PREPARATION OF CONSOLIDATED PROFIT AND LOSS STATEMENT :
While preparing the Consolidated Profit and Loss Statement of the holding company and its subsidiary, the items appearing in the Profit and Loss Statement of the holding and subsidiary companies have to be aggregated. But in doing so, the following adjustments have to be made:
(i) Transfer of goods between the holding company and the subsidiary company should be eliminated both from the purchases and sales appearing in the Consolidated Profit and Loss Statement.
(ii) Stock Reserve for unrealised profit in respect of inter-company transactions should be created by debiting Consolidated Profit and Loss Statement and crediting Stock Reserve Account.
(iii) The share of profits of the subsidiary company arising before the date of acquisition of shares by the holding company that belongs to the holding company will be debited to the Consolidated Profit and Loss Statement and credited to Capital Reserve or Goodwill Account as the case may be. In case of loss the entry will be just reversed.
(iv) The share of profits or losses belonging to the minority shareholders will be respectively credited or debited to Minority Interest Account.
(v) Dividends received from the subsidiary company by the holding company should be eliminated from both the sides of the Consolidated Profit and Loss Statement.
(vi) Care should be taken to see that both the companies pass entries for interest accrued and outstanding on debentures of the subsidiary company held by the holding company. The debenture interest should be eliminated from both the sides of the Consolidated Profit and Loss Statement to the extent to which it relates to the debentures held by the holding company.
(vii) If the subsidiary company has passed entries for proposed dividend and the holding company has taken credit for its shares of the dividends, the holding company’s share should be eliminated from both the sides of the Consolidated Profit and Loss Statement. The necessary changes should also be made on both the sides of the Consolidated Balance Sheet. However, if the holding company has not passed entries for proposed dividends of the subsidiary company, the debit in respect of the proposed dividend should be reduced by the holding company’s share in such proposed dividend and obviously, the liability in respect of proposed dividend in the Consolidated Balance Sheet should also be reduced.
(viii) If there are profits and the dividends on cumulative preference shares are in arrears, the arrears of dividends on preference shares held by the Minority shareholders should be debited to the Consolidated Profit and Loss Statement and credited to Minority Interest Account.
(ix) If fixed assets of the subsidiary company are revalued at the time of acquisition of shares by the holding company without any alteration in book-values, the excess or short depreciation should be adjusted by debiting or crediting the Consolidated Profit and Loss Statement and crediting or debiting the respective Asset Account.
(x) The minority interest will consist of its proportion of total profits after adjustment of excess or short depreciation due to over or under valuation of fixed assets, but before adjusting the proportionate unrealised profit on stock.
It is important to note here that the consolidated Profit and Loss Statement has got no concern with the
Consolidated Balance Sheet. It is prepared in addition to the Consolidated Balance Sheet to serve the purpose
of showing the total profits earned by the group of companies for a particular period.
Illustration
The Trial Balances of H Ltd. and S Ltd. as on 31st December 2013 were as under:
| H Ltd. | S Ltd. | |||
|
Dr. (Rs.) |
Cr. (Rs.) | Dr. (Rs.) | Cr. (Rs.) | |
| Equity Share Capital | 10,00,000 | 2,00,000 | ||
| (Share of ` 100 each) | ||||
| 7% Preference Share Capital | — | 2,00,000 | ||
| (Share of ` 100 each) | ||||
| Reserves | 3,00,000 | 1,00,000 | ||
| 6% Debentures | 2,00,000 | 2,00,000 | ||
| Trade Receivables/Payables | 80,000 | 90,000 | 50,000 | 60,000 |
| P&L A/c balance | 20,000 | 15,000 | ||
| Purchases/Sales | 5,00,000 | 9,00,000 | 6,00,000 | 9,50,000 |
| Wages & Salaries | 1,00,000 | 1,50,000 | ||
| Debenture Interest | 12,000 | 12,000 | ||
| General Expenses | 80,000 | 60,000 | ||
| Preference-Dividend up to 30.6.2013 | 3,500 | 7,000 | ||
| Stock (31.12.2013) | 1,00,000 | 50,000 | ||
| Cash at Bank | 13,500 | 6,000 | ||
| Investment in S Ltd. | 5,28,000 | — | ||
| Fixed Assets | 11,00,000 | ———————————— | 7,90,000 | ————————- |
| Total | 25,13,500 | 25,13,500 | 17,25,000 | 17,25,000 |
Investment in S Ltd. were acquired on 1.4.2013 and consisted of 80% of Equity Capital and 50% of Preference Capital. Depreciation on fixed assets is written off @ 10% p.a. After acquiring control over S Ltd., H Ltd. supplied to it goods at cost plus 20%, the total invoice value of such goods being ` 60,000; 1/4 of such goods was still in stock at the end of the year.
Prepare the Consolidated Profit and Loss Statement for the year ended on 31st December, 2013.
Solution
Consolidated Profit and Loss Statement of H Ltd. and S Ltd.
for the year ended 31st December, 2013
| Particulars | Note No | Rs. |
| I. Revenue from operations | 1 | 17,90,000 |
| II. Total revenue | 17,90,000 | |
| III. Expenses | ||
| Cost of Material purchased/Consumed | 2 | 10,40,000 |
| Changes of Inventories of finished goods | ||
| Employee benefit expense (1,00,000 + 1,50,000) | 2,50,000 | |
| Finance cost (12,000 + 12,000) | 24,000 | |
| Depreciation and amortization expense[1,10,000+79,000] | 1,89,000 | |
| Other expenses [ 80,000 + 60,000] | 1,40,000 | |
| Total expenses | 16,43,000 | |
| IV. Profit before Tax (II-III) | 1,47,000 | |
| Profit transferred to Consolidated Balance Sheet | ||
| Profit After Tax | 1,47,000 | |
| Preference dividend | 3,500 | |
| Preference dividend payable | 3,500 | (7,000) |
| 1,40,000 | ||
| Less: Minority interest (WN 3) | (7,000) | |
| Capital reserve” | (7,000) | |
| Investment Account- dividend for 3 months (prior to acquisition) | (1,750) | |
| 60,000 x 20 | ||
| Stock reserve 4 x 120 | (2,500) | |
| Profit to be transferred to consolidated balance sheet | 1,21,750 |
Notes to Accounts
| Rs. | Rs. | |
| 1 Revenue from Operations | ||
| H Ltd. | 9,00,000 | |
| S Ltd. | 9,50,000 | |
| Total | 18,50,000 | |
| Less : Intragroup sales (H sold to S) | 60,000 | 17,90,000 |
| “Capital Reserve is made up of 3 month’s profit upto 1.4.2013 i.e. ¼ x 35,000 x 80/100. | ||
| 2 Cost of Materials Purchased/Consumed | ||
| H Ltd. | 5,00,000 | |
| S Ltd. | 6,00,000 | |
| Total | 11,00,000 | |
| Less : Intragroup sales (H sold to S) | (60,000) | 10,40,000 |
| Working Note | ||
| Profit of Subsidiary | ||
| Revenue From Operations | 9,50,000 | |
| Less : Expenses | ||
| Cost of Material purchased/Consumed | 6,00,000 | |
| Changes of Inventories of finished goods | ||
| Employee benefit expense | 1,50,000 | |
| Finance cost | 12,000 | |
| Depreciation and amortization expense | 79,000 | |
| Other expenses | 60,000 | 9,01,000 |
| Profit Before Tax | 49,000 | |
| Preference Dividend | 7,000 | |
| Preference Dividend Payable | 7,000 | |
| Profit available for shareholders | 35,000 | |
| Minority Share (20 %) | 7,000 |