Lecture Notes and Practice Problems on Financial Accounting

Consolidated
Financial Statements
Balkrishna Parab AICWA, FCS

onsolidated financial statements are financial statements that factor the

holdingcompanyssubsidiariesintoitsaggregatedaccountingfigure.It
isarepresentationofhowtheholdingcompanyisdoingasagroup.The
consolidated accounts should provide a true and fair view of the
financial and operating conditions of the group. Doing so typically requires a
complex set of eliminating and consolidating entries to work back from
individualfinancialstatementstoagroupfinancialstatementthatisanaccurate
representation of operations. The consolidated accounts present the financial
situationofagroupofcompaniesasiftheyformedonesingleentity .

Holding Company
A holding company is one that owns enough voting shares in another
company to influence its board of directors and therefore to control its
policiesandmanagement.Aholdingcompanyneednotownamajorityof
thesharesofitssubsidiariesorbeengagedinsimilaractivities.Aholding
companyprovidesameansofconcentratingcontrolofseveralcompanies
with a minimum of investment; other means of gaining control, such as
mergers or consolidations, are more complicated legally and more
expensive. A holding company can reap the benefits of a subsidiarys
goodwillandreputationwhilelimitingitsliabilitytotheproportionofthe
subsidiarys stock that it owns. The parent company in a conglomerate
corporationisusuallyaholdingcompany.

Mr. Balkrishna Parab is a member of the core faculty at the Jamnalal Bajaj Institute of Management Studies,
University of Mumbai, 164, Dadabhoy Naoroji Building, H. T. Parekh Marg, Backbay Reclamation, Mumbai
400 020.
Contact details: (O) 022-2202 4133 (R) 022-4024 1074 (C) 98335 28351 (eMail)
<balkrishnaparab@jbims.edu>.

Consolidated Financial Statements

One of the advantages of a holding company over a merger as an

approach to expansion are the ability to control sizeable operations with
fractional ownership and commensurately small investment; the
somewhat theoretical ability to take risks through subsidiaries with
liability limited to the subsidiary corporation; and the ability to expand
through unobtrusive purchases of shares, in contrast to having to obtain
theapprovalofanothercompanysshareholders.

Subsidiary Company
A subsidiary company is one that is controlled by another. A subsidiary
company operates under the control of a parent or holding company,
which may have a majority on the subsidiarys board of directors, or a
majorityshareholdinginthesubsidiarycompanygivingitmajorityvoting
rightsoritmaybenamedinacontractashavingcontrolofthesubsidiary.
Ifallofthesharesinacompanyareownedbyitsparent,itisknownasa
whollyownedsubsidiary.
Thelaw1definesasubsidiaryasfollows:
Acompanyisdeemedtobeasubsidiaryofanotherif,butonlyif:
(a) ThatothercontrolsthecompositionofitsBoardofdirectors;or
(b) That other holds more than half in nominal value of its equity share
capital;or
(c) Thefirstmentionedcompanyisasubsidiaryofanycompanywhichis
thatotherssubsidiary.

Illustration
CompanyBisasubsidiaryofCompanyA,andCompanyCisasubsidiary
of Company B. Company C is a subsidiary of Company A, by virtue of
clause(c)above.IfCompanyDisasubsidiaryofCompanyC,CompanyD
willbeasubsidiaryofCompanyBandconsequentlyalsoofCompanyA,
byvirtueofclause(c)above;andsoon.

Financial Reporting Obligations of Holding Company

Thelawrequiresthatthebalancesheetofholdingcompanytoincludethe
followingparticularsasregardingitssubsidiaries:
(a) Acopyofthebalancesheetofthesubsidiary;
(b) Acopyofitsprofitandlossaccount;
1

Section 4 of the Companies Act, 1956.

2 of 11

balkrishnaparab@jbims.edu

(c)

AcopyofthereportofitsBoardofdirectors;

(d) Acopyofthereportofitsauditors;
(e)

Astatementoftheholdingcompanysinterestinthesubsidiary

Purpose of Consolidated Financial Statements

An analysis of the accounting documents of each individual company
belongingtoagroupdoesnotserveasaveryaccurateorusefulguideto
theeconomichealthofthewholegroup.Theaccountsofacompanyreflect
the other companies that it controls only through the cost of its
shareholdingsandthesizeofthedividendsthatitreceives.Consolidation
is intended to remedy these deficiencies. The purpose of consolidated
accountsistopresentthefinancialsituationofagroupofcompaniesasif
theyformedonesingleentity.

Minority Interest
Minority interest in business is an accounting concept that refers to
ownership of a company (subsidiary) that is less than 50 per cent of
outstanding shares. Minority interest belongs to other investors and is
reported on the consolidated balance sheet of the owning company to
reflect the claim on assets belonging to other, noncontrolling
shareholders. Also, minority interest is reported on the consolidated
incomestatementasashareofprofitbelongingtominorityshareholders.
Minorityinterestisanintegralpartoftheenterprisevalueofacompany.

Example
The following are the summarized balance sheets of Hard Limited and
SoftLimitedasonMarch31,2008.
Liabilities
Hard
EquitySharesRs.10each200,000
GeneralReserve
50,000
SecuredLoans
30,000
UnsecuredLoans
58,500
Creditors
45,000
ProvisionforTaxation
15,000
ProvisionforDepreciation:

Premises
7,500
Furniture&Fittings
3,000
DesktopPCs
40,000
DoubtfulDebtsProvision 1,000
TotalRs
450,000

Soft
50,000
75,000
25,000
15,000
25,000
28,000

6,000
500
24,000
1,500
250,000

Assets
Hard
Premises
100,000
Furniture&Fittings
25,000
Goodwill
5,500
DesktopPCs
80,000
Investments
120,000
Debtors
75,000
Inventories
10,000
UnsecuredLoantoSoft 15,000
Cash&Bank
15,000
PrepaidExpenses
500
PrelimExpenses
4,000
TotalRs
450,000

3 of 11

Soft
30,000
10,000
23,500
60,000

60,000
55,000

10,000
1,500

250,000

Consolidated Financial Statements

AdditionalInformation
The investments of Hard Limited represent the purchase of 3000 equity
sharesofSoftLimitedatRs.40pershareonMarch31,2008.
Required
PrepareaconsolidatedbalancesheetinverticalformatofHardLimitedas
onMarch31,2008.
Solution
ConsolidatedBalanceSheetasonMarch31,2008
A

SourcesofFunds
ShareCapital..........................................................200,000
Reserves&Surplus..................................................50,000
SecuredLoans...........................................................55,000
UnsecuredLoans......................................................58,500
MinorityInterest(seenote2)..................................50000
TotalRs...............................................................413,500

ApplicationofFunds
FixedAssets(seenote3)......................................298,000
Investments........................................................................0
CurrentAssets(seenote4)...........224,500
Less:CurrentLiabilities................113,000
NetCurrentAssets.................................................111,500
MiscellaneousExpenses............................................4,000
TotalRs...............................................................413,500

Note1:CostofControl

NetWorthofSoftLimitedon31.3.2008

EquityShares(Rs.10each)

GeneralReserve

Total

ShareofHardLimited60%of125,000

Investments

Thus,CostofControl(Goodwill)(120,00075000)

4 of 11

50,000
75,000
125,000
75000
120,000
45,000

balkrishnaparab@jbims.edu

Note2:MinorityInterest

NetWorthofSoftLimitedon31.3.2008
EquityShares(Rs.10each)
GeneralReserve
Total
ShareofMinorities40%of125,000

50,000
75,000
125,000
50,000

Note3:ScheduleofFixedAssets
FixedAssets

GrossBlock
Ason

Depreciation

NetBlock

Additions

Ason

Upto

Forthe

Upto

1.4.07 duringtheyear

31.3.08

1.4.07

year

31.3.08

Premises

100,000

30,000

130,000

7,500

6,000

13,500

116,500

Furniture

25,000

10,000

35,000

3,000

500

3,500

31,500

Goodwill

5,500

23,500

29,000

29,000

80,000

60,000

140,000

40,000

24,000

64,000

76,000

45,000

45,000

45,000

210,500

168,500

379,000

50,500

30,500

81,000

298,000

DesktopPCs
Goodwill(Note1)
TotalRs

Note4:ScheduleofCurrentAssets
Particulars
Debtors
DoubtfulDebtsProvision
Inventories
Cash&BankBalances
PrepaidExpenses
TotalRs

Hard
75,000
(1,000)
10,000
15,000
500

Soft
Total
60,000 135,000
(1,500) (2,500)
55,000
65,000
10,000
25,000
1,500
2,000
224,500

Exercises
1

From the balance sheets of H Limited and S Limited as on March

31,2008,prepareaconsolidatedbalancesheet.
BalanceSheetofHLimitedasonMarch31,2008

A.

B.

SourcesofFunds
EquityShareCapital(ofRs.10each)20,000
Reserves&Surplus

SecuredLoans

UnsecuredLoans

Total

ApplicationofFunds

5 of 11

10,000
3,500
1,500
35,000

Consolidated Financial Statements

FixedAssets

InvestmentsinSLimited(800shares)
CurrentAssets

MiscellaneousExpenditure

Total

20,000
8,000
5,000
2,000
35,000

BalanceSheetofSLimitedasonMarch31,2008

A.

SourcesofFunds
EquityShareCapital(ofRs.10each)
Reserves&Surplus
SecuredLoans
UnsecuredLoans
Total

10,000
0
1,500
3,500
15,000

B.

ApplicationofFunds
FixedAssets
Investments
CurrentAssets
MiscellaneousExpenditure
Total

10,000
0
5,000
0
35,000

H Limited had acquired the 750 shares of S Limited on March 31,

2008. From the balance sheets of H Limited and S Limited as on
March31,2008,prepareaconsolidatedbalancesheet.
BalanceSheetofHLimitedasonMarch31,2008

A.

SourcesofFunds
EquityShareCapital(ofRs.10each)
Reserves&Surplus
SecuredLoans
UnsecuredLoans
Total

20,000
8,000
10,000
5,000
43,000

B.

ApplicationofFunds
FixedAssets
InvestmentsinSLimited(750shares)
CurrentAssets
MiscellaneousExpenditure
Total

20,000
10,000
13,000
0
43,000

6 of 11

balkrishnaparab@jbims.edu

BalanceSheetofSLimitedasonMarch31,2008

A.

SourcesofFunds
EquityShareCapital
Reserves&Surplus
SecuredLoans
UnsecuredLoans
Total

10,000
5,000
5,000
2,000
22,000

B.

ApplicationofFunds
FixedAssets
Investments
CurrentAssets
MiscellaneousExpenditure
Total

10,000
0
12,000
0
22,000

ThefollowingarethesummarizedbalancesheetsofHardLimited
andSoftLimitedasonMarch31,2008.

Liabilities
Hard
EquityShares(Rs.10each) 200,000
GeneralReserve
50,000
SecuredLoans
30,000
UnsecuredLoans
58,500
Creditors
45,000
ProvisionforTaxation
15,000
ProvisionforDepreciation:

Premises
7,500
Furniture&Fittings
3,000
DesktopPCs
40,000
DoubtfulDebtsProvision
1,000
TotalRs
450,000

Soft
50,000
75,000
25,000
15,000
25,000
28,000

6,000
500
24,000
1,500
250,000

Assets
Premises
Furniture&Fittings
DesktopPCs
Investments
Debtors
Inventories
Cash&BankBalances
PreliminaryExpenses
PrepaidExpenses
Goodwill
UnsecuredLoantoSoft
TotalRs

Hard
100,000
25,000
80,000
120,000
75,000
10,000
15,000
4,000
500
5,500
15,000
450,000

Soft
30,000
10,000
60,000
0
60,000
55,000
10,000
0
1,500
23,500
0
250,000

AdditionalInformation
The investments of Hard Limited represent the purchase of 4000
equitysharesofSoftLimitedonMarch31,2008.
Required
AconsolidatedbalancesheetinverticalformatofHardLimitedas
onMarch31,2008.

7 of 11

Consolidated Financial Statements

From the following are the summarized balance sheets of H

LimitedandSLimitedasonMarch31,2008,prepareaconsolidated
balancesheetintheverticalformat.

Liabilities
ShareCapital(Re1)
GeneralReserve
Profit&LossA/C
Creditors
SecuredLoans
UnsecuredLoans
Total

HLtd
10,000
4,000
4,000
7,000
2,000
1,000
25,000

SLtd
8,000
3,000
2,000
5,000
1,000
1,000
20,000

Assets
Building
Plant
InvestmentsinS
ClosingStock
Debtors
Cash
Total

HLtd
4,000
1,000
10,000
3,000
8,000
2,000
28,000

SLtd
0
6,000
0
8,000
5,000
1,000
20,000

AdditionalInformation

DebtorsofHLtdincludesRs.2000duefromSLtd.;creditors
ofHLtdincludesRs.500duetoSLtd.

HLtdacquiredcontrolofSLtdonOctober1,2007bybuying
6000sharesforRs.10000.

Duringtheyear200708,SLtd.earnedaprofitofRs.2000.It
may be assumed that the profits are evenly earned during
theyear.

Prepare a consolidated balance sheet of Honey Limited and its

subsidiary Sony Limited as on March 31, 2009 on the basis of
informationgivenbelow.
The investments appearing in the balance sheet of Honey Limited
represents purchase of 1800 shares of Sony Limited on March 31,
2009.

8 of 11

balkrishnaparab@jbims.edu

BalanceSheetsasonMarch31,2009.

SourcesofFunds
ShareCapital:
EquityShares(FaceValueRs.10)
Reserves&Surplus
GeneralReserve
Profit&LossAccount
TotalRs

ApplicationofFunds
FixedAssets
Premises
Plant&Machinery
Furniture
Investment
NetCurrentAssets
CurrentAssets
Stock
Debtors
Cash&BankBalance
PrepaidExpenses
Advances
SecurityDeposit
CurrentLiabilities
Creditors
OutstandingExpenses
TotalRs

HoneyLtd.

SonyLtd.

120000

60000
30000
210000

30000

30000
15000
75000

80000
30000
6000
54000

20000
20000
5000

23000
5000
12000
4000
2000
1000

17000
10000
3000
2000
3000
1000

(4000)
(3000)
210000

(3000)
(3000)
75000

The balance of Honeywell Limited and Sun Shine Limited as on

March31,2009areasfollows:

SourcesofFunds
ShareCapital
EquityShares(Rs.10each)
Reserves&Surplus
GeneralReserve
Profit&LossAccount
TotalRs

9 of 11

Honeywell
Limited

600000

500000
550000
1650000

SunShine
Limited

300000

300000
240000
840000

Consolidated Financial Statements

ApplicationofFunds
FixedAssets
Land&Building
Plant&Machinery
Furniture
Investment
NetCurrentAssets
TotalRs

1000000
250000
135000
180000
85000
1650000

300000
200000
145000
35000
160000
840000

AdditionalInformation
1

The investments appearing in the balance sheet of Honeywell

Limitedrepresentspurchaseof2250sharesofSunshineLimitedon
September30,2008.

When Honeywell Limited acquired the shares, Sunshine Limited

hadacreditbalanceintheprofitandlossaccountofRs.180000and
generalreserveofRs.240000.

Required
Prepare a consolidated balance sheet of Honeywell Limited and its
subsidiarySunshineLimitedasonMarch31,2009.

The balance sheet of Honey Limited as on March 31, 2008 is as

follows:

BalanceSheetofHoneyLimitedasonMarch31,2008

A.

B.

SourcesofFunds
EquityShareCapita(Rs.10each)

Reserves&Surplus

SecuredLoans(Debentures)

Total

ApplicationofFunds
FixedAssets
GrossBlock
28,00,000
LessDepreciation
10,00,000
Investments

CurrentAssets
10,00,000
LessCurrentLiabilities
8,00,000
MiscellaneousExpenditure

Total

10 of 11

20,00,000
10,00,000
5,00,000
35,00,000

18,00,000
14,00,000
2,00,000
1,00,000
35,00,000

balkrishnaparab@jbims.edu

The balance sheet of Sony Limited as on March 31, 2008, is

givenbelow:

BalanceSheetofSonyLimitedasonMarch31,2008
A.

SourcesofFunds
EquityShareCapita(Rs.100each)

Reserves&Surplus
(asonApril1,2007)
4,00,000
Profit&LossAccount
3,00,000
SecuredLoans(Debentures)

Total

B.

ApplicationofFunds
FixedAssets
GrossBlock
LessDepreciation
Investments
CurrentAssets
LessCurrentLiabilities
MiscellaneousExpenditure
Total

21,00,000
4,00,000

6,00,000
4,00,000

10,00,000

7,00,000
2,00,000
19,00,000

17,00,000
0
2,00,000
0
19,00,000

AdditionalInformation:

HoneyLimitedhadacquiredthe8000sharesofSonyLimited
onAugust1,2007attherateofRs.175pershare.
The opening balance in the profit and loss account as on
April1,2007wasRs.1,60,000.
Current liabilities in the balance sheet of Sony Limited
includeRs.40,000payabletoHoneyLimited.

Required:
1
Minorityinterest
2
Costofcontrol
3
Consolidatedbalancesheetintheverticalformat.

11 of 11