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Good evening,
I have a question regarding a consolidated balance sheet.I would be very grateful if you could help me out.I haven’t been able to insert an image of very basic example of this,so I will describe the situation instead.A parent company invested £15,000 in the subsidiary company.I understand that for the parent,the journal entry for this should be DB Investments, CR Bank (£15,000).However,I believe that from the subsidiary’s POV,the journal entry should be DB Bank,CR ordinary Share Capital (£15,000).So then why does the subsidiary only have £10,000 of share capital?Surely it should have a minimum of £15,000 due to the investment from the parent company?No cancellations have occurred as of yet-this is just the beginning of a very basic question on consolidating balance sheets.
Thank you in advance.
The shares have obviously been issued at a price that is more than the nominal value.
Without seeing the rest of the question, it would appear that the nominal value of the shares issued was $10,000 (assuming that the parent bought 100% of the subsidiary) and the additional $5,000 would be credited to the share premium account.
This is all explained in my free lectures. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Many thanks for your response.I initially thought that this would be the case as well,but there was no account for share premium.All there was in the equity accounts of the subsidiary was £10,000 of share capital and £5,000 of retained earnings,which were then cancelled out with the £15,000 investment as in this case,the parent had purchased 100% of the subsidiary.That is why I was confused as to why there wasn’t a minimum of £15,000 in the subsidiary’s share capital when there is no share premium account.This was a very basic example devised by my lecturer simply to get the idea of consolidating balance sheets across to us-perhaps she wasn’t paying much attention to the specific details?
Edit:this seems to be the case with every question I’ve come across,including the free lectures as well.There is no share premium account in any of the statements;the only components of equity provided in the questions I have seen are retained earnings and share capital.If I could,I would have included a snapshot.But I will provide an example from Chris’ lecture on basic consolidation (https://www.youtube.com/watch?v=M_NrCgZednE):
Peter (parent) invests £1000 in Steven (subsidiary).However,share capital only has a value of £250.Retained earnings is £750 and there is no share premium or any other items of equity provided.That is what confuses me-if there is no share premium,surely Steven’s share capital should have a minimum balance of £1000 due to Peter buying all their shares [DB Bank,CR Share Capital (£1000)]?
It is not a question of cancelling anything out.
Unless the shares were purchased on the date of incorporation then when the parent company buys shares they are not paying the money to the subsidiary – they are paying it to whoever they bought the shares from (i.e. the previous owner of the shares)!!
Thank you for your response,sir.I was given an example where the fair value of the subsidiary’s property was deemed higher than it’s book value by £12,000 on the date of consolidation-a revaluation situation,therefore DB PPE,CR Revaluation Reserve by that amount.The PPE of the subsidiary immediately rose by £12,000,but whilst the fair value adjustment was included in the subsequent goodwill working,it wasn’t added on to the equity of the subsidiary in the consolidated statement.Why was this the case-that the PPE of the subsidiary was increased,but the resultant increase in the revaluation reserve in the subsidiary’s equity was ignored?
I have noticed in all the examples I have done so far that the only items in equity are always share capital and retained earnings.Is there a reason for this-why are other items such as revaluation reserve overlooked?
Although in the consolidated accounts we want to show the fair value of the assets, the only legal entities are the two individual companies and it is up to them individually whether or not this with to revalue their assets. If they had revalued then there would have been no fair value adjustment needed 🙂
When consolidating we are not revaluing as such. We are using the fair value of the assets in order to be able to put a fair value on the goodwill arising on consolidation.
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