CONTINGENT LIABILITIES :
If the contingent liabilities relate to the outsiders they must be shown by way of a footnote in the consolidated balance sheet. But a contingent liability in respect of a transaction between holding and subsidiary companies (internal contingent liability) will disappear from the foot note as they appear as actual liability in the consolidated balance sheet.
Illustration 5
From the following balance sheets of H Ltd. and its subsidiary S Ltd. drown up at 31st March, 2014, prepare a consolidated balance sheet as at that date, having regard to the following:
(i) Reserves and Profit and Loss Account (Cr.) of S Ltd. stood at Rs. 25,000 and Rs.15,000 respectively on the date of acquisition of its 80% shares by H Ltd.
(ii) Machinery (book-value Rs. 1,00,000) and Furniture (Book-value Rs.20,000) of S Ltd. were revalued at Rs. 1,50,000 and Rs. 15,000 respectively for the purpose of fixing the price of its shares; book values of other assets remaining unchanged. These values are to be considered for consolidation purposes.
Balance Sheet of H Ltd. as on 31st March, 2014
| I EQUITIES AND LIABILITIES | H Ltd. Amount (Rs.) | S Ltd. Amount (Rs.) | ||
| 1 Shareholders’ funds | ||||
| (a) Share Capital | ||||
| Authorised, Issued subscribed and paid | ||||
| up capital | ||||
| Equity shares of ` 100 each, fully called up | 5,00,000 | 1,00,000 | ||
| and paid up | ||||
| (b) Reserve and surplus | ||||
| General Reserve | 2,00,000 | 75,000 | ||
| Profit and Loss A/c | 1,00,000 | 3,00,000 | 25,000 | 1,00,000 |
| 2 Current Liabilities | ||||
| Trade Payables | 1,55,000 | 50000 | ||
| TOTAL | 9,50,000 | 2,50,000 | ||
| II ASSETS | ||||
| 1 Non-current Assets | ||||
| (a) Fixed Assets | ||||
| Machinery | 3,00,000 | 90,000 | ||
| Furniture | 50,000 | 17,000 | ||
| Other Assets | 4,40,000 | 7,90,000 | 1,43,000 | 2,50,000 |
| (b) Long term Investment | ||||
| 800, Shares at ` 200 each in S Ltd. (at cost) – | 1,60,000 | ____-____ | ||
| TOTAL | 9,50,000 | 2,50,000 | ||
Solution:
Working Notes:
1. Pre-acquisition profits and reserves of S Ltd.
(Rs.)
Reserve 25,000
Profit and Loss Account 15,000
40,000
H Ltd.’s = 4/5 x 40,000 32,000
Minority Interest = 1/5 x 40,000 8,000
2. Profit on revaluation of assets of S Ltd.
Profit on Machinery Rs.(1,50,000 – 1,00,000) 50,000
Less: Loss on Furniture Rs.(20,000 – 15,000) 5,000
Net profit on revaluation 45,000
H Ltd.’s share 4/5 x 45,000 36,000
Minority Interest 1/5 x 45,000 9,000
3. Post-acquisition reserve of S Ltd.
Post-acquisition reserves = Rs.(75,000 – 25,000) 50,000
H Ltd.’s share 4/5 x 50,000 40,000
Minority Interest 1/5 x 50,000 10,000
4. Post-acquisition profits of S Ltd.
Post-acquisition profits ` (25,000 – 15,000) 10,000
Add: Excess depreciation charged on furniture @ 15%
on ` 5,000 i.e. (20,000 – 15,000) 750
10,750
Less: Under-depreciation on machinery @ 10%
on ` 50,000 i.e. (1,50,000 – 1,00,000) 5,000
Adjusted post-acquisition profits 5,750
H Ltd.’s share 4/5 x 5,750 4,600
Minority Interest 1/5 x 5,750 1,150
Note: Rate of depreciation has been ascertained as follows:
Machinery = 10,000*/100 000 x 100 = 10%
Furniture = 3 000*/20 000 x 100 = 15%
5. Minority Interest
Paid-up value of (1,000 – 800) 200 shares held by outsiders, i.e., 200 x ` 100 20,000
Add : 1/5th share of pre-acquisition profits and reserves 8,000
“ 1/5th share of profit on revaluation 9,000
“ 1/5th share of post-acquisition reserves 10,000
“ 1/5th share of post-acquisition profit 1,150
48,150
6. Cost of Control or Goodwill
Paid-up value of 800 shares held by H Ltd. i.e., 800 xRs.100 80,000
Add: 4/5th share of pre-acquisition profits and reserves 32,000
4/5th share of profit on revaluation 36,000
Intrinsic value of the shares on the date of acquisition 1,48,000
Price paid by H Ltd. for 800 shares 1,60,000
Less: Intrinsic value of the shares 1,48,000
Cost of Control or Goodwill 12,000
* The difference between the book figure stated in point (ii) of the problem and the figures in the balance sheet
of S Ltd.
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as at 31st March, 2014
| I EQUITIES AND LIABILITIES | S Ltd. Amount (Rs.) | ||
| 1 Shareholders’ funds | |||
| (a) Share Capital | |||
| Authorised, Issued subscribed and paid up capital | |||
| Equity shares of ` 100 each, fully called up and paid up | 5,00,000 | ||
| (b) Reserve and surplus | |||
| Reserve | 2,00,000 | ||
| Add: 4/5 shares in post acquisition reserve of ‘S’ Limited | __40,000_ | 2,40,000 | |
| Surplus Account | 1,00,000 | ||
| Add: 4/5 shares in post acquisition profits of ‘S’ Limited | __4,600__ | 1,04,600 | |
| 2 Non-current liabilities | |||
| Minority Interest | 48,150 | ||
| 3 Current Liabilities | |||
| Trade Payables | |||
| H Limited | 1,50,000 | ||
| S Limited | 50,00 0 | 2,00,000 | |
| TOTAL | 10,92,750 | ||
| II ASSETS | |||
| 1 Non-current Assets | |||
| (a) Fixed Assets | |||
| Machinery | |||
| H Limited | 3,00,000 | ||
| S Limited | 1,00,000 | ||
| Add: Appreciation | 50,000 | ||
| Total | 1,50,000 | ||
| Less: Depreciation | 15,000 | 1,35,000 | 4,35,000 |
| Furniture | |||
| H Limited | 50,000 | ||
| S Limited | 20,000 | ||
| Less:: Decrease in Value | 5,000 | ||
| 15000 | |||
| Less: Depreciation | 2,250 | 12,750 | 62,750 |
| Goodwill | 12,000 | 12,000 | |
| Other Assets | |||
| H Limited | 4,40,000 | ||
| S Limited | 1,43,000 | 5,83,000 | |
| TOTAL | 10,92,750 | ||