Consolidation Of Financial Statements And Analysis Of Acquisition

Purpose of consolidated financial statements

Consolidated financial statements are prepared to present the group’s financial numbers to the owners of the group companies. It helps them to understand the overall profitability of the companies in the groups. (Staff, 2018)

Meaning of group, a parent and a subsidiary

Group is the combination of all the holding and subsidiary companies.Parent company is the one who holds more than 51% shares of the other company or has controlling power of the other company.Subsidiary company is one whose shares are held by the other company or is controlled by the holding company.

No. of parent companies in a group

A group can have any number of parent companies. However, the ultimate parent company will be one only. In case of multiple holding, the shares of one company is held by other company, hence the situation of multiple holding in a group arises. The ultimate parent holding is the one who owns the shares of all the parent companies of the group.

Requirement of Intragroup transactions

Intra group transactions are notional transactions since the profit earned or loss incurred is within the group only. Hence, these transactions needs to be eliminated, so that the financials of group companies reflect the true and fair view. (“Intra-group transactions: identifying differences | Sigma Conso”, 2018)

Realisation of profit in relation to inventories transfers within the group

In relation to inventories transfer within the group, the profit is realised when the inventories are sold to the external or third parties.In the absence of any instruction, tax rate has been assumed to be 30%.

Acquisition Analysis as at 1 July, 2019
Particulars	Amount ($)
Share Capital	650,000
General Reserve	20,000
Retained earnings	250,000
Fair value of equipment (50000 x (1-30%))	35,000
Lawsuit (-40000 x (1-30%))	(28,000)

Net fair value of assets and liabilities acquired	927,000
Amount paid as consideration	1,000,000
Goodwill	73,000

Consolidated Worksheet Entries as at 1 July, 2019
Particulars	Dr./ Cr.	Amount ($)
Accumulated Depreciation	Dr.	80,000
Equipment	Cr.	30,000
Deferred tax liability	Cr.	15,000
Business combination valuation reserve	Cr.	35,000
(Equipment recorded at fair value)

Business combination valuation reserve	Dr.	28,000
Deferred tax liability	Dr.	12,000
Provision for lawsuit	Cr.	40,000
(Provision created for lawsuit)

Goodwill	Dr.	73,000
Business combination valuation reserve	Cr.	73,000
(Goodwill on acquisition)

Share Capital	Dr.	650,000
General Reserve	Dr.	20,000
Retained earnings	Dr.	250,000
Business combination valuation reserve	Dr.	80,000
Shares in Soletta Limited	Cr.	1,000,000
(Pre-acquisition entry for investment in Soletta Ltd.)

Solution 3 Calculation of depreciation of tractor sold

Particulars	$
Gain on sale of tractor	4000
Depreciation Rate	10%
Depreciation from 1st Jan to 30th Jun-18 (4000 x 10% x (6/12))	200
Written Down Value as on 30th Jun-18	3800
Depreciation from 1st Jul-18 to 30th Jun-19 (3800 x 10%)	380
Written Down Value as on 30th Jun-19	3420
Depreciation from 1st Jul-19 to 30th Jun-20 (3420 x 10%)	342
Written Down Value as on 30th Jun-20	3078

Consolidated Worksheet Entries as at 30 June, 2019
Transaction No.	Particulars	Dr. / Cr.	Amount ($)
(a)	Retained earnings (1/7/18)	Dr.	175
	Income tax expense	Dr.	75
	Cost of Sales	Cr.	250
	(Profit eliminated on sale of inventory)

(b)	Retained earnings (1/7/18)	Dr.	2,800
	Deferred tax asset	Dr.	1,200
	Tractor	Cr.	4,000
	(Elimination of profit on sale of tractor)

	Accumulated depreciation (refer WN-1)	Dr.	580
	Depreciation expenses	Cr.	380
	Retained earnings (1/7/18)	Cr.	200
	(Excess depreciation expenses eliminated)

	Income tax expense	Dr.	114
	Retained earnings (1/7/18)	Dr.	60
	Deferred tax asset	Cr.	174
	(Income tax adjustment on above entry)

(c)	Sales revenue	Dr.	400
	Cost of sales	Cr.	300
	Inventory	Cr.	100
	(Profit eliminated on sale of inventory)

	Deferred tax asset	Dr.	30
	Income tax expense	Cr.	30
	(Income tax adjustment on above entry)

	Payable to Salto Ltd.	Dr.	100
	Receivable from Patagonia Ltd	Cr.	100
	(Inter company receivables and payables eliminated)

(e)	Loan from Salto Ltd.	Dr.	50,000
	Loan to Patagonia Ltd	Cr.	50,000
	(Elimination of inter company loan)

	Interest income (50,000*6%)	Dr.	3,000
	Interest expenses	Cr.	3,000
	(Elimination of inter company interest expense and interest income)

	Interest payable (50,000*6%/2)	Dr.	1,500
	Interest receivable	Cr.	1,500
	(Interest payable on 30 June, 2019 eliminated)

Consolidated Worksheet Entries as at 30 June, 2020
Transaction No.	Particulars	Dr. / Cr.	Amount ($)
(b)	Retained earnings (1/7/19)	Dr.	2,800
	Deferred tax asset	Dr.	1,200
	Tractor	Cr.	4,000
	(Elimination of profit on sale of tractor)

	Accumulated depreciation (refer WN-1)	Dr.	922
	Depreciation expenses	Cr.	342
	Retained earnings (1/7/19)	Cr.	580
	(Excess depreciation expenses eliminated)

	Income tax expense	Dr.	103
	Retained earnings (1/7/19)	Dr.	174
	Deferred tax liability	Cr.	277
	(Income tax adjustment on above entry)

(c)	Retained earnings (1/7/19)	Dr.	70
	Income tax expense	Dr.	30
	Cost of Sales	Cr.	100
	(Profit eliminated on sale of inventory)

(d)	Management fee	Dr.	3,000
	Management expense	Cr.	3,000
	(Inter company management services eliminated)

	Payable to Patagonia Ltd	Dr.	3,000
	Receivable from Salto Ltd	Cr.	3,000
	(Inter company receivables and payables eliminated)

(e)	Loan from Salto Ltd.	Dr.	50,000
	Loan to Patagonia Ltd	Cr.	50,000
	(Inter company loan eliminated)

	Interest income (50,000*6%)	Dr.	3,000
	Interest expenses	Cr.	3,000
	(Elimination of inter company interest expense and interest income)

	Interest payable (50,000*6%/2)	Dr.	1,500
	Interest receivable	Cr.	1,500
	(Interest payable on 30 June, 2020 eliminated)

(f)	Dividend income	Dr.	1,500
	Interim dividend paid	Cr.	1,500
	(Interim dividend payment eliminated)

(g)	Dividend payable	Dr.	3,000
	Final dividend declared	Cr.	3,000
	(Final dividend entry eliminated)

	Dividend revenue	Dr.	3,000
	Dividend receivable	Cr.	3,000
	(Final dividend entry eliminated)

References

Staff, I. (2018). Consolidated Financial Statements.

Intra-group transactions: identifying differences | Sigma Conso. (2018).

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