Consolidation of Profit and Loss Accounts (With Illustrations)

Apart from the usual items of gains, incomes, losses and expenses which will appear in the profit and loss accounts of both the holding and the subsidiary companies and which will therefore be aggregated, some adjustments will be required.

The following are the most important:

(1) The profit of the subsidiary company arising before the date of acquisition of shares in the subsidiary company and belonging to the holding company should be debited to the Con­solidated Profit and Loss Account and credited to Capital Reserve or Goodwill as the case may be. In case there is a loss, the Consolidated Profit and Loss Account will be credited and Capital Reserve or Goodwill debited.

(2) In respect of T the proportion of the profits of the subsidiary company which belongs to the minority shareholders, their account should be credited by debit to the Consolidated Profit and Loss Account. In ease of loss, the Minority Shareholders Suspense Account should be debited and the Consolidated Profit and Loss Account credited.

(3) All items internal to the holding and subsidiary companies should be eliminated. If the subsidiary company has passed entries for proposed dividend and the holding company has also taken credit for its share of the dividends, there will be a cancellation from both sides of the Consolidated Profit and Loss Account.

If the proposed dividend has not been passed through the holding company’s books, the debit in respect of proposed dividend will be reduced by the holding company’s share in the Consolidated Profit and Loss Account; the corresponding liability in the Balance Sheet will also be reduced.

(4) Reserve for un-realised profit in respect of inter-company transactions relating to goods will have to be created by debit to the Consolidated Profit and Loss Account and credit to Stock Reserve Account.

The transfer of goods between the holding company and the subsidiary company should be eliminated both from the purchases and sales appearing in the Consolidated Profit and Loss Account.

(5) Debenture interest or dividends received by the holding company from the subsidiary will have to be eliminated from both sides of the Consolidated Profit and Loss Account.

No adjustment is required in respect of tax on dividends or on interest on debentures paid by the subsidiary company to the holding company. In case of interest outstanding or accruing, care should be taken to see that both the holding and subsidiary companies pass entries.

Then the debenture interest will be cancelled from both sides of the Consolidated Profit and Loss Account, so far as it relates to the debentures held by the holding company.

(6) In case Cumulative Preference Shares are held by outsiders and in case the dividend is in arrear, such arrear may be shown by way of a note in the Consolidated Balance Sheet. Alternatively, the amount due by way of dividends should be debited to the Consolidated Profit and Loss Account and credited to the Minority Shareholders Account and shown as a liability in the Consolidated Balance Sheet.

Illustration 1:

H Ltd. holds 7,500 equity shares of Rs 10 each in S Ltd. whose capital consists of 10,000 equity shares of Rs 10 each and 14% 1,000 cumulative preference shares of Rs 100 each. S Ltd. has also issued 14% debentures to the extent of Rs 2,00,000 out of which H Ltd. holds Rs 1,00,000.

The following are the profit and loss accounts of the two companies for the year ending 31st March, 2012:—


The following further information is given:—

(1) The shares were acquired by H Ltd. on 1st July 2011 but the debentures were acquired on 1st April 2011, S Ltd. was incorporated on 1st April, 2011.

(2) During the year, S Ltd. sold to H Ltd. goods costing Rs 1,00,000 at the selling price of Rs 1,50,000. One-fourth of the goods remained unsold on 31st March, 2012. The goods were valued at cost to the holding company for closing stock purposes.

Prepare Consolidated Profit and Loss Account. Assume the absence of dividend distribution tax.



(1) The dividend received has been eliminated against interim dividend paid.

(2) The proposed dividend includes Rs 63,000 payable to H Ltd. by S Ltd. This has been eliminated. The cor­responding elimination on the other side will be from the liability for Proposed Dividend in the Balance Sheet, since H Ltd. has not yet taken credit for the proposed dividend,

(3) The total capital profits—up to 1st June—are 1/4 of Rs 1,62.000 or Rs 40,500, i.e., 1/4 (2,88,000-1,12,000 – 14,000). Three fourths of this—the holding company’s share—is capital profit.

(4) The reserve against profits on unsold stock has been calculated as under: The total profit made was Rs 50,000 but since only one-fourth of the goods remain unsold, only one-fourth of the profit, viz., Rs 12,500 is un-realised.

(5) It has been assumed that the dividends have been paid or proposed out of current (post-acquisition) profits.

Illustration 2:

Air Ltd., Sea Ltd. and Rail Ltd. are members of a group. Air Ltd. bought 70% of the shares of Sea Ltd. on October 1,2010 and 30% of the shares of Rail Ltd., on 1st January 2012. Sea Ltd. bought 60% of the shares of Rail Ltd. on October 1, 2011.

The following information is available:


Illustration 3:

Flower Ltd. is a trading company which has owned 100% of the share capital of Pot many years. On 1st December, 2011 Flower Ltd. acquired 80% of the equity share capital Ltd. but did not acquire any of the Rs 1,00,000 14% preference shares.

The draft Profit and Loss Accounts of three companies for the year ended 31st March, 2012 showed:—


The following information is ascertained:

(1) The equity dividend proposed by Shed Ltd. has not been brought into credit by Flower Ltd. in the draft accounts.

(2) In all three companies, the trading profits are deemed to occur evenly over the year.

(3) Included in the stock of Flower Ltd. at cost is Rs 18,000 for goods which were purchased subsequent to December from Shed Ltd., which had added its usual margin of 33 1/3% to cost but then allowed a special sales discount of 10%.

(4) On 1st May, Flower Ltd. sold a machine in the ordinary course of its trade to Pot Ltd., which capitalized this item as part of Plant and Machinery. Pot Ltd. paid Rs 10,000, the cost to Flower Ltd. being Rs 6,000.

(5) Throughout the group, depreciation on fixed assets is charged at 1% per month calculated on cost.

(6) The holding company believes in a policy of decentralized management. The only director common to all companies is the chairman of Flower Ltd. who received fees of Rs 500 from Pot Ltd. and Rs 200 from Shed Ltd.

(7) The compensation for loss of office was paid by Shed Ltd. in June 2011 and was an excep­tional item of expense, not connected with the acquisition of control by Flower Ltd.

(8) In general, in all three companies the taxable profits approximate to the accounting profits. However, in 2011 when the rate of corporation tax is taken as 50%, Flower Ltd. is to provide Rs 30,000 as additional provision for taxation.

(9) Rs 20,000 of the interest receivable by Flower Ltd. was from a bank deposit account, the balance being from a mortgage loan repayable in 2016.

You are required to prepare the consolidated profit and loss statement for the year ended 31st March, 2012. Ignore dividend distribution tax. [Adapted from C.A. (Eng.) Final]



Illustration 4:

From the following balance sheets of a group of companies and the other information provided, draw up the consolidated Balance Sheets as on 31.3.2012.







Illustration 5:

Ack Ltd. acquired control of Tick Ltd. and Tock Ltd. on 1st April, 2011. The respective balance sheets on March 31, 2012 were:





Illustration 6:

Whole Ltd. purchased 8,000 shares in Fragment Ltd. 2007-08, and a further 2,000 shares in 2009-10. In 2007-08 Fragment Ltd. had no capital reserve and a balance on revenue reserve of Rs. 15,000; in 2009-10 the balances on capital and revenue reserves were Rs. 60,000 and Rs. 30,000 respectively.

Whole Ltd. purchased 12,000 shares in Part Ltd. in 2008-09 when there had been an adverse balance on reserves of Rs. 40,000.

A on 31st March, 2012 the balance sheets of the three companies showed the following position:







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