Accounts of Groups Short Answer Type Questions
Question 1.
Explain the Scope of consolidated financial statements.
Answer:
Consolidated financial statements shall include all subsidiaries of the parent. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:
→ Power over more than half of the voting rights by virtue of an agreement with other investors.
→ Power to govern the financial and operating policies of the entity under a statute or an agreement.
→ Power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body.
→ Power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
Question 2.
Explain the need for consolidated financial statements.
Answer:
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parents and its subsidiaries are presented as those of a single economic entity.
1. Exemption from preparing group accounts:
A parent need not present consolidated financial statements if and only if all of the following hold.
(a) The parent is itself a wholly-owned subsidiary or it is a partially owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements.
(b) Its securities are not publicly traded.
(c) It is not in the process of issuing securities markets.
(d) The ultimate or intermediate parent publishes consolidated financial statements that comply
2. Potential voting rights: An entity may own share warrants, share call options, or other similar instruments that are convertible into ordinary shares in another entity. If these are exercised or converted they may give the entity voting power or reduce another party’s voting power over the financial and operatating policies of the other entity. The existence and effect of potential voting rights held by another entity, should be considered when assessing whether an entity has control over another entity.
3. Exclusion of a subsidiary from consolidation: The rules on exclusion of subsidiaries from consolidation are necessarily strict, because this is a common method used entities to manipulate their results, if a subsidiary which carries a large amount of debt can be excluded, then the gearing of the group as a whole will be improved. In other words, this is way of taking debt out of the consolidated statement financial position.
4. Different reporting dates: In most cases, ail group companies will prepare accounts to the same reporting date. One or more Subsidiaries may, however, prepare accounts to a different reporting date from the parent from the parent and the bulk of other Subsidiaries in the group.
In such case Subsidiary may prepare additional statements to the reporting date of the rest of the group, for consolidation purposes. If this is not possible, the Subsidiary’s accounts may still be used for the consolidation, provided that the gap between the reporting dates is three months or less.
5. Uniform accounting policies: Consolidated financial statements should be prepared using uniform accounting policies for like transaction and other events in similar circumstances. Adjustments must be made where members of a group use different accounting policies, so that their financial statements are suitable for consolidation.
Question 3.
Explain the Procedure for the preparation of consolidated financial position statement.
Answer:
In preparing consolidated financial statements, an entity combines the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial statements present financial information about the group as that of a single economic entity, the following steps are then taken:
(a) The carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated (see IFRS 3, which describes the treatment of any resultant goodwill).
(b) Non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting period are identified.
(c) Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the parent’s ownership interests in them. Non-controlling interests in the net assets consist of:
- The amount of those non-controlling interests at the date of the original combination calculated in accordance with IFRS 3.
- The non-controlling interests’ share of changes in equity since the date of the combination.
Question 4.
Explain the disclosures to be made in consolidated financial statements.
Answer:
(a) The nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power.
(b) The reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control.
(c) The end of the reporting period of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a date or for a period that is different from that of the parent’s financial statements, and the reason for using a different date or period.
(d) The nature and extent of any significant restrictions (example – resulting from borrowing arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.
(e) A schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control on the equity attributable to owners of the parent; and
(f) If control of a subsidiary is lost, the parent shall disclose the gain or loss.
- The portion of that gain or loss attributable to recognising any investment retained in the former subsidiary at its fair value at the date when control is lost.
- The line item(s) in the statement of comprehensive income in which the gain or loss is recognised (if not presented separately in the statement of comprehensive income).
Practical Problems
Question 1.
From the following Trial balance of Reddy prepare statement of financial position of the company as on 31.3.2016.
| Debit | Credit | ||
| Cash at Bank | 1,50,000 | Equity shares capital | 2,50,000 |
| Non current assets | 1,00,000 | Reserves and surplus | 50,000 |
| Non current investments | 50,000 | Non-current liabilities | 4,00,000 |
| Land and Building | 4,00,000 | Current liabilities | 1,00,000 |
| Furniture | 1,00,000 | Staff provident Fund | 1,00,000 |
| Office equipment | 50,000 | Deposits from public | 1,00,000 |
| Goodwill | 1,00,000 | Preference capital | 2,50,000 |
| Stock | 2,00,000 | ||
| Trade receivables | 1,00,000 | ||
| 12,50,000 | 12,50,000 |
Question 2.
Consolidated statement of financial position as at 31st March 2017.
Question 3.
The statements of financial position of Mohan Co. and of its subsidiary Sunil Co. have been made up to 30th June. Mohan Co. has owned ail the ordinary shares and 40% of the loan stock of Sunil Co. since its incorporation.
Question 4.
Shakir Co. acquired the ordinary shares of Mohsin Co. on 31 March when the draft statements of financial position of each company were as follows.
Question 5.
From the following prepare a statement of financial position on 31.3.2019 under companies Act, 2013.
Question 6.
H Ltd. acquired 60% shares of S Ltd. on 1.7.2018. The following information is available as on 31.3.2019 in respect of S Ltd.
(a) Share capital: 1,00,000 equity shares of 10 each
(b) General Reserve as on 1.4.2018 – 80,000
(c) P&L A/c balance (Cr.) on 1.4.2018 – 60,000
(d) Net profit for the year ended 31.3.2019 – 1,00,000
Calculate non-controlling interest. Dec 2019
Question 7.
H Company Ltd. acquired 4,000 equity shares of S company Ltd. as on 1st April 2017. the following are the Balance Sheet of the two companies as on 31.3.2018.
Calculate Non Controlling Interest and Goodwill / Capital Reserves.
Question 8.
Partho acquired 75% of the shares in Sonu on 1st January 2017 when Sonu had retained earnings of’ 15,000.
The market price of Sonu’s shares just before the date of acquisition was 1.60.
Partho values non-controiiing interest at fair value.
Goodwill is not impaired.
The statement of financial position of Partho and Sonu December 2016 were as follows:
Question 9.
Harsha Ltd., acquires 70% of the equity shares of Meena Ltd., on 1st January 2012.
On that date, paid up capital of Meena Ltd., was 10,000 equity shares of 10 each; accumulated reserve balance was 1,00,000.
Harsha Ltd., paid 1,60,000 to acquires 70% interest in the Meena Ltd., Assets of Meena Ltd., were revalued on 1.1.2012 and a revaluation loss of 20,000 was ascertained.
Calculate the value of goodwill. Nov 2018
Question 10.
H Ltd. acquired 75% of the shares of S Ltd. on 31.7.2015
And earned a profit of 67,500 for the year ending 31.3.2016.
The face value of shares of S Ltd. is 10 per share
The S Ltd. had a balance of 82,500 in P/L A/c as on 31.3.2016 and 1,05,000 in General Reserve.
Calculate the non controlling interest.
Solution:
Calculation of Non-controlling interest
a. Assetainment of ratio of holdings
No. of shares held by H Ltd. In S Ltd : No. of share held by Non-Controlled Shareholders
75% : 25%
Ratio of holding = 3:1
b. Ascertainment of share of capital profits of NC shareholders
| General Reserve balance | 1,05,000 |
| Balance of P/L A/c on 1.1.15 (82,500-67,500) | 15,000 |
| Share of Profit earned from | |
| 1.4.15 to 31.7.15 | 22,500 |
| Total capital profit | 1,42,500 |
| Share of NC shareholders (1,42,500 x 1/4) | 35,625 |
C. Ascertainment of Revenue Profits of NC shareholders
Profit earned from 1.8.15 to 31.3.16 (67,500×8/12) 45,000
Share of .NC shareholders of R.P. (45,000×1/4) 11,250
D. Calculation of NC Interest
| NC shareholders share of capital profit | 35,625 |
| NC shareholders share of Revenue profit | 11,250 |
| Amount of share capital holding by | |
| Non-Controlling interest | 96,875 |
Question 11.
Sri Rama Ltd. acquired 60% of Equity Shares in Laxman Ltd. on 1.10.2016. The following balances are extracted from the Balance Sheet of Laxman Ltd. as on 31.3.2017.
(i) Share capital: 40000 Equity shares of
(ii) General Reserve on 1.4.2016 80,000
(iii) Profit and Loss a/c (Credit) on 1.4.2016 30,000
(iv) Net profit for the year ended 31.3.2017 60,000
Calculate cost of control.
Question 12.
Calculate the Non-controlling interest from the following:
Geetha Ltd. acquired 75% of equity shares in Seetha Ltd. on 1.7.2015. The following balances are extracted from the financial position of Seetha Ltd. as on 31.3.2016.
1) Share capital
20000 Equity shares of 10 each
2) Balances as on 1.4.2015
General Reserve 70,000
Profit and Loss A/c 55,000
3) Net profit for the year
ending 31.3.2016 45,000
Solution:
Calculation of Non-Controlling interest
a. Ratio of holding
No. of shares held by Geetha 75%
No. of shares held by Non-Controlling shareholders in Seeth Ltd. 25%
Ratio of holding = 3 : 1s
b. Capital profits of Non-controlling shareholders
| General reserve on 1.4.2015 | 70,000 |
| P/L on 1.4.2015 | 55,00 |
| Net profit during the year (95,000×3/12) | 11,250 |
| Total | 1,36,250 |
| Non-Controlling shareholders hsares (1,36,250 x 1/4) | 34,062 |
C. Revenue Profit of Non-Controlling Shareholders
| Net profit during the year (95,000 x 3/4) | 33,750 |
| NCSH shares (33,750 x 1/4) | 8,937 |
| Non-controlling interest share capital profit | 50,000 |
| Add: Capital profit | 34,062 |
| Add: Revenue profit | 8,437 |
| Non-Controlling Interest | 92,499 |
Question 13.
Calculate the borrowing cost in the case of Indraprastha Co. Ltd.
(1) 30 crores arranged by 12% p.a. Debentures payable after 10 years, 10 crores by 12 years loan from SBI and 10 crores from Indian Bank. The SBI interest rate is 14% p.a. and Indian Bank interest rate is 16% p.a.
(2) Debentures repayable at 10% premium.
(3) the cost.of issue of Debentures is 22 lakhs
(4) The service charges for SBI loan 8%.
Question 14.
The cost of a machine is 3,00,000, which has 5 years of useful life. Depreciation is on straight line method at 10% p.a. Machine is expected to generate ‘ 30,000 p.a. net cashflow for 5 years.
The net realisable value of the machine on current date is 1,40,000.
The required rate of return is 10% p.a.
Calculate:
(i) Carrying amount of the machine.
(ii) Impairment loss
(iii) Revised carrying amount.
(The present value of an annuity at 10% p.a. for 5 years is 3.79).
Solution:
(i) Carrying cost of machinery:
Cost of machinery 3,00,000
Less: Depreciation at 10% 3,00,000 (for 5 years 30,000×5) 1,50,000
Carrying amount 1,50,000
Value in use 30,000 x 3.79 = 1,13,700
(ii) Impairment Loss
Carrying amount – Net realisable value 1,40,000 or value in use
(1,13,700 w.e.f (1,50,000 – 1,40,000)) 10,000
(iii) Revised carrying amount
(Carrying value – impairment loss)
(1,50,000 – 10,000) 1,40,000
Question 15.
Ashok Ltd. took a loan of Euros 5000 on 1st April 2015 for the purpose of setting up a new subsidiary.
The company took a loan at an interest rate of 5% p.a. payable annually. On 1 April 2015 the exchange rate was determined at 60 per Euro. The exchange rate on 31.3.2016 stood at 65 per Euro. The amount corresponding could have also been borrowed at 12% p.a. in the local currency on 1.4.2015.
Calculate:
(a) Borrowing cost
(b) Increase in the liability towards the principal amount
(c) Exchange rate difference accounted.
Solution:
(a) Calculation of borrowing cost:
a. Calculation of interest for the period Euros
5,000 x 65 x 5/100 = 16,250
b. Increase in the liability towards principal amount Euros
5,000 x (65 – 60) = 25,000
c. Interest if loan was borrowed in home currency
5000 x 60 x 12/100 = 36,000
d. Difference between loan current and foreign currency
36,000 – 16,250 = 19,750
Borrowing cost
| Total interest for the period | 16,250 |
| Add: Increase in the liability towards the principal amount | 15,000 |
| Total borrowing cost | 41,250 |
Exchange rate difference is not to be accounted in this problem as the difference between the borrowings in the local and the foreign currency is greater than the total increase in the liability.
Question 16.
The draft statement of financial position of Ananya Co. and Manan Co. on 31st March 20_8 were as follows.
Statement of financial position as at 31st March 20_8
Question 17.
From the following particulars of M/s Ravinandan Ltd., prepare a statement of P/L fro the year ended 31 March, 2017 as per Schedule III of Companies Act, 2013:
| Revenue from operations | 1,00,000 |
| Printing and Stationery | 2,000 |
| Advertisement | 4,000 |
| Salaries and allowances | 6,000 |
| Interest on long term loans | 4,500 |
| Goodwill written off | 1,500 |
| Material consumed | 35,000 |
| Discount allowed | 1,000 |
| Interest on investment received | 1,500 |
| Depreciation on fixed assets | 2,000 |
Question 18.
The particulars are given from Sachidananda Ltd. for the year ending 31.12.2016:
| Goods acquired | 6,00,000 |
| Stock of goods on 1.1.2016 | 80,000 |
| Stock of good son 31.12.2016 | 90,000 |
| Sales | 10,00,000 |
| Depreciation on fixed assets | 10,000 |
| Preliminary expenses written off | 8,000 |
| Salaries to the employees | 19,000 |
| Rent of showroom | 12,000 |
| Interest on loan | 10,000 |
| Discount received from suppliers | 5,000 |
| Office expenses | 2,000 |
| Printing and Stationeries | 1,800 |
| Carriage outwards | 1,200 |
| Advertisement | 800 |
Income tax at 40%
From the above particulars, prepare a Statement of Profit or Loss as per Schedule III of Companies Act. 2013. Nov 2017
Question 19.
The Trial Balance of Mysore Ltd. on 31.3.2017 was given as under:
Prepare a statement of financial position of Mysore Ltd. as on 31.3.2017 as per Schedule III of Companies Act. 2013. Nov 2017.
Question 20.
The statement of financial of keerthi Ltd. and Murthy Ltd. as on 31.3.2017:
Keerthi Ltd. acquired the shares in Murthy Ltd. on 1.8.2016. From the above details calculate non-controiiing interest.
Question 21.
The statement of financial position of X Ltd. and Y Ltd. as on 31.3.2019. were as follows:
X Ltd. purchased the shares of Y ltd. on 1.7.2018. Calculate the non-controlling interest.
Question 22.
The following are the Balance Sheets of P Ltd. and Q Ltd. as on 31.3.2019.