sheet of Moon Ltd. and its subsidiary Star Ltd. as on March 31, 2013 Liabilities ` Assets ` Share Capital in shares of ` 10 each 10,00,000 Goodwill 2,94,750 General Reserve 4,20,000 Land & Buildings Profit & Loss A/c 2,70,883 Moon 4,00,000 1,00,000 Bills Payable: Star 5,00,000 CU IDOL SELF LEARNING MATERIAL (SLM)

114 Advanced Financial Accounting Moon 80,000 Plant & Machinery Star 60,000 1,40,000 Moon 5,00,000 Less: M/O 40,000 1,00,000 Creditors: Star 6,00,000 1,90,000 2,00,000 Moon 42,000 1,00,000 Stock: 40,000 2,33,333 Star 3,85,000 Minority Interest Moon 6,667 Star 3,00,000 85,000 2,32,000 2,40,000 50,000 1,72,200 Less: URP 30,000 Book Debts: Moon Star Bills Receivable Moon Star 80,000 Less: M/O 40,000 40,000 Cash and Bank Moon 80,000 Star 62,000 1,42,000 21,95,083 21,95,083 CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 115 Working Notes: ` 1. Percentage or Degree of Holding 10,000 18,750 Number of shares in Star Ltd. 20,000 (` 2,00,000 y ` 10) 50,000 78,750 HFG KIJShares held by the holding company 12,000, i.e., 12,000 u 100 = 60% ` 20,000 85,000 10,000 HFG JKIShare held by the Minority 8,000, i.e., 75,000 8,000 u 100 = 40% 20,000 2. Accounting period: April 1, 2012 to March 31, 2013. Pre-acquisition period 3 months (A, M, J, 2012) Post-acquisition period 9 months (July 1, 2012 to March 31, 2013) ` 3. Pre-acquisition (Capital) Profits Balance of Profit as on 01.04.2012 = 40,000 30,000 FGH KJILess: Dividend paid out of the above 15 u ` 2,00,000 100 GFH JKIAdd: Profit for 3 months of 2012-13 3 u ` 75,000 12 : General Reserve after bonus issue (` 1,50,000 – ` 1,00,000) GFH JKIShare of Moon Ltd 60 u ` 78,750 ` 47,250 100 ` 31,500 HFG JIKShare of Minority 40 u ` 78,750 100 4. Current Year’s (2012-13) Profit Profit at the end of the year Less: Profit as on April 1, 2012 after payment of dividend CU IDOL SELF LEARNING MATERIAL (SLM)

116 Advanced Financial Accounting 5. Post-acquisition (Revenue) Profit ` 56,250 GHF JKIProfit for 9 months of the current year, i.e., 9 u ` 75,000 4,500 12 51,750 Less: Service charges payable to Moon Ltd. (` 500 u 9) ` 1,70,000 GHF JKIShares of Moon Ltd. 60 u ` 51,750 ` 31,050 2,45,250 100 ` 20,700 75,250 12,000 FGH KIJShares of Minority 40 u ` 51,750 6,000 100 18,000 6. Cost of Control ` Price paid for 12,000 shares Less: Face value of shares acquired (18,000 × ` 10) 1,80,000 Share in Capital Profits 47,250 18,000 HFG JIKDividend on 12,000 shares 15 u ` 1,20,000 100 Capital Reserve 7. Shares in the hands of Moon Ltd, of Star Ltd. Shares purchased FGH IKJAdd: Bonus Issue (one share for every two shares held, i.e., 1 u ` 12,000 2 CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 117 8. Goodwill as shown in the Consolidated Balance Sheet ` Goodwill as per Balance Sheets: Moon Ltd. 3,00,000 Star Ltd. 70,000 3,70,000 Less: Capital Reserve 75,250 9. Minority Interest 2,94,750 Shares held by the Minority: ` Original holding 8,000 shares Bonus Issue 4,000 shares 12,000 shares Face value of 12,000 shares (12,000 u ` 10) 1,20,000 Add: Share in Capital Profits 31,500 Share in Revenue Profits 20,700 1,72,200 10. Unrealised Profit (URP) = ` 6,667 11. Profit as shown in the consolidated Balance Sheet of Moon & Star: ` Profit of Moon Ltd. 2,60,000 Less: Dividend included in the above as declared by Star Ltd. 18,000 2,42,000 CU IDOL SELF LEARNING MATERIAL (SLM)

118 Advanced Financial Accounting Add: Service charges receivable from Star Ltd. (` 500 u 9) 4,500 Less: Unrealised Rent 2,46,500 Add: Share in Revenue Profits Illustration – 3 6,667 2,39,833 31,050 2,70,883 The following are the Balance Sheets of X Ltd. and its subsidiary Y Ltd. as on March 31, 2013. Particulars X Ltd. Y Ltd. ` ` Liabilities Equity shares of ` 10 each 4,00,000 1,00,000 Profit and Loss Account 50,000 20,000 External Liabilities 7,50,000 4,80,000 Assets 12,00,000 6,00,000 Equipments Investment (9,000 equity shares in Y Ltd on April 1, 2012) 2,50,000 95,000 Other Assets 1,40,000 – 8,10,000 5,05,000 12,00,000 6,00,000 On April 1, 2012, Profit and Loss Account of Y Ltd. showed a credit balance of ` 8,000 and equipments of Y Ltd. were revalued by X Ltd. at 20% above its book value of ` 1,00,000 (but no such adjustment is affected in the books of Y Ltd.) Prepare the consolidated Balance Sheet as on March 31, 2013. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 119 Solution: Working Notes: 1. Percentage or Degree of Holding in the Shares of Y Ltd. Number of shares in Y Ltd. = 10,000 (` 1,00,000 y ` 10) FGH IKJShares held by X Ltd. = 9,000, i.e., 90% 9,000 u 100 10,000 HFG IJKShares held by Minority = 1,000, i.e., 10% 1,000 u 100 10,000 2. As the shares on Y Ltd. are acquired by X Ltd. on 01.04.2012, the entire accounting period of 01.04.2012 to 31.03.2013 is Post-acquisition period. 3. Capital (Pre-acquisition) Profits ` Balance of Profit on 01.04.2012 8,000 20,000 GHF KJIIncrease in the value of equipments = 20 u ` 1,00,000 100 HFG IKJShares of X Ltd. = 28,000 90 u ` 28,000 = ` 25,200 ` 100 HFG KIJShares of Minority = 10 u ` 28,000 = ` 2,800 100 4. Rate of Depreciation on Equipment Value of Equipment on 01.04.2012 1,00,000 Book value of the same on 31.03.2013 95,000 Depreciation for the year 5,000 The rate of Depreciation is: ` 5,000 u 100 = 5% ` 1,00,000 Additional depreciation on appreciated value of equipment (of ` 20,000) FG IJ5 u ` 20,000 = ` 1,000 H K100 CU IDOL SELF LEARNING MATERIAL (SLM)

120 Advanced Financial Accounting 5. Post-acquisition (Revenue) Profits ` Profit of Y Ltd. on 31.03.2013 20,000 Less: Profit on 01.04.2012 8,000 Less: Additional Depreciation on Equipment 12,000 1,000 GFH KIJShares of X Ltd. = 11,000 90 u ` 11,000 = ` 9,900 100 ` 1,40,000 FHG KIJShares of Minority = 10 u ` 11,000 = 1,100 90,000 100 25,200 1,15,200 6. Cost of Control: 24,800 Price paid for 9,000 shares of Y Ltd. ` 10,000 Less: Face value of shares acquired (9,000 u ` 10) 2,800 Share in Capital Profits 1,100 13,900 Goodwill ` 7. Minority Interest 50,000 Face value of 1,000 shares held by the Minority (1,000 x ` 10) Add: Share in Capital Profits 9,900 Share in Revenue Profit 59,900 8. Balance of Profit as shown in the consolidated Balance Sheet Profit of X Ltd. Add: Share in Revenue Profits of Y Ltd. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 121 Consolidated Balance Sheet of X Ltd and its subsidiary Y Ltd. as on March 31, 2013 Liabilities ` Assets ` Equity shares of ` 10 each 4,00,000 Goodwill 24,800 Equipment: Profit and Loss Account 59,900 X Ltd. Y Ltd. External Liabilities: 2,50,000 Less: Depreciation 1,20,000 X Ltd. 7,50,000 (5,000 + 1,000) 3,70,000 Other Assets: Y Ltd. 4,80,000 12,30,000 X Ltd. 6,000 Y Ltd. Minority Interest 13,900 3,64,000 17,03,800 8,10,000 5,05,000 13,15,000 17,03,800 7.6 Preparation of Group Cash Flow Statement Meaning of Cash Flow Statement In Cash Flow Statement the term “fund” is used to mean cash only and does not include even the most liquid current assets. A cash flow statement shows the impact of transactions on cash position of the firm and includes all transactions having a direct impact upon cash. It explains the changes in cash position between two periods. Note: According to AS 3 (revised) all manufacturing and finance companies which are listed in a stock exchange or all commercial or industrial and business enterprises whose sales are more than 50 crores per year, must prepare and publish CFS by indirect method. This is made compulsory from April 1, 2001 onwards. CU IDOL SELF LEARNING MATERIAL (SLM)

122 Advanced Financial Accounting Cash Flow Statement, AS 3 (Accounting Standard 3) AS 3: Change in Financial Position which was issued in June 1981. AS 3 (Revised): In March 1997, issued Cash Flow Statement by the Institute of Chartered Accountants of India. Accounting Standard 3 has become mandatory w.e.f. April 1, 2001 for the following enterprises: (a) Those equity or debt securities are listed or going to be listed by the recognised Stock Exchange of India. (b) Others like business, commercial and industrial reporting enterprises whose turnover more than ` 50 crores in accounting period. The Companies Act, 1956, under Section 211, the companies in respect of which AS 3 is mandatory are needed to agree with AS 3. Securities and Exchange Board of India requires that all companies should submit a cash flow statement along with other financial statements of the company, which are prepared as per AS 3 issued by the Institute of Chartered Accountants of India. Uses or Advantages of Cash Flow Statement The chief advantages of cash flow statement are as follows: (i) Planning and Co-ordination of Financial Operations Cash flow statement is useful in evaluating financial polices and current cash position. Since cash is the basis for carrying operations, the cash flow statement will enable the management to plan and co-ordinate the financial operations probably. It is so because cash flow statement is prepared on an estimated basis for the next accounting period. The management comes to know how much cash is needed in the future and what time and how can be arranged, how much initially and how much from outside? Cash flow statement is especially useful in preparing cash budgets. (ii) A Control Device Cash flow statement is also a control device for the management. A comparison of cash flow statement of previous year with the budget for the year would indicate to what extent the resources of the enterprise were raised and applied according to the plan. Thus, a comparison of original forecast with actual result may highlight trends of movement that might otherwise go undetected. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 123 (iii) Useful to Internal Financial Management Since it gives a clear picture of cash inflow from operations, it is therefore very useful to internal financial management in considering the possibility of retiring long-term debts, in planning replacement of plant facilities or in formulating dividend policies. (iv) Profit and Cash Position It enables the management to account for situation when business has earned huge profits yet run without money or when it has suffered a loss and still has plenty of money at the bank. (v) Short-term Financial Decision Cash flow statement helps the management in taking short-term financial decisions. Suppose, if firm wants to know its state of solvency after one month from to-date, it is possible only from the cash flow analysis and not to from fund flow statement. Shorter the period, greater is the importance of cash flow statement. Difference between Fund Flow Statement and Cash Flow Statement Fund Flow Statement Cash Flow Statement 1. Fund here means working capital. 1. Fund refers to actual cash in cash flow analysis. 2. It is concerned with all items constituting 2. It deals with cash transaction only. funds. 3. It shows the causes for changes in 3. It shows the causes for the change in working capital. cash. 4. Fund flow statement is for a long-term 4. Cash flow analysis is a tool for short-term planning. financial planning. 5. There are no opening or closing balances 5. Cash Flow Statement starts with the in the fund flow statement operating cash balance and ends with closing cash balances. 6. Schedule of changes in working capital 6. Calculations of cash from operations is is prepared. prepared. CU IDOL SELF LEARNING MATERIAL (SLM)

124 Advanced Financial Accounting Classifications of Cash Flow 1. Cash Flow from Operating Activities 2. Cash Flow from Investing Activities 3. Cash Flow from Financing Activities 1. Cash Flow from Operating Activities Operating activities are the main revenue producing activities of the enterprise. These involve producing goods and services and selling them. Cash flows from operating activities generally result from the transactions and events that enter into the determination of net profit or loss. In short, operating activities are activities relating to operations. Examples of cash flow from operating activities. Cash Inflows: (a) Cash sales. (b) Cash receipts from debtors for sale of goods or rendering services. (c) Cash receipts from royalties, fees, commission and other revenue. Cash Outflows: (a) Cash purchases. (b) Cash payments to suppliers of goods and services. (c) Payments for operating expenses (wages, salaries, rent, insurance, etc.) (d) Cash payment to government for taxes and duties. There are some transactions such as sale of an item of plant, etc. that may result in profit or loss. These are usually taken in the determination of net profit or loss. However, these are cash flows from investing activities. 2. Cash Flow from Investing Activities Investing activities include purchase and sale of fixed assets, securities (share, debentures), etc. Cash flow from investing activities discloses the expenditures incurred for resources intended to generate future income and cash flows. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 125 Examples of cash flow from investing activities. Cash Inflows: (a) Cash receipts from sale of fixed assets and intangible assets. (b) Cash receipts from sale of securities such as shares, debentures, etc. c) Receipt of interest and dividend on investment. Cash Outflows: (a) Cash payment for purchase of fixed assets and intangible assets (investment in assets). (b) Cash payment for purchase of securities (investment in securities). (c) Loans given to borrowers. It may be noted that the cash receipt on sale of fixed and intangible assets are taken as cash flows from investing activities. Thus, profit or loss on sale is automatically adjusted here. That is why profit or loss on sale of fixed assets and intangible assets is not taken as cash flows from operating activities. 3. Cash Flow from Financing Activities Financing activities are those activities which result in changes in size and composition of owners’ capital (or shareholders’ funds) and borrowing of the enterprise. These include raising funds from owners, borrowing from creditors and repayment/redemption. Examples of cash flows from financing activities. Cash Inflows: (a) Cash proceeds from issue of shares. (b) Cash proceeds from issue of debentures, bonds, etc. (c) Short-term and long-term loans or borrowings. Cash Outflows: (a) Redemption of preference shares. (b) Redemption of debentures, bonds, etc. CU IDOL SELF LEARNING MATERIAL (SLM)

126 Advanced Financial Accounting (c) Repayment of loans (short term and long term). (d) Payment of dividend. (e) Payment of interest on debentures and loans. It may be noted that interest and dividend on investment (inflow) are cash flow from investing activities, while payment of interest and dividend on capital and borrowings are cash flows (outflow) from financing activities. Procedure of Preparing a Cash Flow Statement Cash flow statement is prepared with the help of financial statements and additional information. The preparation of cash flow statement involves the following steps: 1. Calculate the net increase or decrease in cash and cash equivalents by comparing these accounts given in the comparative balance sheets. 2. Calculate the net cash flow provided/ used in operating activities. This is done by analyzing the Profit & Loss A/c, Balance Sheet and additional information. There are two methods of calculating cash flows from operation – Direct method and Indirect method. 3. Calculate the net cash flow from investing activities. 4. Calculate the net cash flow from financing activities. 5. Prepare a cash flow statement showing the net cash flow from (or used in) operating, investing and financing activities separately. 6. Make an aggregate of net cash flows from the three activities and ensure that the total net cash flow is equal to the net increase or decrease in cash and cash equivalent as calculated in step 1. 7. Report significant non-cash transactions that do not involve cash or cash equivalents in a separate schedule to the CFS. Note: The sum of cash flow from all the activities taken together, along with the opening cash and cash equivalents shall be equal to the closing cash and cash equivalents. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 127 Calculation of Cash Flow from Operating Activities Cash from operation means the cash generated in the business as a result of producing goods and services. It can be ascertained either by direct method or by indirect method. Direct Method Under the direct method major classes of gross cash receipts (inflows) and gross cash payments (outflows) are disclosed. In this method, cash receipts from operating revenues and cash payments for operating expenses are calculated to arrive at cash flows from operating activities. The difference between the cash receipts and the cash payments is the net cash flow from (or used in) operating activities. The information about major classes of gross cash receipts and gross cash payments may be obtained either: (i) From the accounting records of the enterprise, or (ii) By adjusting sales, cost of sales and other items in the Profit & Loss A/c for: 1. Changes during the period in inventories and operating receivables and payables, 2. Other non-cash items and 3. Other items for which the cash effects are investing or financial cash flows. Form of Cash Flow Statement Cash Flow Statement contains sources of cash (cash inflows) and uses or applications of cash (cash outflows). A widely used format of CFS is given as follows: Cash Flow Statement (Direct Method) For the year ended ………….. Particulars `` Cash Flows from Operating Activities: xxx xxx A. Operating Cash Receipts: xxx Cash Sales xxx Cash received from debtors Commission, fees received Royalties received CU IDOL SELF LEARNING MATERIAL (SLM)

128 Advanced Financial Accounting B. Operating Cash Payments: xxx Cash purchases xxx Cash paid to creditors xxx Cash operating expenses xxx Taxes and duties paid xxx Net Cash Flow from Operating Activities (A – B) xxx Cash Flow from Investing Activities: xxx xxx xxx Sale of fixed asset xxx xxx Sale of investment xxx xxx Interest received xxx xxx Dividend received xxx Purchase of fixed assets Purchase of investments Net Cash from (or used in) Investing Activities Cash Flow from Financing Activities: xxx xxx Proceeds from issue of shares xxx Proceeds from debentures and long-term borrowings xxx Repayment of long-term borrowings xxx Interest paid Dividend paid Net Cash from (or used in) Financing Activities Net Increase/Decrease in Cash and Cash Equivalents Add: Cash and Equivalents at beginning Cash and Cash Equivalents at closing Note: Figures in bracket indicate the cash outflows (i.e., negative figures). CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 129 The following amounts are required to be calculated: 1. Cash received from debtors: Cash received from debtors can be ascertained by preparing Total Debtors A/c. Dr. Total Debtors A/c Cr. Particulars ` Particulars ` To Balance b/d xxx By Cash Received (bal. fig) xxx To Credit Sales xxx By B/R Receivable xxx xxx By Discount Allowed xxx By Bad Debts xxx By Sales Returns xxx By Balance c/d xxx xxx Note: If bills receivable received from debtors is not given, it can be ascertained by preparing bills receivable A/c Dr. Bills Receivable A/c Cr. Particulars ` Particulars ` To Balance b/d xxx By Cash xxx To Debtors (bal. fig.) xxx By Bank (discounted) xxx xxx By Discount on B/R xxx By Balance c/d xxx xxx 2. Cash paid to creditors: Cash paid to creditors can be ascertained by preparing Total Creditors A/c. CU IDOL SELF LEARNING MATERIAL (SLM)

130 Advanced Financial Accounting Dr. Total Creditors A/c Cr. Particulars ` Particulars ` xxx By Balance b/d xxx To Cash (fig.) xxx By Credit Purchase xxx To Purchase Return xxx To Discount Received xxx xxx To B/P Issued xxx To Balance c/d xxx Bills payable issued to creditors can be ascertained by preparing Bills Payable A/c. Dr. Bills Payable A/c Cr. Particulars ` Particulars ` To Cash A/c xxx By Balance b/d xxx To Balance c/d xxx By Creditor A/c (bal. fig.) xxx xxx xxx If purchases are not given (cost of sale is given), then purchases may be ascertained as follows: Purchases = Cost of Sales + Closing Stock – Opening Stock 3. Cash Operating Expenses: To find out cash operating expenses, adjustments for outstanding and prepaid should be made. Cash operating expenses are ascertained as follows: Particulars `` Expenses as given in P & L A/c xxx Add: Outstanding at the beginning xxx Prepaid in the end Less: Outstanding at the end xxx Prepaid in the beginning xxx Cash Paid for Expenses xxx xxx xxx CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 131 Cash Flow Statement (Indirect Method) `` Particulars xxx Cash flow from Operating Activities: Net Profit before tax xxx Add: Non-cash and non operating Items: xxx xxx Depreciation xxx Preliminary expenses written off xxx Discount on issue of shares and debentures written off xxx Goodwill patents etc. written off xxx xxx Loss on sale of fixed assets Provision for doubtful debts, etc. xxx Tax provision xxx Less: Items to be deducted xxx Rent received xxx Interest received xxx Dividend received Profit on sale of fixed asset, investment xxx xxx Operating profit before Working Capital Changes xxx Add: Decrease in Current Assets (Individually) xxx xxx Increase in Current Liabilities (Individually) xxx Less: Increase in Current Assets (Individually) xxx xxx Decrease in Current Liabilities (Individually) xxx Cash generated from operation Less: Income tax paid Adjustment for Extra ordinary items (+/-) Net Cash from (or used in) Operating Activities CU IDOL SELF LEARNING MATERIAL (SLM)

132 Advanced Financial Accounting Cash from Investing Activities (same as under Direct Method) xxx Cash from Financing Activities (same as under Direct Method) xxx Net Increase/Decrease in cash and Cash Equivalents xxx Cash and Cash Equivalents at beginning xxx xxx Cash and Cash Equivalents at the end xxx Calculation Cash from Operation or Operating Activities Cash from Operation refers to the cash generated from trading operations in a given period. There are following methods of determining cash from operation. (i) Cash Sales Method (ii) Adjustment of Current Account to Fund from Operations (iii) Net Profit Method (AS 3) Limitations of Cash Flow Statement Some of the limitations of the useful of cash flow statement as a tool of financial analysis are: (a) As the enterprise shifts from strictly cash basis, enters into credit transactions as well takes into account prepared and accrued items, the net income no doubt would generally represent an increase in working capital, yet equating net income to cash flow for such enterprise would be inaccurate and misleading since a number of non cash items affect the net income of the firm. (b) Most of the business have in addition to current assets, a number of fixed assets. These assets involve cash payment in a years past and charges against operating income of current year depreciation entries. Thus, net income moves even further away from being a net cash flow. (c) The cash balance too easily influenced by postponing purchase and other payments. The above discussion makes it clear that cash flow is the part of the funds flow while income is one of the various sources of funds flow. The cash flow statement can not replace the final statements of account, viz., balance sheet and income statement but it is certainly very useful supplementary statement. CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 133 Cash Sales Method Format of Computation of Cash From Operations Particulars ` ` Sales xxx Less: Increase in account receivable xxx xxx Cash sales Less: Purchase xxx xxx Less: Increase accounts xxx xxx Cash paid in payable creditors xxx Cash operating expenses (after adjusting accruals and prepayments) xxx Cash from Operations Illustration - 1 Following are the summarised Balance Sheets of ESS GEE Ltd. as on December 31, 2014 and 2015. Particulars 2014 2015 Liabilities Share Capital 1,00,000 1,30,000 General Reserve Profit and Loss A/c 25,000 30,000 Bank Loan (long term) Sundry Creditors 15,200 15,400 Provision for Tax 35,000 – Assets: Land and Buildings 75,000 67,500 Machinery 15,000 17,500 2,65,200 2,60,400 1,00,000 95,000 75,000 84,500 CU IDOL SELF LEARNING MATERIAL (SLM)

134 Advanced Financial Accounting Stock 50,000 37,000 Sundry Debtors 40,000 32,100 Cash Bank 200 300 Goodwill – 4,000 – 7,500 2,65,200 2,60,400 Additional information: (a) Dividend of ` 11,500 was paid. (b) Assets of another company were purchased for a consideration of ` 30,000 payable in shares. The following assets were purchased: Stock ` 10,000, Machinery ` 12,500 (c) Machinery was further purchased for ` 4,000 (d) Depreciation written off on Machinery ` 6,000 (e) Income tax provided during the year ` 16,500 (f) Loss on sale of machine ` 100 was written off to General Reserve. You are required to prepare a Cash Flow Statement under indirect method (As per accounting standard) Solution: Share Capital Account Cr. Dr. Particulars ` Particulars ` To Balance c/d 1,30,000 By Balance b/d 1,00,000 By Machinery A/c 12,500 By Stock A/c 10,000 By Goodwill A/c (b/f) 7,500 1,30,000 1,30,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 135 Dr. Land and Buildings Account Cr. Particulars ` Particulars ` To Balance b/d 1,00,000 By Depreciation – b/f 5,000 By Balance c/d 95,000 1,00,000 1,00,000 Dr. Machinery Account Cr. Particulars ` Particulars ` To Balance b/d 75,000 By Depreciation 6,000 To Share Capital A/c (Purchase) 12,500 By Gen. Reserve (loss on sale) 100 To Cash A/c (Purchase) 4,000 By Cash A/c – Sale (b/f) 900 By Balance c/d 84,500 91,500 91,500 Dr. General Reserve Account Cr. Particulars ` Particulars ` To Machinery A/c (loss on sale) 100 By Balance b/d 25,000 To Balance c/d 30,000 By P&L A/c – B/f 5,100 30,100 30,100 Dr. Provision for Tax Account Cr. Particulars ` Particulars ` To Income tax paid – b/f 14,000 By Balance b/d 15,000 To Balance c/d 17,500 By P&L A/c (provision made) 16,500 31,500 31,500 CU IDOL SELF LEARNING MATERIAL (SLM)

136 Advanced Financial Accounting Dr. Goodwill Account Cr. ` Particulars ` Particulars 7,500 7,500 To Balance b/d – By Balance c/d ` To Share Capital a/c 7,500 53,700 7,500 Cash Flow Statement for the year ended December 31, 2015 Particulars ` Cash Flows from Operating Activities: 200 Increase in the balance of Profit and Loss A/c Adjustments for Non-cash and Operating Items: 11,500 Dividend paid 5,000 Depreciation on land and buildings 6,000 Depreciation on machinery 5,100 Transfer to General Reserve 16,500 Provision for Tax 10,000 Purchase of stock against issue of shares (being non cash) 54,300 Operating profit before working capital changes Adjustment for changes in current operating 13,000 assets and liabilities 7,900 Decrease in Stock (7,500) Decrease in Debtors 67,700 Decrease in Sundry Creditors 14,000 Cash generated from operations Less: Income tax paid Net cash from operating activities CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 137 Cash Flow from Investing activities: (4,000) Purchase of Machinery (other than for issue of shares) 900 Sale of Machinery Net cash used in investing activities (3,100) Cash flows from Financing Activities: Payment of Bank loans (35,000) Dividend paid (11,500) Net Cash used in financing activities Net increase in cash and cash equivalents (46,500) Cash and cash equivalents at the beginning of the year 4,100 Cash and cash equivalents at the end of year (300 + 4000) 200 4,300 7.7 Summary A holding company is one which holds either the whole of the share capital or a majority of the shares in another company. That other company (the shares of which are held by the holding company) is called the subsidiary company. Under the Companies Act, 2013, a holding company is any company which holds more than half of the equity share capital of other companies or controls the composition of the board of directors of other companies. Consolidation of Balance Sheets refers to the combining of the separate Balance Sheets of the holding company and its subsidiary into a single Balance Sheet. The shareholders of a holding company are interested in the financial affairs of its subsidiary to the extent of their holdings in the subsidiary company. Consolidation of Balance Sheets refers to the combining of the separate Balance Sheets of the holding company and its subsidiary into a single Balance Sheet. The shareholders of a holding company are interested in the financial affairs of its subsidiary to the extent of their holdings in the subsidiary company. CU IDOL SELF LEARNING MATERIAL (SLM)

138 Advanced Financial Accounting (i) Ascertain the Degree or Percentage of holding of shares of the subsidiary company, (ii) Ascertain the pre-acquisition and post-acquisition periods, (iii) Ascertain the pre-acquisition and post-acquisition profits and divide it between the holding company and the Minority, (iv) Calculate the Cost of Control, (v) Calculate the unrealized Profit and eliminate it completely, i.e., deduct it from the profit as well as stock, (vi) Eliminate Mutual obligation, (vii) Calculate Minority Interest. 7.8 Key Words/Abbreviations z Holding Company: A holding company is any company which holds more than half of the equity share capital of other companies. z Minority Interest: It refers to the claim of the outside shareholders in the net assets of the subsidiary company. z Pre-acquisition Period: It is the period before the shares are acquired by the holding company. z Contingent Liabilities: Contingent liabilities are shown as a foot note after the Balance Sheet. 7.9 Learning Activity 1. What are unrealized profits? How is it treated in a consolidated Balance Sheet? _________________________________________________________________ _________________________________________________________________ 2. Briefly explain the steps involved in the preparation of a consolidated Balance Sheet. _________________________________________________________________ _________________________________________________________________ 3. What are the components of Capital Profit? Explain its. _________________________________________________________________ _________________________________________________________________ CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 139 7.10 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. What is Minority Interest? How do you calculate it? 2. What is Goodwill? How do you calculate it? 3. What is Capital Reserve? How is it calculated? 4. What are the components of Capital Profit? How is it ascertained? 5. How do you ascertain Revenue Profit? 6. Following is the balance sheet of S Ltd.: Balance Sheet of S Ltd. as on March 31, 2018 Liabilities ` Assets ` Land and Buildings 5,00,000 Share capital 3,00,000 5,00,000 Machinery 2,00,000 50,000 shares of ` 10 each 2,00,000 Current Assets General Reserve as on April 1, 2018 2,00,000 1,00,000 Profit and Loss Account 1,50,000 Add: Profit for 1998 50,000 Creditors 10,00,000 10,00,000 H Ltd. acquired 40,000 shares of S Ltd. on October 1, 2017 at ` 7,80,000. H Ltd. valued the machinery at ` 2,50,000 and current assets at ` 2,75,000. Calculate the minority interest. Ans: Minority interest ` 1,85,000 CU IDOL SELF LEARNING MATERIAL (SLM)

140 Advanced Financial Accounting 7. The summarised Balance Sheets of Honey Ltd. and Moon Ltd. as on March 31, 2018, were as follows: Liabilities Honey Moon Assets Honey Moon Ltd. Ltd. Ltd. Ltd. Capital: ` ` ` ` 2,500 equity shares of ` 100 each Plant 1,20,000 54,700 2,50,000 — 1,000 equity shares of Premises 75,000 90,000 ` 100 each — 1,00,000 Capital Reserve — 60,000 Investments in Moon Ltd. at cost 1,70,000 — General Reserve 1,20,000 — Stock 70,000 18,000 Profit and Loss Account 28,600 18,000 Profit and Loss Account 28,600 18,000 Bank overdraft 50,000 — Debtors 21,000 20,000 Bills payable including Amount owing by 1,000 — ` 1,500 to Honey Ltd. — 4,200 Moon Ltd. Creditors 23,550 — Bank 7,250 4,000 Bills receivable including 7,900 — ` 1,500 from Moon Ltd. `` `` Creditors: Honey Ltd. — 500 Others — 4,000 4,72,150 1,86,700 4,72,150 1,86,700 CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 141 Honey Ltd. acquired 800 equity shares of ` 100 each in Moon Ltd. on July 1, 2018. Prepare a consolidated Balance Sheet as on March 31, 2018, showing your workings. (a) Sundry creditors of Honey Ltd. include ` 6,000 due to Moon Ltd. (b) The directors are advised that the premises of Moon Ltd. are undervalued by ` 10,000 and its plant overvalued by ` 5,000. (c) A cheque for ` 500 sent to Honey Ltd. by Moon Ltd. on March 30, 2018 was not received by the former until April 3, 2018. Ans: Balance Sheet total ` 5,20,250 8. Balance Sheets Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd. Share capital: ` ` ` ` Sundry Assets 6,00,000 3,00,000 Shares of ` 100 each 5,00,000 2,00,000 1,500 shares in S Ltd. 2,40,000 — Reserves 1,40,000 50,000 Profits 1,00,000 30,000 Creditors 1,00,000 20,000 8,40,000 3,00,000 8,40,000 3,00,000 S Ltd. had a credit balance of ` 10,000 in the Reserves when H Ltd. acquired shares in it. S Ltd. made a bonus issue of one share for every five shares held, all out of the post-acquisition profits. Calculate the cost of control before and after the bonus issue and prepare the consolidated Balance Sheet. Ans: Balance Sheet total ` 9,52,500 CU IDOL SELF LEARNING MATERIAL (SLM)

142 Advanced Financial Accounting 9. The following Balance Sheets are presented to you (as on 31-3-2018): Particulars H Ltd. S Ltd. ` ` Share capital: Shares of ` 100 each 5,00,000 2,00,000 1,00,000 — General Reserve — Profit and Loss Account 80,000 6% Debentures — 1,00,000 Trade creditors 45,000 75,000 Fixed Assets 7,55,000 3,45,000 Stock 1,50,000 Debtors 3,50,000 40,000 6% Debentures in S Ltd. (acquired at par) 90,000 30,000 Shares in S Ltd. 1,500 @ ` 80 60,000 — Bank 60,000 — Profit and Loss Account 25,000 1,20,000 1,00,000 75,000 — 3,45,000 7,55,000 H Ltd. acquired the shares on May 1, 2018. The Profit and Loss Account of S Ltd. showed a debit balance of ` 1,50,000 on April 1, 2018. During March 2018, goods costing ` 6,000 were destroyed by fire and the insurers paid only ` 2,000. Trade creditors of S Ltd. include ` 20,000 for goods supplied by H Ltd. on which the latter company made a profit of ` 2,000. Half of the goods were still in stock. Prepare the consolidated Balance Sheet. Ans: Balance Sheet total ` 8,71,000 10. Glory Co. Ltd. had a profit of ` 3,60,000 for the year ended March 31, 2015, after taking into consideration the following: CU IDOL SELF LEARNING MATERIAL (SLM)