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Company Accounts CBCAT6T10

RTMNU B.Com Semester 6 · Major: Accounting and Taxation · 4 units · notes for every unit

UniversityRTMNU – Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur
CourseB.Com (Four Year UG Programme, NEP 2020)
SemesterSemester VI
Paper codeCBCAT6T10
Paper titleCompany Accounts
CategoryMajor: Accounting and Taxation
Credits4 credits
Marks80 marks theory (3 hours) as per question paper pattern; CIE marks not stated in the syllabus extract
Syllabusas per official RTMNU NEP 2020 B.Com syllabus for Sem V & VI (session 2026-27 onwards)

Unit topics below follow the official RTMNU syllabus. RTMNU official website · All RTMNU B.Com papers

Units

  1. 1Unit I: Amalgamation and Absorption of CompaniesNotes
  2. 2Unit II: Reconstruction and Reorganisation of CompaniesNotes
  3. 3Unit III: Investment AccountsNotes
  4. 4Unit IV: Accounts of Holding CompanyNotes

RTMNU B.Com Sem 6 · CBCAT6T10 · Unit I

Unit I: Amalgamation and Absorption of Companies

Syllabus topics (RTMNU)

  • Amalgamation of Companies as per the Indian Companies Act, 2013 and Accounting Treatment as per Accounting Standard-14
  • Introduction
  • Meaning
  • Characteristics
  • objectives
  • Methods of Purchase Consideration
  • Accounting Procedure of Amalgamation and Absorption

Introduction and Meaning of Amalgamation and Absorption

Amalgamation means joining of two or more existing companies into one. Either (a) two or more companies are dissolved and a new company is formed to take over their business (e.g., A Ltd + B Ltd → C Ltd), or (b) one existing company takes over another, which is called absorption (e.g., A Ltd takes over B Ltd; B Ltd is dissolved).

In the Companies Act, 2013, amalgamations (mergers) are done through a scheme of compromise or arrangement under Sections 230 to 232, approved by shareholders and creditors and sanctioned by the National Company Law Tribunal (NCLT). Section 233 gives a simpler "fast-track merger" for small companies and holding–wholly-owned subsidiary mergers.

Accounting Standard 14 (AS-14) – Accounting for Amalgamations gives the accounting rules. (Companies following Ind AS use Ind AS 103 "Business Combinations"; your syllabus follows AS-14.)

Characteristics and Objectives

  1. Two or more companies combine; at least one company loses its identity (is dissolved without winding up).
  2. Assets and liabilities of the transferor company pass to the transferee company.
  3. Shareholders of the transferor company get shares/cash in the transferee company.
  4. It needs approval under a legal scheme (NCLT).

Objectives: economies of large scale, removal of competition, better use of resources, tax benefits (carry forward of losses as allowed by law), diversification, getting new technology or markets, revival of a sick unit. Indian example: the merger of HDFC Ltd into HDFC Bank (2023).

Types under AS-14:

PointAmalgamation in the nature of mergerAmalgamation in the nature of purchase
ConditionsAll five AS-14 conditions met: all assets and liabilities taken; holders of at least 90% equity shares become shareholders of transferee; consideration only in equity shares (cash for fractions); business continued; book values keptAny one condition not met
MethodPooling of interests methodPurchase method
Assets and liabilitiesRecorded at book valuesRecorded at book values or fair values
ReservesAll reserves of transferor kept as they areOnly statutory reserves kept (by "Amalgamation Adjustment Reserve")
DifferenceAdjusted in reservesGoodwill or capital reserve

Purchase Consideration and Its Methods

Purchase consideration (PC) is the amount the transferee company pays to the shareholders of the transferor company (in shares, cash or other securities) for taking over the business. Liabilities taken over and liquidation expenses paid are not part of PC.

  1. Lump-sum method: a total amount is stated.
  2. Net payment method: add up all payments to shareholders – cash + shares at their issue value + other securities.
  3. Net assets method: PC = agreed value of assets taken over − agreed value of liabilities taken over.
  4. Intrinsic value (share exchange) method: shares exchanged in the ratio of the intrinsic values of shares of the two companies.
Illustration 1 (Net payment method): Y Ltd absorbs X Ltd and agrees to: (a) pay ₹5 cash per share to X Ltd's 20,000 equity shareholders; (b) issue 3 equity shares of ₹10 each (market value ₹15) for every 4 shares of X Ltd; (c) issue 10% preference shares to X Ltd's 5,000 preference shares of ₹100, of the same value plus 10% extra. Y Ltd also pays ₹5,000 liquidation costs.
Solution: Cash = 20,000 × 5 = ₹1,00,000. Equity shares = 20,000 × 3/4 = 15,000 shares × ₹15 = ₹2,25,000. Preference = 5,00,000 + 10% = ₹5,50,000.
Purchase consideration = 1,00,000 + 2,25,000 + 5,50,000 = ₹8,75,000. Liquidation costs (₹5,000) are not part of PC.

Accounting Procedure – Books of Transferor (Vendor) Company

  1. Open Realisation A/c; transfer all assets taken over at book value to its debit, and liabilities taken over to its credit.
  2. Debit transferee company, credit Realisation A/c with PC.
  3. Receive PC in shares/cash.
  4. Transfer share capital, reserves and realisation profit (or loss) to Equity Shareholders A/c; pay them in shares/cash to close all accounts.

Accounting Procedure – Books of Transferee (Purchasing) Company

(Purchase method) 1. Business Purchase A/c Dr / To Liquidator of transferor (PC). 2. Assets A/c Dr (agreed values) / To Liabilities A/c / To Business Purchase A/c; excess of PC over net assets → Goodwill; shortfall → Capital Reserve. 3. Liquidator A/c Dr / To Share Capital / To Securities Premium / To Bank.

Illustration 2: A Ltd's Balance Sheet: Equity share capital (10,000 shares of ₹10) ₹1,00,000; General Reserve ₹30,000; Creditors ₹20,000 – total ₹1,50,000. Assets: Land & Building ₹60,000; Plant ₹40,000; Stock ₹25,000; Debtors ₹15,000; Cash ₹10,000. B Ltd takes over all assets and liabilities; Land is valued at ₹80,000 and Plant at ₹36,000. B Ltd pays the PC by issuing 12,000 equity shares of ₹10 each at ₹12 and ₹6,000 cash. Show Realisation A/c and Equity Shareholders A/c in A Ltd's books and journal entries in B Ltd's books (purchase method).
PC = 12,000 × 12 + 6,000 = ₹1,50,000. Net assets at agreed values = 80,000 + 36,000 + 25,000 + 15,000 + 10,000 − 20,000 = ₹1,46,000. Goodwill = 1,50,000 − 1,46,000 = ₹4,000.

Realisation Account (Books of A Ltd)

Dr Particulars₹Cr Particulars₹
To Land & Building60,000By Creditors20,000
To Plant40,000By B Ltd (PC)1,50,000
To Stock25,000
To Debtors15,000
To Cash10,000
To Equity Shareholders A/c (profit)20,000
Total1,70,000Total1,70,000

Equity Shareholders Account (Books of A Ltd)

Dr Particulars₹Cr Particulars₹
To Equity shares in B Ltd1,44,000By Equity Share Capital1,00,000
To Cash6,000By General Reserve30,000
By Realisation A/c (profit)20,000
Total1,50,000Total1,50,000

Journal (Books of B Ltd)

DateParticularsL.F.Dr ₹Cr ₹
1Business Purchase A/c ... Dr1,50,000
To Liquidator of A Ltd1,50,000
(Being business of A Ltd purchased)
2Land & Building A/c ... Dr80,000
Plant A/c ... Dr36,000
Stock A/c ... Dr25,000
Debtors A/c ... Dr15,000
Cash A/c ... Dr10,000
Goodwill A/c ... Dr4,000
To Creditors A/c20,000
To Business Purchase A/c1,50,000
(Being assets and liabilities taken over)
3Liquidator of A Ltd ... Dr1,50,000
To Equity Share Capital A/c1,20,000
To Securities Premium A/c24,000
To Bank A/c6,000
(Being PC discharged)
Exam tip: In the vendor's books, the Realisation profit belongs to equity shareholders. Always check: Dr total = Cr total in every account.

Likely exam questions

  1. (Long, 8/16 marks) What is amalgamation? Explain the methods of calculating purchase consideration under AS-14.
  2. (Long, 8/16 marks) M Ltd's Balance Sheet shows Equity Share Capital (8,000 shares of ₹10) ₹80,000, General Reserve ₹20,000, Creditors ₹30,000; Assets: Building ₹50,000, Stock ₹40,000, Debtors ₹30,000, Cash ₹10,000. N Ltd takes over all assets and liabilities and issues 10,000 equity shares of ₹10 each at ₹11. Calculate purchase consideration and prepare Realisation A/c in M Ltd's books.
  3. (Short, 4 marks) Distinguish between amalgamation in the nature of merger and in the nature of purchase.
  4. (Short, 4 marks) What is purchase consideration?
  5. (Short, 4 marks) State the objectives of amalgamation.
Unit II →

RTMNU B.Com Sem 6 · CBCAT6T10 · Unit II

Unit II: Reconstruction and Reorganisation of Companies

Syllabus topics (RTMNU)

  • Reconstruction of Companies as per the Indian Company Act, 2013 and Accounting Treatment as per Accounting Standard-14 (Internal Reconstruction and External Reconstruction)
  • Meaning
  • Characteristics
  • objectives
  • the difference between Reconstruction and Reorganisation
  • Accounting Procedure of Reconstruction and Reorganisation

Meaning of Reconstruction

Reconstruction means re-organising the capital and financial structure of a company that has suffered heavy losses, so that its accounts show a true position and it can make profits and pay dividends again.

  • Internal reconstruction: the same company continues; it reduces/re-arranges its capital and writes off losses and fictitious assets. No new company is formed. Legal basis: alteration of share capital (Section 61, Companies Act 2013) and reduction of share capital with NCLT confirmation (Section 66); schemes with creditors under Sections 230–232.
  • External reconstruction: the existing company is wound up and a new company is formed to take over its business, usually with the same shareholders. Under AS-14 it is treated like an amalgamation (normally in the nature of merger, since the shareholders are the same).

Characteristics and Objectives

  1. Done when accumulated losses are large and assets are over-valued.
  2. Shareholders (and sometimes creditors and debenture holders) make sacrifices.
  3. Fictitious assets (preliminary expenses, debit balance of P&L, discount on issue) and over-valued assets are written off.
  4. Needs special resolution and NCLT confirmation for capital reduction.

Objectives: write off past losses, show assets at real values, make the company able to pay dividends again, raise fresh capital, reduce interest burden, restore confidence of investors and lenders.

Difference between Reconstruction (Internal) and Reorganisation/External Reconstruction

PointInternal reconstructionExternal reconstruction
CompanySame company continuesOld company dissolved; new company formed
Legal procedureSections 61, 66 (and 230–232 if creditors involved)Liquidation of old company and scheme under Sections 230–232
AccountsCapital Reduction A/c opened in same booksRealisation A/c in old company; new books in new company
Purchase considerationNot requiredCalculated and paid by the new company
NameName stays the same (may add "and reduced")New company may have a new name
AS-14Not coveredCovered as an amalgamation

The word reorganisation is often used for changes in the rights of different classes of shareholders and creditors (e.g., conversion, consolidation or sub-division of shares, changing creditors' claims into shares).

Accounting Procedure of Internal Reconstruction

  1. Reduction of share capital: Share Capital (old) A/c Dr / To Share Capital (new) A/c / To Capital Reduction A/c.
  2. Sacrifice by creditors/debenture holders: Creditors (or Debentures) A/c Dr / To Capital Reduction A/c.
  3. Sub-division or consolidation: Share Capital (₹100) A/c Dr / To Share Capital (₹10) A/c – no change in amount.
  4. Use of Capital Reduction A/c: Capital Reduction A/c Dr / To P&L A/c (debit balance) / To Goodwill / To Preliminary Expenses / To Assets (reduction in value).
  5. Balance in Capital Reduction A/c: transferred to Capital Reserve.
Illustration 1 (Internal reconstruction): Balance Sheet of P Ltd: Equity Share Capital (20,000 shares of ₹10) ₹2,00,000; 8% Preference Share Capital (1,000 shares of ₹100) ₹1,00,000; Creditors ₹60,000 – total ₹3,60,000. Assets: Goodwill ₹40,000; Plant ₹1,50,000; Stock ₹50,000; Debtors ₹40,000; Cash ₹10,000; Profit & Loss (Dr) ₹60,000; Preliminary Expenses ₹10,000 – total ₹3,60,000.
Scheme: (a) equity shares reduced to ₹4 each fully paid; (b) preference shares reduced to ₹80 each; (c) goodwill, P&L debit balance and preliminary expenses written off; plant reduced by ₹20,000 and stock by ₹10,000. Pass journal entries and prepare the revised Balance Sheet.
Working: Equity reduction = 20,000 × (10 − 4) = ₹1,20,000; Preference reduction = 1,000 × (100 − 80) = ₹20,000; Total in Capital Reduction A/c = ₹1,40,000. Used: 40,000 + 60,000 + 10,000 + 20,000 + 10,000 = ₹1,40,000. Balance = Nil (no capital reserve).

Journal of P Ltd

DateParticularsL.F.Dr ₹Cr ₹
1Equity Share Capital (₹10) A/c ... Dr2,00,000
To Equity Share Capital (₹4) A/c80,000
To Capital Reduction A/c1,20,000
(Being equity shares reduced to ₹4 each)
28% Preference Share Capital (₹100) A/c ... Dr1,00,000
To 8% Preference Share Capital (₹80) A/c80,000
To Capital Reduction A/c20,000
(Being preference shares reduced to ₹80 each)
3Capital Reduction A/c ... Dr1,40,000
To Goodwill A/c40,000
To Profit & Loss A/c60,000
To Preliminary Expenses A/c10,000
To Plant A/c20,000
To Stock A/c10,000
(Being losses and over-valued assets written off)

Revised Balance Sheet of P Ltd (and reduced)

Equity and Liabilities₹Assets₹
Equity Share Capital (20,000 shares of ₹4)80,000Plant (1,50,000 − 20,000)1,30,000
8% Preference Share Capital (1,000 of ₹80)80,000Stock (50,000 − 10,000)40,000
Creditors60,000Debtors40,000
Cash10,000
Total2,20,000Total2,20,000

Accounting Procedure of External Reconstruction

Old company's books: Realisation A/c, Shareholders A/c (same as amalgamation). New company's books: Business Purchase A/c, record assets and liabilities, discharge PC by issuing shares.

Illustration 2 (External reconstruction): Weak Ltd: Share Capital (10,000 shares of ₹10) ₹1,00,000; Creditors ₹15,000 – total ₹1,15,000. Assets: Fixed Assets ₹60,000; Current Assets ₹25,000; P&L (Dr) ₹30,000. Strong Ltd is formed to take over the business: fixed assets valued at ₹50,000, current assets at book value, creditors taken over. For each share in Weak Ltd, one equity share of ₹10, ₹6 paid up, is issued.
PC = 10,000 × ₹6 = ₹60,000. Net assets = 50,000 + 25,000 − 15,000 = ₹60,000 → no goodwill or capital reserve.
Realisation A/c (Weak Ltd): Dr – Fixed Assets 60,000 + Current Assets 25,000 = ₹85,000. Cr – Creditors 15,000 + Strong Ltd 60,000 = ₹75,000. Loss on realisation = ₹10,000 (debited to Shareholders A/c).
Shareholders A/c: Cr Share Capital ₹1,00,000; Dr P&L ₹30,000 + Realisation loss ₹10,000 + Shares in Strong Ltd ₹60,000 = ₹1,00,000. Account closes.
Books of Strong Ltd: Business Purchase A/c Dr 60,000 / To Liquidator of Weak Ltd 60,000; Fixed Assets Dr 50,000, Current Assets Dr 25,000 / To Creditors 15,000 / To Business Purchase 60,000; Liquidator Dr 60,000 / To Equity Share Capital (₹6 paid) 60,000.
Exam tip: Capital Reduction A/c is used only to write off losses and over-valued assets; it can never be used to pay dividends. Any balance goes to Capital Reserve.

Likely exam questions

  1. (Long, 8/16 marks) Distinguish between internal and external reconstruction. Explain the accounting procedure of internal reconstruction.
  2. (Long, 8/16 marks) R Ltd has Equity Share Capital of ₹1,50,000 (15,000 shares of ₹10) and a debit balance of P&L ₹50,000 and Goodwill ₹20,000. Shares are reduced to ₹5 each. Losses and goodwill are written off and the balance is transferred to Capital Reserve. Pass journal entries.
  3. (Short, 4 marks) What is a Capital Reduction Account?
  4. (Short, 4 marks) State the objectives of reconstruction.
  5. (Short, 4 marks) What is external reconstruction?
← Unit IUnit III →

RTMNU B.Com Sem 6 · CBCAT6T10 · Unit III

Unit III: Investment Accounts

Syllabus topics (RTMNU)

  • Meaning of Investment
  • Need, Utility and Objective
  • Sales and Purchases of different types of Securities (cum-Interest and Ex-Interest)
  • Simple Problem on Investment and Securities

Meaning of Investment

Investment means putting money into assets such as shares, debentures, bonds and government securities to earn income (interest/dividend) or capital appreciation. Investment accounts record the purchase, sale, income and profit or loss on such securities.

AS-13 (Accounting for Investments): current investments (held for less than one year) are shown at the lower of cost and fair value; long-term investments at cost, less any permanent fall in value. Cost includes brokerage, stamp duty and fees. (Ind AS companies follow Ind AS 109.)

Need, Utility and Objectives

  1. Earning regular income – interest on bonds/debentures (fixed-income securities) and dividends on shares (variable-income securities).
  2. Capital appreciation – profit on sale when prices rise.
  3. Use of surplus funds – idle cash earns a return.
  4. Safety and liquidity – government securities are safe and can be sold quickly.
  5. Control – buying shares of another company to gain control (holding company).

Utility of investment accounts: separate capital (cost) from revenue (interest/dividend), find profit or loss on sale, find closing cost for the balance sheet, and calculate correct income for the year.

Cum-Interest and Ex-Interest Prices

Interest on fixed-income securities is paid on fixed dates (e.g., half-yearly). When securities are bought or sold between two interest dates, the question is who gets the interest for the broken period.

  • Cum-interest price: price includes interest accrued since the last interest date. Buyer gets full next interest. So Capital cost = Cum-interest price − Accrued interest.
  • Ex-interest price: price excludes accrued interest; buyer pays accrued interest separately. Capital cost = Ex-interest price; interest paid is debited to the interest column.
Remember: Accrued interest = Nominal value × Rate × Period since last interest date / 12. Interest is always on nominal (face) value, never on cost. Brokerage is added to cost on purchase and deducted from sale proceeds.
Illustration 1: On 1 March 2026, Ravi buys ₹20,000 (nominal) 12% debentures at ₹95. Interest is paid on 31 March and 30 September. Find capital cost if the price is (a) cum-interest, (b) ex-interest.
Accrued interest (1 Oct to 1 Mar = 5 months) = 20,000 × 12% × 5/12 = ₹1,000. Price = 20,000 × 95/100 = ₹19,000.
(a) Cum-interest: Ravi pays ₹19,000; capital cost = 19,000 − 1,000 = ₹18,000; interest column Dr ₹1,000.
(b) Ex-interest: Ravi pays 19,000 + 1,000 = ₹20,000; capital cost = ₹19,000; interest column Dr ₹1,000.

Format of Investment Account

The Investment Account has three money columns on each side: Nominal value, Interest (income) and Amount (capital/cost). The interest column balance is transferred to P&L as interest earned; the capital column shows profit/loss on sale (balancing figure after closing stock of investments). Cost of investment sold is found by the average cost method (or FIFO if the question says so).

Illustration 2: On 1 April 2025, Sunita held ₹1,00,000 (nominal) 9% Government Bonds costing ₹96,000. Interest is payable on 30 September and 31 March. On 1 June 2025 she bought ₹50,000 nominal at ₹98 cum-interest. On 1 December 2025 she sold ₹60,000 nominal at ₹99 ex-interest. Market price on 31 March 2026 was ₹97. Prepare the Investment Account for 2025-26 (average cost method).
Working notes:
1. Purchase 1 June: price 50,000 × 98% = ₹49,000; accrued interest (1 Apr–1 Jun, 2 months) = 50,000 × 9% × 2/12 = ₹750; capital cost = 49,000 − 750 = ₹48,250.
2. Interest 30 Sept on ₹1,50,000 = 1,50,000 × 9% × 6/12 = ₹6,750.
3. Sale 1 Dec: sale price = 60,000 × 99% = ₹59,400 (ex-interest); interest received from buyer (1 Oct–1 Dec) = 60,000 × 9% × 2/12 = ₹900.
4. Cost of bonds sold = (96,000 + 48,250) × 60,000/1,50,000 = 1,44,250 × 0.4 = ₹57,700. Profit on sale = 59,400 − 57,700 = ₹1,700.
5. Interest 31 March on ₹90,000 = 90,000 × 9% × 6/12 = ₹4,050.
6. Closing balance: nominal ₹90,000; cost = 1,44,250 − 57,700 = ₹86,550; market value 90,000 × 97% = ₹87,300. Valued at lower of the two = ₹86,550.

9% Government Bonds Investment Account (2025-26)

DateDr ParticularsNominal ₹Interest ₹Cost ₹DateCr ParticularsNominal ₹Interest ₹Cost ₹
1 AprTo Balance b/d1,00,000–96,00030 SepBy Bank (interest)–6,750–
1 JunTo Bank (purchase)50,00075048,2501 DecBy Bank (sale)60,00090059,400
1 DecTo P&L (profit on sale)––1,70031 MarBy Bank (interest)–4,050–
31 MarTo P&L (interest)–10,950–31 MarBy Balance c/d90,000–86,550
Total1,50,00011,7001,45,950Total1,50,00011,7001,45,950

Check: interest earned = ₹1,00,000 for 2 months (₹1,500) + ₹1,50,000 for 6 months (₹6,750) + ₹90,000 for 4 months (₹2,700) = ₹10,950. ✔

Investment in Shares (Dividend)

For equity shares, no "accrued dividend" is adjusted for broken periods; dividend is recognised when declared. If shares are bought cum-dividend and the dividend received relates to the period before purchase, it is credited to the capital (cost) column, not to income. Bonus shares increase the nominal value (and number of shares) at zero cost; right shares are recorded at the amount paid.

Exam tip: Draw the three-column account neatly, write working notes below it, and always state the method used (average cost/FIFO) for cost of investments sold.

Likely exam questions

  1. (Long, 8/16 marks) Explain the meaning, need and objectives of investment. Distinguish between cum-interest and ex-interest prices.
  2. (Long, 8/16 marks) On 1 April 2025, Anil held ₹50,000 (nominal) 10% debentures costing ₹48,000; interest is paid on 30 September and 31 March. On 1 August 2025 he sold ₹20,000 nominal at ₹97 cum-interest. Prepare the Investment Account for 2025-26 (average cost).
  3. (Short, 4 marks) What is a cum-interest price?
  4. (Short, 4 marks) How is the cost of investments sold found under the average cost method?
  5. (Short, 4 marks) Calculate the capital cost of ₹10,000 12% bonds bought at ₹96 cum-interest, 3 months after the last interest date.
← Unit IIUnit IV →

RTMNU B.Com Sem 6 · CBCAT6T10 · Unit IV

Unit IV: Accounts of Holding Company

Syllabus topics (RTMNU)

  • (As per the Indian Companies Act, 2013 and Accounting Standard – 21) Introduction
  • Meaning of Wholly-owned Subsidiary, partly-owned subsidiary
  • preparation of Consolidated Balance Sheet and Statement of Profit and Loss
  • Simple Problem involving two companies only

Introduction: Holding and Subsidiary Companies

Under the Companies Act, 2013, a subsidiary company (Section 2(87)) is a company in which another company (the holding company, Section 2(46)) (a) controls the composition of the Board of Directors, or (b) exercises or controls more than one-half of the total voting power (alone or with its subsidiaries). Example: Tata Sons is the holding company of many Tata group companies.

Section 129(3) requires a company with one or more subsidiaries to prepare Consolidated Financial Statements (CFS) in addition to its own statements. AS-21 (Consolidated Financial Statements) gives the method (Ind AS companies follow Ind AS 110).

  • Wholly-owned subsidiary: holding company owns 100% of the shares. No minority interest.
  • Partly-owned subsidiary: holding company owns more than 50% but less than 100%. The remaining outside shareholders are the minority interest (also called non-controlling interest).

Important Terms in Consolidation

  1. Pre-acquisition (capital) profits: reserves and profits of the subsidiary up to the date the holding company bought the shares. Holding company's share goes to cost of control (not to consolidated profit).
  2. Post-acquisition (revenue) profits: profits earned after that date. Holding company's share is added to consolidated P&L.
  3. Cost of control (Goodwill/Capital reserve): Cost of investment − (holding company's share of subsidiary's share capital + share of pre-acquisition profits). Positive = goodwill; negative = capital reserve.
  4. Minority interest: minority's share of share capital + pre-acquisition profits + post-acquisition profits of the subsidiary. Shown separately in the consolidated balance sheet.
  5. Elimination of inter-company items: mutual debts (debtors/creditors, bills), unrealised profit on stock sold within the group, inter-company dividends.

Steps for Preparing the Consolidated Balance Sheet

  1. Find holding company's % of shares and minority %.
  2. Analyse subsidiary's profits/reserves into pre- and post-acquisition.
  3. Calculate minority interest.
  4. Calculate cost of control (goodwill or capital reserve).
  5. Calculate consolidated reserves/P&L = holding company's own + share of post-acquisition profits.
  6. Add assets and liabilities of both line by line; remove "Investment in subsidiary" and the subsidiary's share capital and reserves; eliminate mutual owings.
Illustration 1 (Partly-owned subsidiary): Balance Sheets as on 31 March 2026:
H Ltd: Equity Share Capital (₹10 each) ₹5,00,000; General Reserve ₹1,00,000; P&L ₹80,000; Creditors ₹70,000 = ₹7,50,000. Assets: Fixed Assets ₹3,50,000; Investment in S Ltd (8,000 shares) ₹1,60,000; Stock ₹1,20,000; Debtors ₹80,000; Cash ₹40,000 = ₹7,50,000.
S Ltd: Equity Share Capital (10,000 shares of ₹10) ₹1,00,000; General Reserve ₹40,000; P&L ₹50,000; Creditors ₹30,000 = ₹2,20,000. Assets: Fixed Assets ₹1,20,000; Stock ₹50,000; Debtors ₹30,000; Cash ₹20,000 = ₹2,20,000.
H Ltd bought the shares on 1 April 2025, when S Ltd's General Reserve was ₹40,000 and P&L was ₹20,000. Prepare the Consolidated Balance Sheet.

Working notes

1. Holding = 8,000/10,000 = 80%; Minority = 20%.

Analysis of S Ltd profitsTotal ₹H Ltd 80% ₹Minority 20% ₹
Pre-acquisition: General Reserve40,000
Pre-acquisition: P&L on 1 Apr 202520,000
Capital profits (total)60,00048,00012,000
Post-acquisition: P&L (50,000 − 20,000)30,00024,0006,000

2. Minority interest = Share capital 20,000 + Capital profits 12,000 + Revenue profits 6,000 = ₹38,000.

3. Cost of control: Cost of investment ₹1,60,000 − (Share capital 80,000 + Capital profits 48,000) = 1,60,000 − 1,28,000 = Goodwill ₹32,000.

4. Consolidated P&L = H Ltd 80,000 + share of revenue profits 24,000 = ₹1,04,000.

Consolidated Balance Sheet of H Ltd and its subsidiary S Ltd as on 31 March 2026

Particulars₹
I. Equity and Liabilities
Shareholders’ funds: Equity Share Capital5,00,000
Reserves and Surplus: General Reserve1,00,000
Reserves and Surplus: Profit & Loss (WN 4)1,04,000
Minority Interest (WN 2)38,000
Current Liabilities: Creditors (70,000 + 30,000)1,00,000
Total8,42,000
II. Assets
Goodwill (WN 3)32,000
Fixed Assets (3,50,000 + 1,20,000)4,70,000
Stock (1,20,000 + 50,000)1,70,000
Debtors (80,000 + 30,000)1,10,000
Cash (40,000 + 20,000)60,000
Total8,42,000
Illustration 2 (Wholly-owned subsidiary, capital reserve and mutual owing): On 31 March 2026, H Ltd buys all 5,000 equity shares (₹10 each) of W Ltd for ₹70,000. On that date W Ltd has share capital ₹50,000 and reserves ₹30,000. W Ltd's creditors include ₹5,000 owed to H Ltd (included in H Ltd's debtors).
Cost of control = 70,000 − (50,000 + 30,000) = −10,000 → Capital Reserve ₹10,000 (all reserves are pre-acquisition because shares were bought on the balance sheet date). No minority interest (100% holding). In the consolidated balance sheet, reduce both Debtors and Creditors by ₹5,000.

Consolidated Statement of Profit and Loss

Revenues and expenses of the holding and subsidiary are added line by line. Then: (1) remove inter-company sales and purchases; (2) remove unrealised profit in closing stock of goods sold within the group; (3) remove inter-company interest, rent and dividends; (4) only post-acquisition profits of the subsidiary are included; (5) the minority's share of the subsidiary's profit is shown separately as "Profit attributable to minority interest", and the rest as "Profit attributable to owners of the parent".

Exam tip: Unrealised profit on stock = Closing stock from group × Profit/Sales. Deduct it from consolidated stock and from consolidated P&L (the holding company's share, or full amount as the question directs).

Likely exam questions

  1. (Long, 8/16 marks) What is a holding company? Explain the steps for preparing a consolidated balance sheet.
  2. (Long, 8/16 marks) A Ltd bought 75% shares of B Ltd (share capital ₹2,00,000) for ₹2,10,000 when B Ltd had reserves of ₹40,000. At the balance sheet date B Ltd's reserves are ₹60,000. Calculate cost of control, minority interest and A Ltd's share of revenue profit.
  3. (Short, 4 marks) What is minority interest?
  4. (Short, 4 marks) Distinguish between pre-acquisition and post-acquisition profits.
  5. (Short, 4 marks) What is cost of control?
← Unit III