EXAMPLE ONE: Basic Consolidation

Balance Sheet H Ltd H Fixed Assets Tangible Investments: 50,000 ordinary shares in S at cost 50,000 110,000 60,000 40,000 S Ltd

Current Assets Stock Debtors: S Ltd: 4,000 Other: 6,000 10,000 Bank 5,000 15,000 6,000 20,000 15,000

Creditors Amount Due Within One Year Due to H Ltd. Creditors (others) (7,000) 28,000 138,000 (4,000) (7,000) 25,000 65,000

Ordinary Share Capital @ 1 Reserves

100,000 38,000 138,000

50,000 15,000 65,000

Above are the individual balance sheets for H (the holding company) and S its 100% subsidiary. H has owned S since S was incorporated. Required: Prepare the consolidated balance sheet for the H Group.

SOLUTION ONE: H & S GROUP

Fixed Assets Current Assets

Tangible Stock Drs Bank 35,000 21,000 11,000

100,000

(60 + 40) (20 + 15) (10 - 4 + 15) (5 + 6)

Creditors (Current due within one year)

67,000 (14,000) 153,000

(7 + 11 - 4)

Ordinary Share Capital Reserves .

100,000 53,000 153,000

(Share capital is holding co. only) (38 + 15)

(1)

Investment in subsidiary in H books cancels with share capital of S in subsidiary books Cancel - inter company Debtors / Creditors. Add together uncancelled items. No cost of control arises so there is no goodwill. H had owned S since incorporation therefore no pre acquisition period. No minority interest arises as H owns 100% of S.

(2) (3) (4) (5) (6)

EXAMPLE TWO: Inter-Company Loan & Goods in Transit Balance Sheet as at 31st December 95 H Fixed Assets: Tangible Investments: Investment in S at cost 90,000 1 ordinary shares 30,000 10% loan stock in S 200,000 150,000 S

90,000 30,000

Current Assets: Stock Debtors Current Account with S Cash 60,000 50,000 20,000 5,000 135,000 Creditors Within One Year: Current Account with H Creditors 55,000 Taxation 20,000 (75,000) 380,000 Creditors After One Year: 10% loan stock 12% loan stock Capital & Reserves: Ordinary shares 1 Reserves 40,000 35,000

7,000 82,000

13,000 25,000 15,000 (53,000) 179,000

50,000 80,000

200,000 100,000 380,000

90,000 39,000 179,000

Above are the individual balance sheets for H (holding company) and its subsidiary S. H has invoiced S for goods to the value of 7,000 which S has not yet received. H has owned 100% of S since S was incorporated. Required: Prepare the consolidated balance sheet for the H Group.

SOLUTION TWO: Fixed Assets: Tangible Current Assets: Stock Goods in Transit Debtors Cash 100,000 7,000 85,000 12,000 (60 + 40) (20 - 13) (50 + 35) (5 + 7) 204,000 Creditors Within One Year: Creditors Taxation 80,000 35,000 (55 + 25) (20 + 15) (115,000) 439,000 Creditors After One Year: 10% loan stock 12% loan stock 20,000 80,000 (Amount Owed outside group only) 100,000 339,000 350,000 (200 + 150)

Capital & Reserves: Ordinary shares 1 200,000 (H only) Reserves (H + S post acquisition retained reserves) 200,000 139,000 339,000

EXAMPLE THREE: Basic Consolidation Rules to Date Balance Sheet: H Fixed Assets: Tangible Investment in S: 100,000 1 ordinary shares 12% Loan stock: Current Assets: Stock Debtors Current account with S Cash 75,000 40,000 30,000 10,000 155,000 Liabilities Within One Year: Creditors Taxation Current account with H 40,000 20,000 30,000 10,000 24,000 (60,000) Liabilities After One Year: 10% Loan stock (100,000) 420,000 12% loan stock (90,000) 124,000 (64,000) 80,000 40,000 250,000 100,000 75,000 150,000 S

8,000 128,000

Ordinary Share Capital Reserves

300,000 120,000 420,000

100,000 24,000 124,000

H has invoiced S for 6,000 of goods which S has not yet received. H has owned S since incorporation. Required: Prepare the consolidated balance sheet for the H Group.

SOLUTION THREE: Consolidated Balance Sheet: Fixed Assets 400,000

Current Assets :

Stock (incl. goods in transit) 161,000 Debtors Cash 80,000 18,000 259,000

Creditors amounts due within 1 yr

Trade Creditors Taxation

(70,000) (30,000) (100,000)

Creditors amounts due after 1 yr

12% Loan Stock 10% Loan Stock

(15,000) (100,000) (115,000) 444,000

Ordinary Share Capital (H only) Reserves *

300,000 144,000

444,000

Reserves *

(H reserves plus groups shares of the post acquisition retained reserves of S)

EXAMPLE FOUR: Minority Interest Balance Sheet as at 31/12/1995 H Ltd. S Ltd.

Fixed Assets:

Tangible 20,000 1 ordinary shares in S (At cost) Current Assets:

70,000

40,000

20,000

30,000 120,000

20,000 60,000

100,000 1 ordinary shares Reserves

100,000 20,000 120,000

25,000 1 ordinary shares

25,000 35,000 60,000

Above are the balance sheets of H (holding company) and its subsidiary S. H has owned 80% of S since S was incorporated.

Required:

Prepare the consolidated balance sheet for the H Group.

SOLUTION FOUR:

Consolidated Balance Sheet:

Fixed Assets Tangible Current Assets (70 + 40) (30 + 20) 110,000 50,000 160,000 Long Term Liabilities Minority Interests 12,000 148,000 - (100% H + 100% S) - (100% H + 100% S)

Share Capital [20,000 + .8 x 35,000] Reserves

100,000 48,000 148,000

- 100% H only - (100% H + 80% S)

Workings:

The total assets and liabilities of S are included in the consolidated balance sheet even when only part of S is owned by H - provided there is control / dominant influence (FRS 2).

Minority Interest

amount of net assets as represented by ordinary share capital and reserves attributable to the minority. 20% of shares 20% of reserve 25,000 x 20% 35,000 x 20% 5,000 7,000 12,000

Group Reserves - H reserves plus groups shares (80%) of the post acquisition retained reserves of S

EXAMPLE FIVE: Total Minority Interest and Allocation of Reserves Between the Group and Minority Interest

H Ltd.

S Ltd.

Fixed Assets Tangible 70,000

Fixed Assets Tangible 60,000

Investment in S Ltd. 20,000 1 ordinary Shares 6,000 1 Preference Shares 7,000 12% Debentures 20,000 6,000 7,000 33,000

Net Current Assets:

20,000

Net Current Assets:

30,000

Creditors after one year 12% Debentures 123,000 (20,000) 70,000

Capital and Reserves Ord Share Capital Revenue Reserves 70,000 53,000

Ord. Share Capital 1 Preference Share Capital Capital Reserve Revenue Reserve 123,000

25,000 12,000 10,000 23,000 70,000

Required: Prepare the consolidated balance sheet of the H Group. H acquired its interest in S when the company was incorporated.

SOLUTION FIVE: Prepare separate working for minority interest and each reserve. Minority interest in reserves is based on minority share of ordinary share capital. The ownership of ordinary share capital decides ownership of reserves. (1) Minority Interest ( 5,000 25,000 Ordinary Share Capital Reserves Capital Revenue = 20%):

20% x 25,000 20% x 10,000 20% x 23,000

5,000 2,000 4,600 11,600

Preference Share Capital 6,000 = 12,000 (2) Capital Reserves: H Ltd. S Ltd (Hs share)

50% x 12,000

6,000 17,600 - Total Minority Interest

10,000 x 80%

8,000 - Post Acquisition Only 8,000 - Total Capital Reserve

(3)

Revenue Reserve: H Ltd. S Ltd (Hs share) 53,000 18,400 - Post Acquisition Only 71,400 - Total Revenue Reserve

23,000 x 80%

Consolidated Balance Sheet of H Group: Tangible fixed assets Net current assets Creditors After 1 Year 12% debentures Minority Interest 130,000 50,000 (70 + 60) (20 + 30)

(13,000) (17,600) 149,400

External liability only

Capital & Reserves Ordinary Share Capital Capital reserve Revenue reserve 70,000 8,000 71,400 149,400 H only

EXAMPLE SIX: Dividends Receivable Payable; Working off up to date information for the purposes of consolidation H Ltd. S Ltd.

Fixed Assets

Tangible Investment in S

10,000

Tangible

8,000

6,000 ordinary shares @ 1 6,000 16,000

Current Assets

5,000

Current Assets Current Liabilities Creditors 3,000

6,000

Current Liabilities (2,000)

(1,000)

Proposed Div.(1,000) 4,000 12,000

19,000

Ordinary Share Capital Revenue Reserve

10,000 9,000 19,000

Ordinary Share Capital 10,000 Revenue Reserve 2,000 12,000

H has not taken credit for dividends receivable from S. H has owned 60% of S, since S was incorporated. Required: Prepare the consolidated balance sheet for the H Group. If H has not taken credit for dividends receivable from S the following entries are required: H: Dr Debtors - with Hs share of the dividend Cr Reserves - with Hs share of the dividend

The debtors in H will cancel with part of the creditors in S (for dividends payable) leaving only the dividend payable outside the group i.e. the amount of proposed dividend which is attributable to the minority interest. This figure will appear as a current liability in the consolidated balance sheet.

SOLUTION SIX:

(1)

Bring Hs individual balance sheet up to date for the dividends receivable from S (60% of 1,000) / Adjust H balance sheet for dividends receivable. The revenue reserves of H also have to be updated. Debit Debtors in H Credit Reserves in H 600 600

(2)

Minority Interest in S

40% of O.S.C. 40% of Revenue Reserve

4,000 800

4,800 (3) Group Revenue Reserves H (adjusted) Share of S 9,600 1,200 10,800 (9,000 + 600) (60% of 2,000) Post acquisition element

Consolidated Balance Sheet of H Group:

Fixed Assets Current Assets 11,000

18,000 (5,000 + 6,000 Debtor in H of 600 cancels with creditor in S of 600)

Current Liabilities Proposed Dividend

(3,000) (400) 7,600 25,600

2,000 + 1,000 (1,000 - 600) Amount payable to

Long Term Liabilities Minority Interest

4,800 20,800

Ordinary Share Capital (H only) Revenue Reserves

10,000 10,800 20,800

EXAMPLE SEVEN: Dividend Adjustments and Working Off Up To Date Information

(a) Provide for: (b) (c)

preference dividend of S Ltd. proposed ordinary dividend of 10% by S Ltd. proposed ordinary dividend of 15% by H Ltd.

H Ltd

S Ltd

Tangible Assets

100,000

Tangible Assets

120,000

Investment in S 60,000 1 O.S.C. 10,000 1 12% preference shares Current Assets Creditors within one year (24,000) 26,000 196,000 60,000 10,000 50,000 70,000 Current Assets 40,000 24,000 144,000

Creditors within one year (16,000)

Ordinary Share Capital

100,000

Ordinary S/C Pref. 1 12%

100,000 20,000 24,000 144,000

Revenue Reserves

96,000 196,000

Revenue Reserve

Required: Prepare the consolidated balance sheet of the H Group.

SOLUTION SEVEN: (1) Adjust both H and S for dividends payable and receivable H Ltd Tangible Assets 100,000 Tangible Assets S Ltd 120,000

Investment in S 60,000 1 O.S.C. 60,000 10,000 1 12% pref. 10,000 70,000 Current Assets Current Liabilities 57,200 (39,000) 18,200 Current Assets 40,000 Current Liabilities (16,000) Proposed Pref Div ( 2,400) Ord Div. (10,000) 11,600 131,600 O.S.C. Preference Share Capital Revenue Reserves
(24,000 - 2,400 - 10,000)

188,200 O.S.C. Revenue Reserves

100,000

100,000 20,000 11,600 131,600

88,200 188,200

Workings: Current Assets (H Ltd) Opening Balance Adjustments: Preference Dividend receivable 50% of 2,400 Ordinary Dividend receivable

50,000

1,200 6,000 57,200

Minority Interest Ordinary share capital 40% of 100,000 40,000 40% of 11,600 4,640 Revenue Reserve Preference Share Capital 50% of 20,000 10,000 54,640 Revenue Reserves Revenue Reserves H Ltd (adjusted balance) Share of S Ltds adjusted reserve (11,600 x 60%)

88,200 6,960 95,160

Minority Interest: Current Liability Preference Dividend (2,400 x 50%) Ordinary Dividend (10,000 x 40%) SOLUTION SEVEN:

1,210 4,000 5,200

Consolidated Balance Sheet of H Group:

Tangible Fixed Assets Current Assets (57,200 + 40,000 - 1,200 - 6,000) Current Liabilities Creditors Proposed Dividend Minority Proposed Div. (1,200 + 4,000) 40,000 15,000 5,200 (60,200) 90,000

220,000

29,800 247,800

Less Minority Interest

54,640 195,160

Ordinary S.C. Reserves

100,000 95,160 195,160

The inter company debtors in H will cancel with the creditors in S leaving only the dividends payable to the minority. The reserves of H and S reflect the up to date figures for consolidation purposes.

EXAMPLE EIGHT: Goodwill Calculation Arising on Consolidation H 250,000 125,000 100,000 475,000 300,000 175,000 475,000 S 150,000 70,000 220,000 100,000 120,000 220,000

Assets Investment in S 75,000 1 Shares Net Current Assets

Assets Net Current Assets

O.S.C. 1 P & L Reserve

O.S.C. 1 Reserves

H purchased shares in S when S reserves were 50,000. Goodwill: Acquired: O.S.C. Reserves 100,000 x 75% 50,000 x 75% Cost of Investment 75,000 37,500 112,500 (difference between the cost of the investment and the fair value of net assets acquired) Goodwill Minority Interest: 25% of 100,000 25% of 120,000 Group Reserves: Groups share of post acquisition reserves of S H Ltd = = = 25,000 30,000 175,000 55,000 12,500 125,000

(120,000 - 50,000) 70,000 x 75% 52,500 227,500

Consolidated B/S H Group: Fixed Assets Intangible Asset (Goodwill) Net Current Assets 400,000 12,500 170,000 582,500 300,000 (H only) 227,500 55,000 582,500

O.S.C. Reserves Minority Interest

Goodwill will be capitalised and amortised to the P & L account over a defined period normally 20 years on a systematic basis.

EXAMPLE NINE: Acquisitions of Subsidiaries during the year

H ACQUIRED 80% OF S ON 31ST MARCH 1995. The share premium and revenue reserves of S at the 31/12/1994 were 12,000 and 20,000 respectively. From the information provided below you are required to prepare the consolidated balance sheet of the H Group.

Draft Balance Sheet of H & S at 31st Dec 1995

H Ltd

S Ltd

Fixed Assets Tangible fixed assets 32,000 1 ord. shares in S 70,000 80,000 50,000

Net Current Assets

40,000 190,000

34,000 84,000

Capital and Reserves: Ordinary Shares 1 Share Premium account Revenue Reserves 20,000 70,000 90,000 190,000 100,000 12,000 32,000 44,000 84,000 40,000

SOLUTION NINE: Revenue Reserves calculation: S Profit for year 32,000 - 20,000 Pre Acq. 12,000 x Pre Acq. Revenue Reserves 20,000 + 3,000 Share Premium All Pre Acquisition Minority Interest: 20% (40,000 + 12,000 + 32,000) 16,800 (Note breakdown between pre and post acquisition reserves is irrelevant for the minority interest.) Goodwill: Cost of Investment Less group share of assets at date of acquisition: O.S.C. 40,000 Pre acq. share premium 12,000 Pre acq. revenue reserves 23,000 75,000 Groups share 80% Goodwill Consolidated Revenue Reserves: H Ltd. S Ltd 80% of (32000 - 23000) 70,000 = 80,000 = = = 12,000 3,000 23,000

(60,000) 20,000

Groups share of post acquisition reserves 7,200 Total 77,200

H Consolidated Fixed Assets Intangible Assets Net Current Assets Minority Interest Ordinary Share Capital Share Premium A/C Revenue Reserves 120,000 20,000 74,000 (16,800) 197,200 100,000 20,000 57,200 177,200 (50 + 70) (40 + 34)

H only

EXAMPLE TEN: Pre Acquisition Losses of Subsidiary H acquired 100% of S for 180,000 on 1st Jan 19X1. S revenue reserves had a debit balance of 60,000 at this date. In 19X1 S made a profit of 75,000. 31 December 19X1 H Assets Invest in S 100,000 1 osc Current Assets 190,000 Assets S 95,000 Consol. 425,000 (190+95+140)

30,000 400,000

Current Assets 20,000 115,000 O.S.C. 100,000 Revenue Res. 15,000 115,000

50,000 475,000 200,000 275,000 475,000

O.S.C. Revenue Reserve

200,000 200,000 400,000

Goodwill: Cost of Investment O.S.C. Losses 100,000 (60,000) 40,000 40,000 Goodwill Reserves: H Share of post Acq. 75000 x 100% 200,000 75,000 275,000 140,000 180,000

EXAMPLE ELEVEN: - Revaluation of Assets of Subsidiary to Fair Value (FRS 7) on Consolidation H acquired 80% of OSC of S on 1 January 19X5. Fair value of S assets was 40,000, higher than book value. Balance on revenue reserves of S were 30,000 at 31st December 19X4. S did not incorporate any revaluation into its own financial statements. S depreciates its fixed assets at 10% per annum. Balance Sheets of H and S as at 31 December 19X5 H Ltd: Fixed Assets Tangible assets: Invest in S at cost: Net Current Assets:

90,000 80,000 20,000 190,000

Capital and Reserves Ordinary Share Capital: Reserves:

100,000 90,000 190,000

S Ltd: Fixed Assets: Net Current Assets: 50,000 12,000 62,000

Capital and Reserves Ordinary Share Capital: Retained Profit:

25,000 37,000 62,000

Required: Prepare the consolidated balance sheet of the H Group.

SOLUTION ELEVEN: Additional depreciation / Debit P&L 40,000 @ 10% = Credit Accumulated Depreciation 4,000 4,000

Assets of S at Fair Value - Book Value Fair Value Adjustment Less Additional Depreciation

50,000 +40,000 - 4,000 86,000

S Ltd adjusted retained reserves. Balance per accounts at 1 Jan X5 Profit for year ended 31 Dec 19X5 Per accounts (37,000 - 30,000) Less additional Depreciation 40,000 x 10% Adjusted retained reserves at 31 Dec 19X5

30,000

7,000

(4,000) 3,000 33,000

Revaluation reserve (All pre acquisition) Minority Interest: O.S.C. 20% Reserves 20% Revaluation Reserve 20% 25,000 33,000 40,000

40,000

5,000 6,600 8,000 19,600

Goodwill: Cost of Investment Share of Net Assets represented by: Ordinary Share Capital 25,000 Reserves on Acq. 30,000 Revaluation Res. 40,000 95,000 @ 80% Goodwill 80,000

76,000 4,000

SOLUTION ELEVEN (contd): Consolidated Revenue Reserves:

H Ltd. Share of S post Acq. retained profits 3,000 @ 80%

90,000

2,400 (after S has charged additional depreciation) 92,400

H Group Consolidated Accounts:

Tangible Fixed Assets Intangible Fixed Assets Net Current Assets Minority Interest

176,000 4,000 32,000 19,600 212,000

(90 + 50 + 40 - 4)

(20 + 12)

Ordinary Share Capital Revenue Reserves

100,000 92,400 212,000

EXAMPLE TWELVE: Inter Company Trading

Balance Sheet 31/12/95:

H Ltd Tangible Assets Investment in S at cost Current Assets Current Liabilities 60,000 (35,000) 120,000 80,000 40,000 (30,000)

S Ltd 80,000

25,000 225,000 150,000 75,000 225,000

10,000 90,000 40,000 50,000 90,000

O.S.C. Reserves

During year S sold goods to H for 70,000. S had a 25% mark-up on cost. At year end H had goods received from S to the value of 20,000 in stock. H Ltd. owed S 18,000 included in creditors of H and debtors of S. H Ltd. acquired all the shares in S Ltd., when S reserves were 20,000.

Required: Prepare the consolidated balance sheet of the H Group.

SOLUTION TWELVE: Current Assets: Current Assets in H Less unrealised profit on stock 20,000 x 25 125 Current Assets in S Less debt with H 60,000 ( 4,000) 56,000 40,000 (18,000) Current Assets Current Liabilities: In H Less debt with S In S Goodwill: Cost of Investment Share of Net Assets Represented By: Share Capital Reserves at Acq. Goodwill Reserves: H Ltd 75,000 S Ltd Post acquisition retained profits 50,000 - 20,000 30,000 Less unrealised profit (4,000) 101,000 Balance Sheet H & S Group: Tangible Assets Intangible Assets Current Assets Current Liabilities 200,000 20,000 78,000 (47,000) 31,000 251,000 150,000 (H only) 101,000 251,000 (H & S) (40,000) (20,000) 20,000 80,000 35,000 (18,000) 17,000 30,000 22,000 78,000

56,000

Current Liabilities

(47,000)

Ordinary Share Capital Reserves