MCom - Accounts ch-4 Topic2

Financial Accounting &
Analysis
Consolidation of Financial
Statements of Holding Companies
and its subsidiary companies
(Financial Accounting & Analysis)
(Holding and Subsidiary company accounts)
This chapter will teach you about the accounting for Holding and Subsidiary companies
Learning Objectives
At the end of this topic, you will be able to:

Understand what are holding and subsidiary companies
Develop an understanding of the differences between wholly
owned and partially owned subsidiary companies
Understand the preparation of financial statements
Understand the advantages and disadvantages of holding
companies
Develop an understanding of the components of the financial
statements.
Understand the procedures for the statements
Understand the cost of control
Develop an understanding of the minority interest

Dividend Received From Subsidiary Companies
The profits already earned and accumulated by the subsidiary company, up to the date of acquisition of the
shares by the holding company, are capital profits. If shares are acquired during the course of a year, the profit
should be treated as accruing from day to day (in the absence of any other indication) and, therefore, should be
apportioned on the time basis.
The distinction between capital profits and revenue profits is most important from the point of view of the
holding company. Dividends received out of capital profits must be credited to “Investment Account” since the
cash received is against the price of shares paid at the time of the acquisition.
Only dividends received out of revenue profits can be treated as income and credited to the Profit and Loss
Account. Let’s take an example:
On 1st November, 2020, H Ltd. acquired 30,000 equity shares of Rs. 10 each (at a cost of Rs 15 per share) in S Ltd.
whose total share capital consisted of 50,000 equity shares of Rs 10 each, fully paid.

The balance in the profit and loss account of S Ltd. as on 31 st March’2021 was Rs. 4,40,000 made up of
Balance brought forward on 1st April’2020 1,40,000

Profit (after meeting all expense and taxation) 3,00,000
4,40,000
S Ltd. declared a dividend of 40% and issued bonus shares in the ratio of one share for every four held.
First, we will ascertain the capital profits. These are
Balance in Profit and Loss Account on 1st April’2011 1,40,000

Profit for seven months upto 1st November 2020 (7/12 of Rs. 3,00,000) 1,75,000
Total 3,15,000
Revenue Profits are (5/12 of Rs. 3,00,000) 1,25,000


Since H Ltd. holds 30,000 shares out of 50,000, three-fifths of the profits belong to H Ltd. Hence, capital profit, as
far as H Ltd. is concerned, is three-fifths of Rs 3,15,000 or Rs 1,89,000; Revenue Profit, as far as H Ltd. is
concerned, is Rs 75,000. Total dividend received by H Ltd. is 40% on Rs 3,00,000 or Rs 1,20,000. The question
now arises : which profit has been utilised first to pay the dividend?
There are four possibilities:—

1. The dividend has been paid first out of previous profits and then out of current profits.
2. The dividend has been paid first out of latest profits and then out of the previous profits.
3. The profits of the current year as a whole have been used first to pay the dividend.
4. The two profits have been utilised proportionately.
The journal entries to be made in each of the cases are:


1. Bank Account Dr 1,20,000
To Investment Account Cr 1,20,000
(Being the dividend of Rs. 1,20,000 received from S Ltd. credited to investments being out of previous (capital)
profits only)

To Investment Account Cr 70,000
To Profit and Loss Account Cr 50,000
[Total Dividend Received Rs. 1,20,000
Treated as capital receipt 1,75,000
1,20,000 X 3,00,000 and
revenue receipt 1,25,000 in the proportion

1,20,000 X 3,00,000
of current year’s profit upto and after 1st Novermber’2020


(Being the total dividend of Rs. 1,20,000 received from S Ltd. having been declared first out of current profits
(Rs. 75,000) and then out of previous (capital) profits Rs. 45,000 i.e., 1,20,000-75,000)

[Being, the two dividend of Rs. 1,20,000 received from S Ltd, split into two parts in the ratio of previous profits
viz. 1,89,000, and current profits, viz., Rs. 75,000- the portion applicable to current profits credited to profit and
loss account)
Summary
In this topic, you learnt:
Understood what are holding and subsidiary companies-holding co is a company
controlling another company. The controlling can be through shares, board of
directors, or by controlling a holding co of another co. A subsidiary co is one which is
belonging to another company
Develop an understanding of the differences between wholly owned and partially
owned subsidiary companies
Understood the advantages and disadvantages of holding companies
Understood the preparation of financial statements – co has to prepare consolidated
financial statements apart from it’s own statements.
Developed an understanding of the components of the financial statements.-
consolidated Balance Sheet, consolidated Profit/loss, consolidated cash flow and
consolidated notes
Understood the procedures for the statements-firstly individual balances are
aggregated on line-by-line basis and then certain adjustments are made.

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Financial Accounting &

(Holding and Subsidiary company accounts)

At the end of this topic, you will be able to:

(Holding and Subsidiary company accounts)

(Holding and Subsidiary company accounts)

Balance brought forward on 1st April’2020 1,40,000

Balance in Profit and Loss Account on 1st April’2011 1,40,000

Revenue Profits are (5/12 of Rs. 3,00,000) 1,25,000

(Holding and Subsidiary company accounts)

There are four possibilities:—

4. The two profits have been utilised proportionately.

The journal entries to be made in each of the cases are:

(Holding and Subsidiary company accounts)

2. Bank Account Dr 1,20,000

revenue receipt 1,25,000 in the proportion

of current year’s profit upto and after 1st Novermber’2020

(Holding and Subsidiary company accounts)

4. Bank Account Dr 1,20,000

(Holding and Subsidiary company accounts)

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