3. Investment holdings > 50% = Large holdings The holding company > The subsidiary

4. To give shareholders An overview of their investments An overall financial position and performance of the group

5. To prepare a group financial statement As a Single Economic Entity

6. Transactions between the group companies do not reflect transactions between the external parties and therefore should be eliminated

7. Inter company indebtedness e.g. inter company loan debentures proposed dividends

8. Long term investment of H Share capital + reserves of S

9. 1. Unrealized Profits from intra-group transactions - on unsold inventories - on fixed assets

10. Pre-acquisition Reserves - Cost of control - Minority interests

11. Pre-acquisition Reserves - Share Premium - General Reserve - Revaluation Reserve of subsidiary

12. Minority interests - Profit and loss account - Balance sheet

13. Proposed dividend pay out from Pre-acquisition Profit - should not be treated as investment income - It is a reduction in the cost of investment

14. Proposed dividend Pay out from Post-acquisition Profit - investment income

15. % of holdings: 4000/5000 = 80%

17. 2.At the acquisition date, 1 January 2003 the shareholders’ equity of Jackson Ltd: ref (i) $000 Ordinary share Capital5,000 Share premium500 General reserve1,000 Profit and loss account1,500 Revaluation reserve 9,800-9,000 800 8,800

18. 3.Calculation of Goodwill Answer (a)$000 Investment in Jackson Ltd7,500 Ordinary share Capital 5,000 x 80%4,000 Share premium 500 x 80%400 General reserve 1,000 x 80%800 Profit and loss account 1,500 x 80% 1,200 Revaluation reserve 800 x 80% 6407,040 460

19. 4.Goodwill amortization 460 / 5 = 92 ------- Consolidated profit and loss account 460 – 92 = 368 ----- Consolidated Balance Sheet

20. 5.At 31 March 2003, the shareholders’ equity of Jackson Ltd: $000 Ordinary shares of $1.00 each5,000 Share premium500 General reserve1,750 Profit and loss account1,750 Revaluation reserve 800 9,800

21. 6.Minority interests Ref: (ii) (3) Depreciation adjustment (iv) Unrealized profit on inventories $000 Ordinary shares of $1.00 each 5,000 x 20%1,000 Share premium 500 x 20%100 General reserve 1,750 x 20%350 Profit and loss account 1,750 x 20%350 Revaluation reserve 800 x 20% 1601,960 To share unrealized profit on inventories 160 Transfer to consolidated balance sheet1,800

22. Workings of the Consolidated Balance Sheet: 7.Freehold land : 10,000,000 + 9,800,000 ( revised value) = $19,800,000

23. 7.Plant and machinery: Unrealized profit on sale of fixed asset to Jackson: ref (iii) = 1,000,000 – 600,000 = 400,000 consolidated profit and loss Depreciation to be reduced = 40,000 Consolidated profit and loss Cost = 7,900,000 +4,150,000 - 400,000 = 11,650,000 Provision for depreciation = 4,980,000 + 3,150,000 - 40,000 = 8,090,000 Net book value = 3,560,000

24. 8.Shareholders’ Fund:$000 Ordinary shares of $1.00 each15,000 Share premium3,000 General reserve 1,400 + (1750-1000) x 80% 2,000

25. 9.Unrealized profit on inventories: ref (ii)(3), (iv) Mark up = 25% = 1/4 Margin = 20% = 1/5 Unrealized profit on inventories = 4,000,000 / 5 = 800,000 Inventories = 5,550,000 + 1,250,000 – 800,000 = 6,000,000 800,000 x 20 % = 160,000 ------ share by Minority interests 800,000 x 80% = 640,000 ------- consolidated profit and loss

26. 10. Intra-group indebtedness: ref: (v), (ii) (4), Accounts receivable: 1,500,000 +750,000 -500,000 = 1,750,000 Accounts payable: 3,050 – 500 + 1,600 = 4,150 Dividend payable: 750 Dividend payable to Minority interests = 500 x 20% = 100,000

27. 11. Bank: 1,450,000 + 100,000 = 1,550,000 Tax payable: 1,200,000 + 1,000,000 = 2,200,000

28. 12.Consolidated profit and loss account$000 Profit and loss account : M. Ltd4,520 S. Ltd (1,750,000 – 1,500,000)200 Unrealized profit on Sale of fixed asset(400) Depreciation adjustment40 Goodwill amortization(92) Unrealized profit on inventories(640) Intra-group dividends 400 4,028

29. To sum up: Fixed assets = H + S – I Current assets = H + S – I Current liabilities = H + S – I Long term liabilities = H + S – I Share Capital = H Reserves = H + Post-acquisition Reserves of Subsidiary