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sir I have got few dumb confusions over consolidation. pls explain me
1.while Parent (P) company deciding an investment on subsidiary (S) company, who will decide whether to invest or not? Is it decided by board of directors or who else?
2. to be a board of directors, should directors have to own more shares in that company?
3. ”when P company is 60% shareholder in S company, it would have 60% votes in ordinary shares”. what does it mean sir? I know P company has voting right but irrespective of percentage , P can vote in for S. so does it make any difference on voting right if P company owns 60% instead of 70%?”
4. while voting in S company, who can vote from P company? board of directors or who else?
Although I will answer your questions, most of them are examined in the law exam (Paper F4) and not in Paper F3 🙂
1 The directors will recommend but usually the shareholders of P will decide whether or not the investment should go ahead.
2 No – directors do not have to own shares in the company (they often do own shares, but they do not have to – they are simply employed to run the company).
3 Usually there is 1 vote per share. So if P owns 60% of the shares then they have 60% of the votes. If they own 70% then they have 70% of the votes.
4 The directors of P will decide how to vote.
thank you sir 🙂
1.sir why is goodwill shown instead of investment cost? if investment cost is 50m and goodwill is 10 m, then what is the use of only 10m in financial position? what about the remaining 40m? it does not show the whole figure.
2. consolidation is prepared for parent company and subsidiary company. but why NCI is shown in SOFP? aren’t we supposed to show the equity of parent company and % of parent company owning subsidiary company . why should we show remaining amount of subsidiary company related with NCI.?
3.In a single entity, if transactions are made and inventory is left, we have to remove unrealized profit. If we have to adjust unrealized profit later, so why is it necessary for selling company to sell goods to another company above its cost price? why are they allowed to sell above CP within single entity?
On 1 January 2009, X paid $21,600 to acquire 90% of the ordinary shares of Y, which was incorporated on that date. On 31 December 2010, the Statements of Financial Position of each of the two companies were as follows:
X Y Non-current assets 70,000 36,000
Investment in S, at cost 21,600
Current assets 27,000 15,000
118,600 51,000Share capital – $1 shares 62,000 24,000
Retained earnings 44,600 19,500
Current liabilities 12,000 7,500
118,600 51,000sir i did not understand why we got ans zero? In answer it has given reason of ”incorporation”. but I could not understand
2. sir if the fair value of NCI at acquisition is not given in question, how would we calculate it’s fair value?
Sorry, but you are going to have to watch my free lectures on consolidations, because all of your questions are dealt with in the lectures – I cannot type out all of the lectures here 🙂
(but with regard to point 2 of your latest question, you will be given the fair value of the NIC at the date of acquisition in Paper F3.)
I really do suggest that you watch our free lectures. They are a complete course for Paper F3 and cover everything you need in order to be able to pass the exam well.
sorry sir due to your accent and poor internet connection I could not understand very basic concepts.
because of your notes and lectures I can solve the questions. Though I can do it I don’t understand the reason behind adjusting some figures and how it came.In below question
P S
NCA 85000 18000
investments shares
in subsidiary 60000
current assets 160000 84000ordinary shares $1 65000 20000
share premium 35000 10000
retained earnings 70000 25000current liabilities 135000 47000
P acquired ordinary $1 shares in S on !jan 2008 when retained earnings stood 20000. on this date, the fair value of NCI was 12500.
prepare consolidated financial position for 31 dec 2008.
so, I can easily solve this question because of your videos… 🙂 but the thing I did not understand is,
we get goodwill 22,500 . in which 80% is of parent company and 20% of NCI.
parent investment is 60000. here what made me confuse is we adjust goodwill value in group account but where are the remaining figures of investment gone? I mean to say from cost of investment of 60000 ,we show certain amount as goodwill but what about the remaining amount?sorry sir if it is stupid question but I can not get this question out from my mind until I understand properly
When we consolidate we are showing all of the assets and liabilities of the whole group as though it was just one big company, we are replacing the cost of the investment effectively with the value of the assets in the subsidiary as at the time of the investment.
When the cost of the investment is more than what the assets were worth at the time of the acquisition, the the difference is the goodwill. (So the rest of the investment that you refer to has been replaced by the value of the assets at the time of the investment)
sir investment in S’s company is $30000.. share capital in S’s balance sheet is also 30000.
journal entry for P company is,
dr. investment 30000
cr cash 300000but for S what will be the journal entry.
dr cash
cr… ?S will not have an entry.
It is not S who will receive the cash – it is the person that they bought the shares from 🙂
(Unless the shares were bought then the company was first formed, in which case it would be Dr Cash and Cr Share capital)
oh parent company buys shares from the person? till today I was thinking parent buys shares from company.
sir I did not understand that bracket thingy. you mean to say , before acquisition of subsidiary company, the entry is
dr cash
cr share capitalsir I am confused why NCI is shown in group account? so I will tell you what I have understand. please correct if i get wrong
In consolidation statement ,though parent owns let’s say 60% of shares of Subsidiary, it will control whole assets and liabilities. NCI should also get their share of net assets. So to show the amount that belongs only to parent shareholders , we need to put NCI value in liability side.
The ‘bracket thingy’ is saying that they only pay the subsidiary for the shares if they buy them when the shares are first issued (which happens on the day the company is incorporated i.e. the day it is first formed).
In the SOFP we bring in all of the assets and liabilities of both companies.
However some of those do not belong to the shareholders of the parent company, but belong to the others – the NCI. So we show the amount belonging to them as a separate item.
okay sir thank you
sir parent company controls all assets and liabilities. It means before buying any assets or taking loan, does subsidiary company have to take permission of parent company? Is parent company the one to decide what to do or what not to do in subsidiary?
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