Accounting. Consolidated Balance Sheets [ADVANCED HIGHER] Brian Bennie. abc

Transcription

1 Accounting Consolidated Balance Sheets [ADVANCED HIGHER] Brian Bennie abc

2 Acknowledgement Learning and Teaching Scotland gratefully acknowledge this contribution to the National Qualifications support programme for Accounting. First published This publication may be reproduced in whole or in part for educational purposes by educational establishments in Scotland provided that no profit accrues at any stage. ISBN

3 CONTENTS Introduction 4 Section 1: Where control is obtained by buying all of the ordinary shares at balance-sheet value 5 Section 2: Where control is obtained by buying all of the ordinary shares where the subsidiary has reserves 9 Section 3: Where control is obtained by buying all of the ordinary shares at above or below balance-sheet value 13 Section 4: Where control is obtained but not all of the ordinary shares are purchased 17 Section 5: Preparing consolidated balance sheets at a date after purchase 21 Post-acquisition profits 21 Unrealised profits 24 Current accounts 28 Section 6: Writing off goodwill 37 Solutions 47 ACCOUNTING (ADVANCED HIGHER) 3

4 INTRODUCTION When one undertaking (the parent), has gained control of another (the subsidiary), a Consolidated Balance Sheet shows how the group as a whole relates to the outside world, and gives the shareholders in the parent an overall view of the performance of their investment. These notes describe the following possible situations under which control of a subsidiary may be obtained and show how to prepare a consolidated balance sheet at time of purchase in each case: 1. Buying all of the ordinary shares at balance-sheet value. 2. Buying all of the ordinary shares where the subsidiary has reserves. 3. Buying all of the ordinary shares at above or below balance-sheet value. 4. Buying a majority of the ordinary shares. The notes then explain the procedures to be followed and show how to prepare a consolidated balance sheet at the end of subsequent years taking into account: 5. Post-acquisition profits, inter-company dealings, unrealised profits. 6. Writing down of goodwill. All worked examples assume that the parent undertaking is X plc, and that the subsidiary is Y plc. So as not to obscure the principles involved: Worked examples and answers use a simplified balance sheet layout and many of the headings, dates and groupings required by the Companies Acts, etc. are not used. It could be appropriate, however, for students to use the detailed layout and headings covered in the section of the Advanced Higher course dealing with Final Accounts and Balance Sheets of a plc when completing questions 16 onwards and in examinations. Worked examples use relatively small numbers, not the millions which may be involved in real-life examples. 4 ACCOUNTING (ADVANCED HIGHER)

5 SECTION 1 CONSOLIDATED BALANCE SHEETS Where control is obtained by buying all of the ordinary shares at balance-sheet value Example 1 Summarised Balance Sheets prior to purchase X plc Y plc Bank Other assets , Liabilities , Ordinary Shares 1, X then purchased all of the ordinary shares in Y for 250, paying by cheque. In the new balance sheet of X, the Bank balance goes down and this is replaced by a new asset Investment in Y plc. There is no effect on the balance sheet of Y (the money is paid directly to the shareholders, not to Y). The two balance sheets now appear as: Balance Sheets of. X plc Y plc Investment in Y plc 250 Bank Other assets , Liabilities , Ordinary Shares 1, ACCOUNTING (ADVANCED HIGHER) 5

6 To consolidate the balance sheets, it is not simply a case of adding both sets of figures together, although this will in fact happen to many items. It is necessary first of all to eliminate any instances of the same item being included in both balance sheets. Thus the investment in Y, held as an asset by X, which is exactly the same thing as the capital of Y, does not appear in the consolidated balance sheet. Showing all three balance sheets together: X plc Y plc Consolidated Balance Sheet Investment in Y 250 Bank Bank 250 Other assets Other assets 1,000 1, ,250 Liabilities Liabilities 250 1, ,000 1 Ordinary Shares 1, Ordinary Shares 1,000 The same principle of elimination will also apply to: existing loans between the companies trading debts between the companies It should be noted that the ordinary share capital of the subsidiary will never appear as an item in the consolidated balance sheet the ordinary share capital of the group is the same as the ordinary share capital of the parent. 6 ACCOUNTING (ADVANCED HIGHER)

7 Example 2 (dealing with trading debts between the companies) The following are the balance sheets of X and Y prior to purchase: X Y Bank 600 Bank 200 Debtor Y 100 Other assets 600 Other assets 1, ,900 Creditors 200 Creditors 400 Creditor X 100 1, Ordinary Shares 1,500 1 Ordinary Shares 500 X purchases the entire ordinary share capital of Y for 500 paying by cheque. Showing all three balance sheets together: X plc Y plc Consolidated Balance Sheet Investment in Y 500 Bank Bank 300 Debtor Y 100 Other assets 1, Other assets 1,800 1, ,100 Creditors Liabilities 600 Creditor X 100 1,500 1, Ordinary Shares 1, Ordinary Shares 1,500 Note that the debtor/creditor has been eliminated and does not appear in the consolidated balance sheet. A similar elimination would take place for any loans between the companies. ACCOUNTING (ADVANCED HIGHER) 7

8 8 ACCOUNTING (ADVANCED HIGHER)

9 SECTION 2 CONSOLIDATED BALANCE SHEETS Where control is obtained by buying all of the ordinary shares where the subsidiary has reserves In addition to paying for the ordinary shares, a purchaser of a company will also pay for any reserves, as these belong to the ordinary shareholders. Once the business is purchased, the new owner will own the shares and the reserves. Example 3 The following are the balance sheets of X and Y prior to purchase: X Y Bank 800 Bank 300 Other Assets 1,400 Other Assets 700 2,200 1,000 Creditors 400 Creditors 400 1, Ordinary Shares 1,200 1 Ordinary Shares 500 Profit and Loss 600 Profit and Loss 100 1, X purchases the entire ordinary share capital of Y for 600 by cheque. Consolidated Balance Sheet of X and Y Bank ( ) 500 Other Assets 2,100 2,600 Creditors 800 1,800 1 Ordinary Shares 1,200 Consolidated Reserves* 600 1,800 Notice that the reserves of the subsidiary on consolidation are treated exactly the same as its ordinary capital i.e. they do not appear in the consolidated balance sheet. * This may simply be called profit and loss, or consolidated profit and loss. On consolidation, it has the same value as the profit and loss balance of the parent, but as these notes progress, it will be seen that in future years this will include other items. ACCOUNTING (ADVANCED HIGHER) 9

10 Question 1 Big plc has total assets of 4,000 and this is represented by ordinary share capital of the same value. Small plc has total assets of 400 and this is also represented by ordinary share capital of the same value. Big purchased the entire capital of Small at balance sheet value paying by cheque. Prepare the consolidated balance sheet. Question 2 Great plc had the following assets and liabilities: Bank 400 Other Assets 1,300 Liabilities Ordinary Shares 1,500 On the same date, the balance sheet of Small plc showed the following: Bank 50 Other Assets Ordinary Shares 250 Great purchased the entire capital of Small at balance sheet value paying by cheque. Prepare the consolidated balance sheet. 10 ACCOUNTING (ADVANCED HIGHER)

11 Question 3 Large plc has total assets of 40,000 (including 1,000 owing to it by Little plc). It has 5,000 of liabilities and is financed entirely by 1 ordinary shares. Little plc has total assets of 5,000 and 1,500 of liabilities. It is financed entirely by 1 ordinary shares. Large purchased the entire share capital of Little, paying by cheque. Prepare the consolidated balance sheet. Question 4 The following figures are from the summarised balance sheets of Major plc and Minor plc as at 3 May year 1. Major Minor Buildings 10,000 2,000 Equipment 20,000 1,000 Stocks 30,000 2,000 Debtors 20,000 2,000 Bank 30, Creditors 12,000 3,800 98,000 4,000 Financed by 1 Ordinary Shares 98,000 3,000 Share Premium 1,000 4,000 On the above date, Major purchased the entire capital of Minor for 4,000 paying by cheque. Included in the debtors and creditors figures is 500 owing by Minor to Major. Prepare the consolidated balance sheet as at 3 May year 1. ACCOUNTING (ADVANCED HIGHER) 11

12 Question 5 The following are the Balance Sheets of Town plc and Village plc as at 1 March year 1. Town Village Property 40,000 5,000 Machinery 30,000 4,000 Stocks 20,000 5,000 Debtors 30,000 8,000 Bank 30,000 1,000 Loan to Village 5,000 Creditors 20,000 5,000 Loan from Town 5, ,000 13,000 Financed by 1 Ordinary Shares 110,000 10,000 Profit and Loss 25,000 3, ,000 13,000 On the above date: Included in the debtors and creditors figures is 1,000 owing by Town to Village. On 1 March year 1, Town purchased the entire capital of Village at balance sheet value of 13,000, paying by cheque. Prepare the consolidated balance sheet at 1 March year ACCOUNTING (ADVANCED HIGHER)

13 SECTION 3 CONSOLIDATED BALANCE SHEETS Where control is obtained by buying all of the ordinary shares at above or below balance-sheet value Where the amount paid exceeds the balance-sheet value, goodwill is created. Where the amount paid is less than the balance-sheet value, goodwill with a negative value is created. Thus if the subsidiary has 10,000 1 ordinary shares and reserves of 4,000 and the business is purchased for 15,000, goodwill of 1,000 is created; if it is purchased for 12,000, negative goodwill of 2,000 is created. Example 4 The following are the Balance Sheets of X and Y prior to purchase. X Y Bank 1,000 Bank 200 Other Assets 1,400 Other Assets 600 2, Creditors 600 Creditors 300 1, Ordinary Shares 1,400 1 Ordinary Shares 400 Profit and Loss 400 Profit and Loss 100 1, X purchases the entire Ordinary Share Capital of Y for 550 by cheque. Goodwill is therefore valued at 50 (550 ( ) ACCOUNTING (ADVANCED HIGHER) 13

14 Consolidated Balance Sheet of X and Y after purchase Goodwill 50 Bank 650 Other Assets 2,000 2,700 Creditors 900 1,800 Ordinary Shares 1,400 Consolidated Reserves 400 1,800 Question 6 The following are the summarised Balance Sheets of Glasgow plc and Dundee plc prior to purchase on 8 September year 1. G D Fixed Assets 50,000 10,000 Current Assets 25,000 6,000 75,000 16,000 Current Liabilities 10,000 3,000 65,000 13,000 Ordinary Shares 50,000 11,000 Profit and Loss 15,000 2,000 65,000 13,000 Notes The balance sheets include 1,000 owing by Glasgow to Dundee for goods supplied. Glasgow purchased all of the ordinary share capital of Dundee for 15,000. Prepare the consolidated balance sheet immediately after purchase. 14 ACCOUNTING (ADVANCED HIGHER)

15 Question 7 The following are the Balance Sheets of Tay plc and Don plc prior to purchase on 9 May year 1. Tay Don Buildings 50,000 20,000 Equipment 90,000 10,000 Stocks 15,000 5,000 Debtors 20,000 4,000 Loan to Don 5,000 Bank 10,000 Bank 3,000 Loan from Tay 5, ,000 31,000 1 Ordinary Shares 170,000 30,000 Profit and Loss 20,000 1, ,000 31,000 Notes Tay purchases all of the ordinary share capital of Don, paying 28,000 by cheque. Prepare the consolidated balance sheet immediately after purchase. ACCOUNTING (ADVANCED HIGHER) 15

16 16 ACCOUNTING (ADVANCED HIGHER)

17 SECTION 4 CONSOLIDATED BALANCE SHEETS Where control is obtained but not all of the ordinary shares are purchased Where more than 50%, but less than 100%, of the subsidiary s ordinary shares are purchased, it follows that some of the ordinary shares will remain in the hands of the original owners. Thus the subsidiary is not wholly owned and the consolidated balance sheet must show this. The top part of the balance sheet treats all of the assets and liabilities of the subsidiary as if they were fully owned by the parent. No attempt is made to split items such as machinery or stocks into the amount owned by the parent, and the amount owned by the other shareholders. Instead, all of these items are included at full value, since although they are not fully owned, they are fully under the control of the parent. The capital and reserves section of the balance sheet however includes a value for MINORITY INTEREST, i.e. the share of the subsidiary which the parent undertaking does not own and is therefore still owned by the other shareholders of the subsidiary. As before, the ordinary share capital and the reserves of the subsidiary do not appear in the consolidated balance sheet. ACCOUNTING (ADVANCED HIGHER) 17

18 Example 5 Y has 40,000 1 ordinary shares and reserves of 10,000. X purchases 30,000 shares in Y, paying 42,000 by cheque. Y has a value of 50,000 X owns 75% of Y 37,500 Minority Interest owns 25% of Y 12,500 Minority Interest appears in the financed by section of the consolidated balance sheet. It should be shown separately from the other items in this section. The price paid for the business is not relevant to the calculation of Minority Interest. Goodwill, however, will be purchase price less value of Y purchased, i.e. 42,000 less 37,500. Example 6 The following are the summarised balance sheets of X plc and Y plc prior to purchase. X Y Buildings 40,000 10,000 Equipment 25,000 20,000 Stock 15,000 6,000 Debtors 10,000 3,000 Bank 30,000 4,000 Creditors 12,000 3, ,000 40,000 1 Ordinary Shares 100,000 36,000 Profit and Loss 8,000 4, ,000 40,000 X purchased 60% of the ordinary shares of Y for 29,000 paying by cheque. X owns 60% of 40,000 = 24,000 Minority Interest owns 40% of 40,000 = 16,000 Y paid 29,000 for its share of 24,000 therefore goodwill is 5, ACCOUNTING (ADVANCED HIGHER)

19 Consolidated Balance Sheet Goodwill 5,000 Buildings 50,000 Equipment 45, Stock 21,000 Debtors 13,000 Bank 5,000 39,000 Creditors 15,000 24, ,000 Financed by: 1 Ordinary Shares 100,000 Consolidated Reserves 8, ,000 Minority Interest 16, ,000 Question 8 (a) Calculate Minority Interest and Goodwill in each of the following examples. A B C Total number of 1 ordinary shares 40, ,000 50,000 Profit and loss balance ( ) 10,000 20,000 5,000 Number of shares purchased 24,000 60,000 40,000 Purchase Price ( ) 32,000 78,000 47,000 Minority Interest Goodwill ACCOUNTING (ADVANCED HIGHER) 19

20 The following are the summarised balance sheets of Parent plc and Child plc prior to purchase on 3 October year 1. Parent Child Buildings 40,000 20,000 Equipment 60,000 20,000 Stocks 25,000 5,000 Debtors 20,000 4,000 Bank 10,000 Bank 2,000 Creditors 14,000 2, ,000 45,000 1 Ordinary Shares 120,000 30,000 Profit and Loss 21,000 15, ,000 45,000 The share capital of Child consists of 1 ordinary shares. Parent purchases 24,000 of these paying 40,000 by cheque. Parent partly finances this by the issue of 25,000 1 ordinary shares at a premium of 0.20 per share Included in the balance sheets above is 1,000 owing by Child to Parent for goods purchased. (b) Prepare the Consolidated Balance Sheet on 3 October year 1. (c) Explain how your answer would have been different if the purchase price had been 30, ACCOUNTING (ADVANCED HIGHER)

21 SECTION 5 CONSOLIDATED BALANCE SHEETS Preparing consolidated balance sheets at a date after purchase So far, the consolidated balance sheet has been drawn up immediately upon the purchase being made. However the situation is ongoing, and it will be necessary to prepare a consolidated balance sheet at the end of each financial year. Goodwill will still be calculated at time of purchase and included in the balance sheet at these values. (See later regarding the writing down of goodwill.) However, there are three new considerations. (i) Post-acquisition profits Any profits made by the subsidiary company after purchase must be shared between the parent and minority interest. This profit will be found by comparing the reserves (profit and loss balances) of the subsidiary at the date of consolidation and at the end of the year in question. Any increase will be treated as a profit, part of which will be added to the consolidated reserves, and part added to the minority interest. This profit is known as POST-ACQUISITION PROFITS and will be shared out in proportion to ordinary share ownership. ACCOUNTING (ADVANCED HIGHER) 21

22 Example 7 On 30 September year 1, Y plc has 1,000 1 ordinary shares and a profit and loss balance of 400. On that date X purchases 60% of these shares for 900. On 31 December of that year, the balance sheet of Y shows a profit and loss balance of 500. On purchase goodwill is valued: Price paid 900 Value taken over (60% of 1,400) 840 Goodwill 60 On purchase minority interest may be calculated: Value of Y 1,400 Value taken over 840 Minority interest (i.e. 40% of 1,400) 560 On preparing consolidated balance sheet at year end: Reserves at purchase 400 Reserves at balance sheet date 500 Post-acquisition profits 100 Which are shared by adding to: Consolidated reserves 60 Minority interest 40 Minority Interest therefore equals 600 (560+40) In most examples it will not be necessary to find minority interest in this way. It can be found simply by taking the closing balance sheet of the subsidiary and applying the minority interest percentage to the total of ordinary capital plus reserves at that date. In the above example: Ordinary shares 1,000 Reserves at end of year 500 1,500 40% of 1,500 = ACCOUNTING (ADVANCED HIGHER)

23 You should now be aware of the different treatments applied to the reserves of a subsidiary. Any reserves which are in existence at the time of consolidation are included in the initial calculation of goodwill and of minority interest. Changes in the profit and loss balance over the years are included in the calculation of consolidated reserves and of minority interest. In neither case do the reserves appear as separate items in the consolidated balance sheet. Question 9 Complete the table below for each of the four illustrations. DATA (i) (ii) (ii) (iv) At date of purchase 1 Ordinary Shares in subsidiary 5,000 10,000 25,000 50,000 Reserves in subsidiary 1,000 2,000 5,000 5,000 Number of ordinary shares purchased 4,000 7,500 22,500 30,000 Price paid 5,500 9,000 26,000 37,000 Goodwill At year end Reserves in subsidiary 1,500 3,000 6,000 4,000 Total post-acquisition profits Value added to consolidated reserves Value added to minority interest Final Minority Interest* * Remember that this can be calculated in 2 ways: Minority Interest at time of purchase plus amount added since purchase, or Minority Interest % multiplied by value of subsidiary ordinary shares plus reserves at end ACCOUNTING (ADVANCED HIGHER) 23

24 (ii) Unrealised profits It is an established accounting principle that profit is recognised at point of sale. Assume X buys goods for 100 and sells them to Y for 150. This gives X a profit of 50. If, however, the goods have not yet been sold by Y, from the point of view of the group no goods have actually been sold and therefore no profit has yet been made by the group. There is also a difference in stock valuation. The goods will have been entered into the books of Y at a cost price of 150, but as far as the group is concerned the cost price is only 100. Therefore, looking at the individual accounts of the two companies results in a profit of 50 and a closing stock of 150, whereas from the group perspective there is no profit and the closing stock is worth only 100. Profits generated in this way are referred to as unrealised profits and this must be taken into account when preparing the consolidated balance sheet. It might be worthwhile to recap on paragraph 1, page 4 of these notes, which said: When one company (the parent), gains control of another (the subsidiary), a Consolidated Balance Sheet shows how the group as a whole relates to the outside world. It follows then that the group figures, and not the individual company ones, must be shown in the consolidated balance sheet Where goods have been traded between the two companies, when preparing a consolidated balance sheet, any unrealised profits on these goods must be deducted from consolidated reserves and consolidated stocks 24 ACCOUNTING (ADVANCED HIGHER)

25 A more likely situation is where X has sold goods to Y and at balance sheet date some of them have been sold on. It is then necessary to calculate the amount of over-recorded profit on the ones that have NOT yet been sold. Example 8 X purchases goods at a cost of 1,000. These are sold to Y for 1,500. At balance sheet date, Y has sold 60% of these goods for 1,200. PROFITS SHOWN BY INDIVIDUAL COMPANIES X will record: Sales 1,500 Purchases 1,000 Profit 500 Y will record: Sales 1,200 Purchases 1500 Less stock Profit 300 Total profit 800 PROFITS SHOWN BY GROUP AS A WHOLE Goods costing 600 have been sold for 1,200 = total profit 600 Therefore on consolidation, profit is over-recorded by 200. From the perspective of the group, the closing stock ought to be valued at cost to the group, i.e. 400, not 600. Therefore, on consolidation, closing stock is over-recorded by 200. ACCOUNTING (ADVANCED HIGHER) 25

26 Method: It is not necessary to go through the above process, simply: Calculate profit made by X as if all goods were sold. 500 Apply percentage unsold by Y to this figure. 40% Reduce profits and closing stock by answer. 200 Beware: The selling price and any profit made by Y is not relevant this profit has been made and does not require to be adjusted. Questions may give you the amount sold, or the amount unsold. Question 10 (a) Calculate the adjustment required to consolidated profits and closing stock in each of the following four cases: (i) (ii) (iii) (iv) Cost of goods produced by X Price charged to Y % sold by Y 40% 60% 80% 30% Reduction required in recorded profit Reduction required in stocks (b) At the end of the financial year stocks held by Peter plc and Paul plc were 40,000 and 20,000 respectively and consolidated reserves amounted to 75,000. However, towards the end of the year goods costing 6,000 were sold by Peter to Paul at a mark-up of 25%. At the end of the year 30% of these goods were unsold. Calculate the figures to appear in the year-end balance sheet for (i) (ii) consolidated reserves closing stock 26 ACCOUNTING (ADVANCED HIGHER)

27 (c) At the end of the financial year stocks held by Grand and Petit were 10,000 and 3,000 respectively. However 1,000 units of brand Z had been produced by Grand at a cost of 60p per unit and sold to Petit at a price of 80p per unit. To date, Petit had sold 700 of these for 1.10 each. (i) (ii) Calculate the profit recorded by Grand Petit Group (and show unrealised profit) Calculate the value of the group closing stock. ACCOUNTING (ADVANCED HIGHER) 27

28 (iii) Current accounts Adjustment must be made for any funds in transfer between the companies. In some cases, the two companies operate CURRENT or TRANSFER ACCOUNTS which record transactions between them. Any payments made just before balance sheet date are likely to be recorded in the current account of the paying company, but not yet in the account of the receiving one. To prepare the consolidated balance sheet, assume that any payments recorded by one company have been received by the other. Example 9 On 28 December Y owes X 500 this is recorded in current accounts in both companies. If balance sheets were to be prepared on that date, Y would have a current liability, X a current asset, and nothing would appear in the consolidated balance sheet. If, however, Y then repays X 200, the transaction would immediately affect the bank and current account in the books of Y, but would probably not reach X by the year end. Extract from balance sheets: Before repayment After repayment X Y X Y Bank 4, , Current (asset) Current (liability) To consolidate, it is necessary to eliminate the current accounts and adjust the total bank balance. Thus the consolidated balance sheet will show only the bank figure of 4,800 (not 4,600). The missing 200 belongs to the group it has to be included in its balance sheet. 28 ACCOUNTING (ADVANCED HIGHER)

29 Question 11 On 1 July year 1, the balance sheet of Valley plc contained the following: Debtors 5,000 Stocks 4,000 Debentures 10,000 1 Ordinary Shares 30,000 Profit and Loss 6,000 (a) If, on the above date, ordinary shares in Valley were purchased by Glen plc, calculate the goodwill (if any) in each of the following possible situations: (i) 20,000 1 shares were purchased for 25,000 (ii) 22,500 1 shares were purchased for 30,000 (iii) 18,000 1 shares were purchased for 23,000 (iv) 5,000 1 shares were purchased for 7,000 (b) (c) Calculate the value of the minority interest in each of the above situations. During years 4 to 6 goods were sold by Glen to Valley. Calculate the adjustment required to consolidated profits in each of the following possible situations: (i) Year 4 Goods costing 3,000 were sold for 5,000 and 80% of these are unsold by Valley (ii) Year 5 Goods costing 2,000 were sold at a mark-up of 25% and 60% of these are unsold by Valley (iii) Year 6 Goods costing 4,200 were sold at a gross profit of 25% on sales. Valley had sold 60% of these for 6,000. ACCOUNTING (ADVANCED HIGHER) 29

30 (d) At the end of years 2 to 4, the profit and loss balances of Valley were as shown below. Calculate the adjustment required to consolidated reserves in each year for option (i) in (a) above. (i) Year 2 7,200 (ii) Year 3 5,700 (iii) Year 4 9, ACCOUNTING (ADVANCED HIGHER)

31 Question 12 On 1 September year 1, the balance sheet of Foggie plc contained 40,000 1 ordinary shares and a profit and loss balance of 10,000. When Turra plc gained control of Foggie plc on the above date, goodwill was calculated to be 5,000. (a) Calculate the purchase price in each of the following possible situations: (i) (ii) (iii) 25,000 ordinary shares were purchased 30,000 ordinary shares were purchased 35,000 ordinary shares were purchased (b) (c) If on 31 December year 2, the profit and loss balance of Foggie was 12,000, calculate the minority interest in each of the above situations. Turra manufactures products at a cost of 2 per unit. During year 4, 5,000 units were sold to Foggie: Calculate the unrealised profits under each of the following possible arrangements: (i) (ii) (iii) Mark-up on cost was 20%, 3,000 units were sold by Foggie. Selling price to Foggie was 3, and these were then resold to customers for units were unsold. Goods were sold at a price to allow Turra a gross profit ratio of 50%. Foggie has 2,500 units in stock. (d) The balance sheet of Foggie on 31 December year 6 included the following which were financed by ordinary shares and reserves Fixed Assets: 50,000 Current Assets: 20,000 Current Liabilities 5,000 Debentures 5,000 Calculate the minority interest in each of the possibilities in (a) above. ACCOUNTING (ADVANCED HIGHER) 31

32 Question 13 On 1 July year 1 Grant plc purchased 1,275 ordinary shares in Baker plc, paying 5,300 by cheque. At the time of purchase, Baker s profit and loss account balance was 1,000 and share premium was 500. During the year Grant sold goods to Baker to the value of 900 being cost plus 25%. An estimated 65% of these were unsold at the end of the year. A cheque for 300 sent to clear a current account balance was in transit at balance sheet date. The following are the balance sheets of Grant plc and Baker plc: Balance Sheets as at 31 December year 1 Grant Baker Fixed Assets Buildings 17,000 4,900 Investment in Baker plc 5,300 22,300 Current Assets Stocks 1, Debtors 1, Current Account 300 Bank ,050 1,460 Current Liabilities Creditors 5,600 2, ,750 5,560 Long-term Loans 6,000 1,300 13,750 4,260 Capital and Reserves 1 Ordinary Shares 6,500 1,500 Share Premium Revaluation Reserve 4,500 Profit and Loss 2,150 2,260 13,750 4, ACCOUNTING (ADVANCED HIGHER)

33 (a) Calculate: (i) (ii) (iii) (iv) (v) Goodwill Post-acquisition profits Unrealised profits in stock holdings Minority Interest at 31 December Consolidated Reserves at 31 December (b) Prepare the consolidated balance sheet as at 31 December year 1. ACCOUNTING (ADVANCED HIGHER) 33

34 Question 14 On 1 July year 1 Dawson plc purchased 80% of the ordinary shares of Smith plc, paying 7,000 by cheque. At the time of purchase, Smith s profit and loss account balance was 1,200. During the year Dawson produced goods at a cost of 800 which were then sold to Smith at cost plus 25%. An estimated 40% of these goods were unsold by Smith at the end of year 1. There is a cheque in transit between the companies. The following are the balance sheets of Dawson plc and Smith plc: Balance Sheets as at 31 December year 1 Dawson Smith Fixed Assets Buildings 25,000 6,000 Investment in Smith plc 7,000 32,000 6,000 Current Assets Stocks 3,000 3,000 Debtors 2,200 1,200 Current 300 Bank 4, ,500 4,600 Current Liabilities Creditors 2, Current 7, ,800 39,000 9,800 Long-term Loans 2,000 2,700 37,000 7,100 Capital and Reserves 1 Ordinary Shares 30,000 5,000 Revaluation Reserve 4,000 Profit and Loss 3,000 7,000 2,100 37,000 7, ACCOUNTING (ADVANCED HIGHER)

35 (a) Calculate: (i) Goodwill (ii) Post-acquisition profits (iii) Unrealised profits in stock holdings (iv) Consolidated reserves at 31 December year 1. (b) Prepare the consolidated balance sheet as at 31 December year 1. ACCOUNTING (ADVANCED HIGHER) 35

36 Question 15 On 1 July year 1 Strachan plc purchased 3,000 1 ordinary shares of Mackenzie plc, paying 1.50 per share by cheque. At the time of purchase, Mackenzie profit and loss account balance was 1,200 and share premium was 400. During the year goods were traded between the companies at a profit of 100. An estimated 75% of these are unsold at the end of the year. Balance Sheets as at 31 December year 1 Strachan Mackenzie Fixed Assets Buildings 30,000 4,000 Equipment 1, Investment in Mackenzie plc 4,500 35,600 4,800 Current Assets Stocks 5,000 3,000 Debtors 3,400 1,200 Bank 3,000 11,400 4,200 Current Liabilities Creditors 2,500 8,900 1,000 3,200 44,500 8,000 Debentures 1,500 1,000 43,000 7,000 Capital and Reserves 1 Ordinary Shares 32,000 5,000 Share Premium 4, Revaluation Reserve 2,000 Profit and Loss 5,000 11,000 1,600 2,000 43,000 7,000 (a) Calculate: (i) (ii) Goodwill Shares of post-acquisition profits (b) Prepare the consolidated balance sheet as at 31 December year ACCOUNTING (ADVANCED HIGHER)

37 SECTION 6 CONSOLIDATED BALANCE SHEETS Writing off goodwill FRS 10 states that positive purchased goodwill should be capitalised and, unless it has an indefinite life, it should be amortised over its useful life by the straight-line method. The consequence of this is that the value of goodwill calculated on purchase will gradually be reduced over a number of years. The balancing entry will be to reduce consolidated reserves by a similar amount. Thus, if goodwill on consolidation is calculated to be 3,000 and this is to be amortised over 10 years, 300 will be deducted from the goodwill figure and from consolidated reserves each year. In the first year, depending upon the date of acquisition and company policy, a full year s charge may be made, or a proportion or none at all. The answer to question 15 should have included: Goodwill 540 Consolidated Reserves 5,165 If the figures had related to year 3, and goodwill had to be written down by a full 10% each for each of the 3 years, the balance sheet would then have shown: Goodwill 378 i.e. down 3 times 54 Consolidated Reserves 5,003 i.e. down 3 times 54 ACCOUNTING (ADVANCED HIGHER) 37

38 Summary In any consolidation question you are likely to be required to do the following: 1. Calculate GOODWILL at time of purchase, i.e. purchase price less (percentage of ordinary shares purchased times subsidiary s ordinary shares and reserves). 2. ELIMINATE common items, e.g. investment held by parent and ordinary shares and reserves of subsidiary, current or transfer accounts, loans. 3. Calculate POST-ACQUISITION PROFITS increase in subsidiary s reserves since purchase has to be shared and relevant amount added to consolidated reserves (and depending upon method used, also added to minority interest if already calculated). 4. Calculate UNREALISED PROFITS profits on unsold goods deducted from consolidated reserves and stock values. 5. Write down GOODWILL based on straight-line method also reduce consolidated reserves. 6. Calculate CONSOLIDATED RESERVES taking into account the above changes. 7. Calculate MINORITY INTEREST i.e. relevant percentage of ordinary shares and reserves in subsidiary s balance sheet. 8. Complete CONSOLIDATED BALANCE SHEET. 38 ACCOUNTING (ADVANCED HIGHER)

39 Question 16 On 1 January year 1 Tay plc purchased 9,000 1 ordinary shares in Don plc for a total of 14,200. On that date the reserves of Don included a profit and loss of 2,800. During December of year 3 Tay sold goods to Don. These had cost 600 to produce and were sold at a price allowing Tay a gross profit of 25% on sales. Only 40% of these goods had been sold by Don by 31 December year 3. During the last week of year 3, a cheque for 300 had been sent by Don to Tay, but this had not been received by Tay by the end of the year. Goodwill is to be written down by 10% (straight line) for each year. Balance Sheets on 31 December year 3 Tay Don Fixed Assets Buildings 40,000 10,000 Machinery 25,000 12,000 Investment in Don plc 14,200 79,200 22,000 Current Assets Stocks 5,000 1,000 Debtors 4, Current Account 400 Bank 1, ,400 1,600 Current Liabilities Creditors 2,500 7, Current Account ,100 22,700 Long-term Loans 15,000 6,000 72,100 16,700 Capital and Reserves 1 Ordinary Shares 55,000 12,000 Share Premium 6,000 1,800 Revaluation Reserve 5,400 Profit and Loss 5,700 17,100 2,900 4,700 72,100 16,700 ACCOUNTING (ADVANCED HIGHER) 39

40 (a) Calculate: (i) (ii) (iii) Goodwill Shares of post-acquisition profits Unrealised profits in stock holding (b) Prepare the consolidated balance sheet as at 31 December year ACCOUNTING (ADVANCED HIGHER)

41 Question 17 A gained control of B in September year 1, purchasing 3,500 1 ordinary shares for 6,050. On that date B s share premium and profit and loss balance amounted to 1,200. (a) Calculate goodwill at that date. During year 3 A sold goods to B for 2,000 at a mark-up of 25% on cost. On 31 December of that year 65% of these goods are unsold. In addition on that date there is a cheque for 100 in transit. Company policy is to depreciate goodwill by 10% per annum (straight line) for each complete year of ownership. (b) Prepare the consolidated balance sheet as at 31 December year 3. Balance Sheets as at 31 December year 3 A B Fixed Assets Buildings 18,000 4,900 Investment in B plc 6,050 24,050 4,900 Current Assets Stocks 1, Debtors 1, Current Account 100 Bank 2, ,550 1,550 Current Liabilities Creditors 4, ,000 25,000 5,900 Long-term Loans 3, ,000 5,400 Capital and Reserves 1 Ordinary Shares 15,000 4,000 Share Premium 2,500 1,000 Revaluation Reserve 3,000 Profit and Loss 1,500 7, ,400 22,000 5,400 ACCOUNTING (ADVANCED HIGHER) 41

42 Question 18 On 1 April year 1, Central plc purchased 5,000 1 ordinary shares in Belt plc for 1.50 per share. At that date, Belt s balance sheet contained: 10% Debentures 6,000 1 Ordinary Shares 8,000 Share Premium 600 Profit and Loss 1,400 On 31 December year 4, the Balance Sheets were: Central Belt Buildings 40,000 10,000 Investment in Belt plc 7,500 47,500 Stocks 2,500 5,400 Debtors 3,000 2,500 Bank 1, Current 1,200 7,700 8,400 Current 900 Creditors 3,000 4,700 2,100 3,000 5,400 52,200 15,400 Debentures 6,000 52,200 9,400 1 Ordinary Shares 30,000 8,000 Share Premium 10, Profit and Loss 12,200 22, ,400 52,200 9, ACCOUNTING (ADVANCED HIGHER)

43 Goodwill is to be written down on a monthly basis at a rate of 8% per annum. During the course of the month of December, goods costing 1,000 were sold by Central to Belt at a mark-up of 40%. 30% of these goods remain unsold. There is money in transit at the end of the year. Prepare the Consolidated Balance Sheet at the end of year 4. ACCOUNTING (ADVANCED HIGHER) 43

44 Question Primary became a plc in year 1 when it issued 200,000 25p ordinary shares to the public at a premium of 10p per share. 2. On 28 April year 3, Academy plc gained control of Primary Plc by purchasing 160,000 ordinary shares for 65, The purchase of Primary was mainly financed by the issue of 40,000 1 ordinary shares in Academy for 1.40 each. 4. On the date of purchase, the Profit and Loss balance of Primary was calculated to be 5,000. (a) Select the information from above and calculate as at 28 April, year 3: (i) (ii) Goodwill Minority Interest On 31 December year 6, the individual balance sheets of Academy and Primary include: Academy Primary Stocks 5,000 3,000 Profit and Loss 7,000 6,000 Stocks held by Primary include 500 units which were purchased from Academy for 5 per unit. (cost plus 25%) Goodwill has been written down so that it is now 75% of its value on creation. (b) From the above information calculate as at 31 December year 6. (i) (ii) (iii) (iv) Goodwill Minority Interest Consolidated Stock Consolidated Reserves 44 ACCOUNTING (ADVANCED HIGHER)

45 Question 20 Explain the meaning, significance and treatment of each of the following terms. (a) (b) (c) (d) Goodwill Minority Interest Consolidated Reserves Post-Acquisition Profits ACCOUNTING (ADVANCED HIGHER) 45

46 Question 21 On 27 November year 1, High plc purchased 20,000 50p ordinary shares in Low plc. At that date, Low s balance sheet contained: Ordinary Shares 15,000 Profit and Loss 3,000 On 31 December year 3, the Balance Sheets were: High Low Buildings 30,000 10,000 Machinery 3,000 6,200 Investment in Low plc 14,500 47,500 16,200 Stocks 3,500 3,400 Debtors 2,000 1,500 Bank 1,000 1,500 Current 2,200 8,700 6,400 Creditors 3,000 5,700 1,000 5,400 53,200 21,600 Debentures 1,000 3,000 52,200 18,600 Ordinary Shares 30,000 15,000 Share Premium 5,000 Profit and Loss 17,200 22,200 3,600 52,200 18,600 Goodwill is to be written down at 10% per annum. During the course of the month of December, goods costing 600 were sold by High to Low at a mark-up of 30%. 80% of these goods have been sold. There is money in transit at the end of the year. Prepare the Consolidated Balance Sheet at the end of year ACCOUNTING (ADVANCED HIGHER)

47 SOLUTIONS CONSOLIDATED BALANCE SHEETS Solutions showing essential information only Question 1 Consolidated Balance Sheet of Big and Small Total Assets 4,000 Capital 4,000 Question 2 Consolidated Balance Sheet of Great and Small Bank 200 ( ) Other Assets 1,500 1,700 Liabilities 200 1,500 Ordinary Share Capital 1,500 Question 3 Consolidated Balance Sheet of Little and Large Total Assets 40,500 ( ) Total Liabilities 5,500 ( ) 35,000 Ordinary Share Capital 35,000 ACCOUNTING (ADVANCED HIGHER) 47

48 Question 4 Consolidated Balance Sheet of Major and Minor as at 3 May year 1 Buildings 12,000 Equipment 21,000 33,000 Stocks 32,000 Debtors 21,500 Bank 26,800 80,300 Creditors 15,300 65,000 98,000 Ordinary Share Capital 98,000 Question 5 Consolidated Balance Sheet of Town and Village as at 1 May year 1 Property 45,000 Machinery 34,000 79,000 Stocks 25,000 Debtors 37,000 Bank 18,000 ( ) 80,000 Creditors 24,000 56, ,000 Ordinary Share Capital 110,000 Consolidated Reserves 25, , ACCOUNTING (ADVANCED HIGHER)

49 Question 6 Consolidated Balance Sheet of Glasgow and Dundee as at 8 September year 1. Goodwill 2,000 Other Fixed Assets 60,000 62,000 Current Assets 15,000 ( ) Current Liabilities 12,000 3,000 65,000 1 Ordinary Shares 50,000 Consolidated Reserves 15,000 65,000 Question 7 Consolidated Balance Sheet of Tay and Don as at 9 May year 1 Goodwill 3,000 ( ) Buildings 70,000 Equipment 100, ,000 Stocks 20,000 Debtors 24,000 44,000 Bank 21,000 23,000 ( ) 190,000 1 Ordinary Shares 170,000 Consolidated Reserves 20, ,000 ACCOUNTING (ADVANCED HIGHER) 49

50 Question 8 (a) A B C Total number of 1 ordinary shares 40, ,000 50,000 Profit and loss balance ( ) 10,000 20,000 5,000 Number of shares purchased 24,000 60,000 40,000 Purchase Price ( ) 32,000 78,000 47,000 Minority Interest 20,000 48,000 11,000 Goodwill 2,000 6,000 3,000 (b) Consolidated Balance Sheet of Parent and Child as at 3 October year 1. Goodwill 4,000 Buildings 60,000 Equipment 80, ,000 Stocks 30,000 Debtors 23,000 53,000 Creditors 15,000 Bank 2,000 17,000 36, ,000 Ordinary Share Capital 145,000 Share Premium 5,000 Consolidated Reserves 21, ,000 Minority Interest 9, ,000 Goodwill = % Minority Interest = 20% (c) If purchase price was 10,000 less, then Goodwill would be a negative of 6,000. Bank balance would have been 10,000 higher. 50 ACCOUNTING (ADVANCED HIGHER)

51 Question 9 DATA (i) (ii) (ii) (iv) At date of purchase 1 Ordinary Shares in subsidiary 5,000 10,000 25,000 50,000 Reserves in subsidiary 1,000 2,000 5,000 5,000 Number of ordinary shares purchased 4,000 7,500 22,500 30,000 Price paid 5,500 9,000 26,000 37,000 Goodwill 700 nil 1,000** 4,000 At year end Reserves in subsidiary Total post acquisition profits 500 1,000 1,000 1,000 Value added to consolidated reserves Value added to minority interest Final Minority Interest* 1,300 3,250 3,100 21,600 * 20% of 25% of 10% of 40% of 6,500 13,000 31,000 54,000 ** Note that this is negative. ACCOUNTING (ADVANCED HIGHER) 51

52 Question 10 (a) (i) (ii) (iii) (iv) Cost of goods sold by X Selling price to Y % sold by Y 40% 60% 80% 30% Reduction required in recorded profit Reduction required in stocks (b) (i) consolidated reserves 74,550 (ii) closing stock 59,550 (c) (i) Grand 1,000 20p = 200 Petit p = 210 Group p = 350 Unrealised profit p = 60 (ii) Closing stock 12, ACCOUNTING (ADVANCED HIGHER)

53 Question 11 (a) (b) (c) (d) Goodwill (i) (2/ ) = 1,000 (ii) (3/ ) = 3,000 (iii) (3/ ) = 1,400 (iv) not applicable, less than 50% of shares purchased Minority Interest (i) 1/ = 12,000 (ii) 1/ = 9,000 (iii) 2/ = 14,400 Unrealised profits (i) % = 1,600 (ii) % = 300 (iii) % = 560 Post-acquisition profits (i) ( ) 2/3 = 800 (ii) ( ) 2/3 = 200 (iii) ( ) 2/3 = 2,000 Question 12 (a) (b) (c) (d) Purchase Price (i) = 36,250 (ii) = 42,500 (iii) = 48,750 Minority Interest (i) 15/ = 19,500 (ii) 10/ = 13,000 (iii) 5/ = 6,500 Unrealised profits (i) (20% 2) 2000 = 800 (ii) = 800 (iii) = 5,000 Minority Interest (i) 15/ = 22,500 (ii) 10/ = 15,000 (iii) 5/ = 7,500 ACCOUNTING (ADVANCED HIGHER) 53

54 Question 13 (a) Goodwill 5300 (85% of 3000) = 2,750 (i) Post-Acquisition Profits = = 1,260 (ii) Unrealised Profit % = % = 117 (iii) Minority Interest 15% of 4,260 = 639 (iv) Consolidated Reserves (85% 1260) 117 = 3,104 (b) Consolidated Balance Sheet as at 31 December year 1. Goodwill 2,750 Buildings 21,900 24,650 Stocks 1,883 Debtors 1,760 Bank 750 4,393 Creditors 6,400-2,007 22,643 Long-term Loan 7,300 15,343 Share Capital 6,500 Share Premium 600 Revaluation Reserve 4,500 Consolidated Reserves 3,104 8,204 14,704 Minority Interest , ACCOUNTING (ADVANCED HIGHER)

55 Question 14 (a) (i) Goodwill = 7000 (80% 6200) = 2,040 (ii) Post-acquisition Profits = = 900 (split 720/180) (iii) Unrealised Profits = 40% (800 25%) = 80 (iv) Consolidated Reserves = (80% 900) 80 = 3,640 (b) Consolidated Balance Sheet at 31 December year 1 Goodwill 2,040 Buildings 31,000 33,040 Stocks 5,920 Debtors 3,400 Bank 4,500 13,820 Creditors 3,100 10,720 43,760 Long-term Loan 4,700 39,060 Share Capital 30,000 Revaluation Reserve 4,000 Consolidated Reserves 3,640 7,640 37,640 Minority Interest 1,420 39,060 ACCOUNTING (ADVANCED HIGHER) 55

56 Question 15 (a) (i) Goodwill = 4500 (6600 3/5) = 540 (ii) Post-acquisition profits = 400, divided consolidated reserves 240, minority interest 160 (b) Consolidated Balance Sheet at 31 December year 1 Goodwill 540 Buildings 34,000 Equipment 1,900 36,640 Stocks 7,925 Debtors 4,600 Bank 3,000 15,525 Creditors 3,500 12,025 48,465 Long-term Loan 2,500 45,965 Share Capital 32,000 Share Premium 4,000 Revaluation Reserve 2,000 Consolidated Reserves 5,165 11,165 43,165 Minority Interest 2,800 45, ACCOUNTING (ADVANCED HIGHER)

57 Question 16 (a) (i) Goodwill = (3/ ) = 1,750 Less = 525 1,225 (ii) Post-acquisition profits = 100 split 75/25 (iii) Unrealised profits cost 600, selling price 800, profit 200, unsold 60% = 120 (b) Consolidated Balance Sheet as at 31 December year 3 Goodwill 1,225 Buildings 50,000 Machinery 37,000 88,225 Stocks 5,880 Debtors 4,500 Bank 1,400 11,780 Creditors 3,300 8,480 96,705 Long Term Loan 21,000 75,705 Share Capital 55,000 Share Premium 6,000 Revaluation Reserve 5,400 Consolidated Reserves 5,130 16,530 71,530 Minority Interest 4,175 75,705 Working Consolidated reserves = = 5,130 Minority interest ¼ = 4,175 ACCOUNTING (ADVANCED HIGHER) 57

58 Question 17 (a) Goodwill = 6050 (7/8 5200) = = 1,200 (b) Consolidated balance sheet as at 31 December year 3 Goodwill 1,200 Buildings 22,900 24,100 Stocks 1,840 Debtors 2,350 Bank 2,650 6,840 Creditors 5,150 1,690 25,790 Long-term Loan 3,500 22,290 Share Capital 15,000 Share Premium 2,500 Revaluation Reserve 3,000 Consolidated Reserves 1,115 6,115 21,615 Minority Interest ,290 Working Minority interest = /8 = 675 Unrealised profits = cost 1600, selling 2000, profit % = 260 Post-acquisition profits = 200 split 175/25 Consolidated Reserves = 1, ACCOUNTING (ADVANCED HIGHER)

59 Question 18 Consolidated Balance Sheet of Central and Belt as at 31 December year 4 Goodwill 875 Buildings 50,000 50,875 Stocks 7,780 Debtors 5,500 Bank 1,800 15,080 Creditors 5,100 9,980 60,855 Debentures 6,000 54,855 Ordinary Share Capital 30,000 Share Premium 10,000 Consolidated Reserves 11,330 21,330 51,330 Minority Interest 3,525 54,855 Working Goodwill = 7500 (5/ ) = 1250 Written down by 30% = 375 Final value 875 Consolidated reserves = 11,330 Minority Interest /8 = 3,525 ACCOUNTING (ADVANCED HIGHER) 59

60 Question 19 (a) (i) Goodwill = 65,000 80% (50, , ,000) = 5,000 (ii) Minority Interest = 20% (50, , ,000) = 15,000 (b) (i) Goodwill = 75% 5,000 = 3,750 (ii) Minority Interest = % ( ) = 15,200 (iii) Consolidated Stock = = 7,500 (iv) Consolidated Reserves = 7000+(80% ) (25% 5000) (500 1) = 6, ACCOUNTING (ADVANCED HIGHER)

61 Question 20 Goodwill The purchase price less appropriate proportion of ordinary shares plus reserves Calculated on consolidation Appears in the balance sheet as a fixed asset May be written down over a number of years Minority Interest The value of that part of the group not under the control of the parent Calculated by applying the percentage of ordinary shares not purchased to the total of ordinary shares plus reserves Appears separately from other parts of the capital and reserves section of the balance sheet Consolidated Balance Sheet A statement showing an overall view of the group as a whole, as opposed to its individual parts Contains the totals for many items but must eliminate common items such as current accounts Does not show the capital or reserves of the subsidiary Post-Acquisition Profits Profits made by subsidiary after purchase Belong to group and to minority interest in proportion to share of ordinary shares Unrealised Profits Arises where goods have been sold by, e.g. parent to subsidiary and not all of these goods have been sold by subsidiary Profits counted by parent on unsold goods by subsidiary must be discounted Consolidated reserves and stock values must be reduced ACCOUNTING (ADVANCED HIGHER) 61

62 Question 21 Balance Sheet as at 31 December year 3 Goodwill 2,000 Buildings 40,000 Machinery 9,200 51,200 Stocks 6,864 Debtors 3,500 Bank 4,700 15,064 Creditors 4,000 11,064 62,264 Debentures 4,000 58,264 Ordinary Shares 30,000 Share Premium 5,000 Consolidated Reserves 17,064 22,064 52,064 Minority Interest 6,200 58,264 Goodwill = 14,500 2/3 18,000 = 2,500 Less 10% for 2 years = 2,000 Unrealised Profits = % = ACCOUNTING (ADVANCED HIGHER)