GOODWILL OR COST CONTROL :
In actual practice, it rarely happens that the cost of acquisition of shares in the subsidiary company agrees exactly with intrinsic value of the shares (i.e. the net assets of the subsidiary company) on the date of acquisition. If the price paid by the holding company for the shares acquired in the subsidiary company is more than the intrinsic value of the shares acquired, the difference should be treated as Cost of Control or Goodwill. If on the other hand, the price paid by the holding company for the shares acquired in the subsidiary company is less than the intrinsic value of the shares acquired, the difference should be treated as capital profits and credited to Capital Reserve. It should be noted that while computing the intrinsic value of the shares as on the date of acquisition of control, all profits and losses upto that date, have to be taken into account.
While preparing the consolidated balance sheet, such Goodwill or Capital Reserve, whatever may be the case, must be shown in the Balance Sheet.
Illustration 4
The Balance Sheets of H Ltd. and S Ltd. as on 31st March 2014 are given below:
| 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 | 6,00,000 | 2,00,000 |
| and paid up | ||
| (b) Reserve and surplus | ||
| General Reserve | 60,000 | 40,000 |
| Surplus A/c | 80,000 | 30,000 |
| 2 Current Liabilities | ||
| Trade Payables | 75,000 | 48,000 |
| TOTAL | ___8,15,000 __ | __3,18,000__ |
| II ASSETS | ||
| 1 Non-current Assets | ||
| (a) Fixed Assets | ||
| Tangible Fixed Assets | 5,91,000 | 3,18,000 |
| (b) Long term Investment | ||
| 1,600, Shares in S Ltd. (at cost) | __ 2,24,000__ | _______-______ |
| TOTAL | __8,15,000 __ | ____3,18,000___ |
H Ltd. acquired the shares in S Ltd. on 31st March 2014. The plant worth book value of ` 60,000 included in sundry assets of S Ltd. was re-valued at ` 50,000 on this date.
Prepare the consolidated balance sheets of H Ltd. and S Ltd. as on that date.
Solution:
1. Pre-acquisition profits and reserves*
(Rs.)
General Reserve as on 31.3.201 40,000
Surplus as on 31.3.2012 30,000
Total accumulated profits upto 31.3.2014 70,000
Holding Company’s share 4/5 x 70,000 56,000
Minority Interest 1/5 x 70,000 14,000
2. Loss on revaluation of plant as on 31.3.2014*
Loss on revaluation of plant Rs.60,000 – 50,000) 10,000
Holding Company’s share 4/5 x 10,000 8,000
minority Interest 1/5 x 10,000 2,000
3. Minority Interest
Paid-up value of 400 shares 40,000
Add: 1/5th share of pre-acquisition profits and reserves 14,000
54,000
Less: 1/5th shares of loss on revaluation of plant 2,000
Net amount due to minority shareholders 52,000
4. Goodwill or Cost of Control
Intrinsic value of shares held in S Ltd.:
Paid-up value of 1,600 shares 1,60,000
Add: 4/5th share of pre-acquisition profits and reserves 56,000
2,16,000
Less: 4/5th share of loss on revaluation of plant 8,000
Intrinsic value of 1,600 shares 2,08,000
Price paid for 1,600 shares 2,24,000
Cost of Control or Goodwill =Rs. (2,24,000 – 2,08,000) 16,000
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 | 6,00,000 | |
| (b) Reserve and surplus | ||
| General reserve | 60,000 | |
| Surplus A/c | 8 0,000 | |
| 2 Non-current liabilities | ||
| Minority Interest | 52,000 | |
| 3 Current Liabilities | ||
| Trade Payables | ||
| H Limited | 75,000 | |
| S Limited | 48,000 | 1,23,000 |
| TOTAL | 9,15,000 | |
| II ASSETS | ||
| 1 Non-current Assets | ||
| (a) Fixed Assets | ||
| H Limited | 5,91,000 | |
| S Limited | 3,08,000 | 8,99,000 |
| Goodwill | ___16,000___ | |
| TOTAL | ___9,15,000__ | |