FAC3764
Subsidiaries
An investee is a subsidiary when they say in the scenario that they have control or if they have more than 50% of the shares or more than 50% of the voting rights.
The consolidated method is used.
This means that transactions of the subsidiary and the parent needs to be consolidated. (Plus all the assets, labilities and equity)
And then eliminate the intercompany transactions.
Non-controlling interest needs to be disclosed
Goodwill or bargain gain purchase needs to be recognised.
1. Use the journal method to take out intergroup transactions.
All possible journals
J1
At acquisition - When proportionate method is use
Debit Credit
Share capital (Equity / SFP) x This is the total amount on trail balance (You take the whole amount out, because intergroup transactions needs to be eliminated)
Retained earnings (Equity/SFP) x They will give this or if acquisition was in the beginning of year they will display it on the Trail balance and say it is in the beginning)
Goodwill (Balancing) (SFP) x This is the balancing figure. (When the credits is more than the debits)
Investment in subsidiary (SFP) x This is the total amount they paid for the shares, if they trade a asset for the shares, include the value of the asset.
Bargain gain purchase (Balancing) (Equity) x This is the balancing figure. (When the debits is more than the credits)
Non-controlling interest (Equity / SFP) x When it is proportionate method take the share capital + retained earnings and any other transactions like mark to mark reserve and revaluations and multiply with the non-controlling %.
Elimination of owner’s equity in Subsidiary at acquisition date
Only include goodwill or bargain gain purchase.
Things to remember:
1. When the non controlling interest is measured at fair value, they will give and amount that it is worth, take the shares that they parent does not have and multiply with
the amount.
2. When the proportionate method is used they will say this:
Elected to measure non-controlling interests in an acquiree at
their elected to measure non-controlling interests in an
acquiree at their
proportional share
of the acquirees identifiable net assets.
3. When the fair value is used
Measure non-controlling interests at fair value at acquisition
The market value of shares a was R1,75 per share.
Preference shares If there is no preference shares do not do this journal
J2 Debit Credit
Share capital - preference shares (SFP) x Total preference shares on the Trail balance.
Investment in subsidiary (SFP) x This is what they paid for the shares.
Non-controlling interest (SFP) (Balancing) x
Elimination of owner’s equity subsidiary at acquisition date
Since acquisition (Only do this if the subsidiary was acquired before the financial year)
J3 Debit Credit
Retained earnings (Equity / SFP) x This is the retained earnings at beginning of the financial year minus the retained earnings at acquisition multiply with the non-controlling %
Non-controlling interest (Equity / SFP) x Use the amount above
Recognition of NCI’s interest in since acquisition retained earnings
Non-controlling interest - Profit for the year
J4 Debit Credit
Non-controlling interest (SPL) x This is the profit for the current financial year multiply with the non-controlling %
Non-controlling interest (SFP) x This is the profit for the current financial year multiply with the non-controlling %
Recording of NCI’s interest in current year’s profit
,Please remember
When the subsidiary sells inventory or assets to the parent include the movement in the transaction above.
Example
Subsidiary sold inventory at a margin of 25% on cost to parent. During the current year parent purchased R750,000 of inventory. The balance of the inventory was
R140,000 at the end of the financial year that was purchased from the subsidiary and the previous year the closing inventory that was purchased form the subsidiary
was R110,000. The parent owns 85% of the subsidiary.
1st calculate the profit for the year. This is before any additional information is considered. The amounts will be displayed on the trail balance. They will
give you the profit for the year or they will give the revenue, cost of sales, other expenses, Income tax expense, Other income. Let say the Trail balance is as follows.
Remember only use subsidiaries amounts.
Trail balance
Parent Subsidiary
Revenue 4,114,000 2,200,000
Other income 386,000 96,000
Cost of sales - 1,600,000 - 950,000
Other expenses - 480,000 - 423,600
Income tax expense - 677,600 - 258,272
Profit for the current year 1,742,400 664,128
Adjusted for:
Unrealised profit in opening inventory (1) 15,840 This is realised profit. They will sell the opening inventory first so it will be sold.
Unrealised profit in closing inventory - 27,360 This is the unrealised profit. They did not sell this.
Profit for the year after adjusted 652,608
Non-controlling interest (652,608 x 15%) 97,891 Use this amount in the journal J4.
,Calculation of adjusted for:
1.Unrealised profit in opening inventory:
If they say that inventory was sold by the subsidiary before year end you need to do this. DO not do this
if the parent sells inventory to the subsidiary. If they say that inventory is sold at a markup of 25% on
(110,000 x 25/125) 22,000 selling take opening inventory x 25/100.
Tax effect (22,000 x 28%) - 6,160
15,840
2. Unrealised profit in closing inventory:
(190,000 x 25/125) 38,000
Tax effect (38,000 x 28%) - 10,640
27,360
Intergroup transactions
1. Selling inventory or assets
Inventory being sold between the subsidiary and parent - Opening
Does not matter who is selling parent or subsidiary the journal will look the same.
J5 Debit Credit
Retained earnings (SFP) x This is balancing.
Deferred tax (SFP) x Take cost of sales balance bellow x 28%or 27% (What the tax rate is)
This is the opening inventory balance x margin % / 100 + margin % (Let say the margin was 25% on cost or selling) If based on selling take opening balance x 25/100 if on cost take
Cost of sales (SPL) x 25/125.
Elimination of unrealised profit in opening inventories
You need to do the tax Aswell.
J6 Debit Credit
Income tax expense (SPL) x (Opening inventory x 25/125 or 25/100) x 28% (Tax)
Deferred tax (SFP) x (Opening inventory x 25/125 or 25/100) x 28% (Tax)
Deferred tax implication on unrealised profit in opening inventories
Inventory being sold between the subsidiary and parent - Closing
J7 Debit Credit
Cost of sales (SPL) x Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)
Inventory (SFP) x Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)
Elimination of unrealised profit in closing inventory
J8 - Tax Debit Credit
Deferred tax (SFP) x (Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)) x 28%
Income tax expense (SPL) x (Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)) x 28%
Tax implication of unrealised profit in closing inventory
J9 - Revenue Debit Credit
Revenue (SPL) x If they say in the scenario the amount of sales during the year in a separate line. Not just the balance of closing (Take the whole amount)
Cost of sales (SFP) x If they say in the scenario the amount of sales during the year in a separate line. Not just the balance of closing (Take the whole amount)
Elimination of realised intra-group sales during the current year (Only do this journal if the parent sells to subsidiary)
Dividends - ordinary
J10 Debit Credit
Other income (SPL) x Take the total ordinary dividends paid multiply by the parents interest.
Non-controlling interest (SPL) x Take the total ordinary dividends paid multiply by the Non-controlling interest.
Ordinary dividends paid x This is the total dividends the subsidiary paid, displayed on the trail balance.
Elimination of ordinary dividends received from subsidiary
,Dividends - preference
J11 Debit Credit
Other income (SPL) x Take the total preference dividends paid multiply by the parents interest.
Non-controlling interest (SPL) x Take the total preference dividends paid multiply by the Non-controlling interest.
Preference dividends paid (SFP) x This is the total preference dividends the subsidiary paid, displayed on the trail balance.
Elimination of preference dividends received from subsidiary
Impairment of goodwill - When goodwill is made less. When it is more than at acquisition debit goodwill and credit Other expenses.
J12 Debit Credit
Other expenses (SPL) x They will say in the additional information if goodwill was impaired. Use that amount.
Goodwill (SFP) x They will say in the additional information if goodwill was impaired. Use that amount.
Impairment of goodwill in current year
Change of ownership - When the parent disposes of shares (In other words the non-controlling interest gets more)
J13 Debit Credit
Investment in subsidiary (SFP) x Take the consideration paid originally dividend by shares acquired x shares disposed.
Other income (SPL) x Balancing figure
Change of ownership equity reserve (SFP) x Take consideration received minus non-controlling interest.
Non-controlling interest (SFP) x Non-controlling interest at acquisition date.
Recording of change in control due to sale of shares to NCI
Goodwill (When the subsidiary impairs goodwill if they acquired shares in another company)
J14 Debit Credit
Impairment loss (SPL) x They will say if the subsidiary impaired its goodwill
Goodwill (SFP) x
Recording of associates interest in since acquisition revaluation surplus
J15 Debit Credit
Non-controlling interest (SFP) x Take the amount above and multiply it with the non-controlling interest %.
Goodwill (SFP) x Rember when you calculate your non-controlling interest for your current years profit you need to deduct this amount.
Recording of associates interest in since acquisition revaluation surplus
When a subsidiary is obtained and the there is a asset that needs to be revalued - do that first
Example - Equipment was R9000,more than carrying amount.
J16 Debit Credit
Equipment (SFP) 9,000 Take the whole amount
Revaluation surplus (SFP) (9000 x 72%) 6,480 Amount x 100% - Tax rate
Deferred tax (SFP) (9000 x 28%) 2,520
Revaluation of equipment at acquisition
So after you did the J16 journal you need to include your Revaluation surplus in your acquisition journal
J17 Debit Credit
Share capital (Equity / SFP) 100,000 Lets say the share capital was R100,000
Retained earnings (Equity/SFP) 120,000 Retained earnings R120,000
Revaluation surplus (SFP) 6,480 Acquired 70%
Goodwill (Balancing) (SFP) 1,464 Acquired for R160,000
Investment in subsidiary (SFP) 160,000
Non-controlling interest (Equity / SFP) 67,944 (100,000 + 120,000 + 6480) x 30%
Elimination of owner’s equity in Subsidiary at acquisition date
,As it was a depreciable asset depreciation needs to be calculated on the revaluation
J18 Debit Credit
Retained earnings (SFP) x Take revaluation amount x depreciation rate x years before it was sold
Accumulated depreciation (SFP) x
Additional depreciation due to revaluation of equipment
Tax on journal 18
J19 Debit Credit
Deferred tax (SFP) x
Retained earnings (SFP) x
Tax effect of additional depreciation
Inter-group loans between subsidiary and parent
Interest
J20 Debit Credit
Interest income (SLP) x
Finance charges (SPL) x
To eliminate intragroup interest on the loan from subsidiary to parent
Loan
J21 Debit Credit
Loan from Subsidiary (SFP) x
Loan to Parent (SFP) x
To eliminate intragroup interest on the loan from subsidiary to parent
Example of change in ownership.
1. Parent exposes of 52,500 shares on 1 May 2017.
2. Acquired 85% of shares of subsidiary on 1 January 2014 when the retained earnings was R300,000.
3. Subsidiary has a total of 350,000 ordinary shares.
4. Parent paid R710,000 for the shares.
5. Parent received R255,000 for the 52,500 shares it disposes off.
6. Year end is 31 December 2017.
7. Subsidiary sold inventory at a margin of 25% on cost to parent. During the current year parent purchased R750,000 of inventory. The balance of the inventory was
R140,000 at the end of the financial year that was purchased from the subsidiary and the previous year the closing inventory that was purchased form the subsidiary
was R110,000. The parent owns 85% of the subsidiary.
Trail balance on 31 December 2017.
Parent Subsidiary
Revenue 4,114,000 2,200,000
Other income 386,000 96,000
Cost of sales - 1,600,000 - 950,000
Other expenses - 480,000 - 423,600
Income tax expense - 677,600 - 258,272
Profit for the current year 1,742,400 664,128
Retained earnings - 1 January 2017 2,777,600 960,000
Share capital 1,000,000 500,000
Preference shares (80,000 (8% cumulative) 80,000
,1.Investment in subsidiary:
Consideration paid 710,000
Total shares acquired (350,000 x 85%) 297,500 Acquired 85% of the shares and there is total of 350,000 shares.
(710,,500) = 2.39
Shares disposed of 52,500 x 2.39 125,294
Use the R125,294 in your journal Investment in subsidiary
2. Non-controlling interest
2.1 At acquisition
Share capital 500,000
Retained earnings - when acquired 300,000
Total 800,000
Non-controlling interest (800,000 x 15%) 120,000
2.2 Since acquisition
Retained earnings 1 January 2017 (960,000 - 300,000) 660,000 Amount of retained earnings at the beginning of the year minus retained earning at acquisition
Unrealised profit in opening inventory - 22,000 (110,000 x 25/125) - Only include if subsidiary sells to parent
Tax effect on unrealised profit 6,160
Total 644,160
Non-controlling interest (644,160 x 15%) 96,624
2.3 Current year
Profit for the current year: Take the amounts on the trail balance - before additional information
Revenue 2,200,000
Other income 96,000
Cost of sales - 950,000
Other expenses - 423,600
Income tax expense - 258,272
Preference dividends paid (80,000 x 8%) - 6,400 Take amount of preference shares x % of cumulative
Profit for the current year 657,728
4 Months (Was disposed on 1 May 2017) 219,243 (657,728 x 4/12)
Unrealised profit in opening inventory 22,000 (R110,000 x 25/125)
Tax effect on opening inventory (22,000 x 28%) - 6,160
(219,243 + 22,000 -3300) 235,083
Non-controlling interest (237,943 x 15%) 35,262
Total non-controlling interest
At acquisition (2.1) 120,000
Since acquisition (2.2) 96,624
Current year (2.3) 35,262
Total non-controlling interest at acquisition 251,886
3. Change in ownership
Consideration received for shares 255,000
Non-controlling interest at disposal - 251,886
Change in ownership 3,114
Journal will look as follow:
Debit Credit
Investment in subsidiary (SFP) (1) 125,294
Other income (SPL) (Balancing) 129,706
Change of ownership equity reserve (SFP)(3) 3,114
Non-controlling interest (SFP) (2) 251,886
Recording of change in control due to sale of shares to NCI
,When the investment of the subsidiary is under equity instruments it needs to be reclassified. It is not an equity instrument.
J14 Debit Credit
Investment in subsidiary (SFP) x Amount of consideration paid under equity instrument.
Investment in equity instrument (SFP) x Amount of consideration paid under equity instrument.
Reclassify equity instrument
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEFOR THE YEAR ENDING XX
When they ask you to do a statement of profit or loss
Steps
1. Add just the parent and subsidiaries income statement amounts in the consolidated statement of profit or loss. This is easy marks.
(Do not add the joint venture or associate, they have a separate line item. Will explain this later.)
2.Now take all the journals you did with SPL after it and add or deduct it from the amounts.
2.1 Income is credited and expenses is debited.
XXX LTD Group (This will be the parents name and just add group)
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEFOR THE YEAR ENDING XX
Revenue
Cost of sales
Gross Profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income for the year attributable to:
Owners 'of the parent Take the profit for the year and deduct the non-controlling interest
Non-controlling interest This will be the amount on the J4 journal.
XXX LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED XXX
Retained Non-controlling
Share capital earnings Change in ownership interest
Balance at 1 Beginning
Total comprehensive income:
Profit for the year
Disposal of interest
Ordinary dividends paid
Preference dividends paid
Balance at end
,XXX LTD
Consolidated Statement of Financial Position of
the XX Ltd Group as at XX
ASSETS
Non-current assets
Property, plant and equipment
Investment
Goodwill
Total non-current assets -
Current asset
Trade and other receivables
Cash and cash equivalents
Total current assets -
Total assets -
EQUITY AND LIABILITIES
Equity
Share capital
Retained earnings
Non-controlling interest
Total equity -
Liabilities
Current liabilities
Trade and other payables
Total current liabilities -
Non-current liabilities
Deferred tax
Total Non-current liabilities -
Total equity and liabilities -
Joint venture and associate - Journals
Dividends received from Associate and joint venture
JV 1 Debit Credit
Other income (SPL) x Take total dividends of joint venture on trail balance x % interest
Investment in joint venture or associate x
Elimination of dividend received from joint venture or associate
Parent sold land to associate or joint venture
JV2 Debit Credit
Other income (SPL) x (Proceeds minus cost) x % interest
Investment in joint venture or associate x
Elimination of unrealised profit on sale of a vacant piece of land to the joint venture
,Parent sold land to associate or joint venture - Tax effect
JV3 Debit Credit
Deferred tax (SFP) x
Income tax expense (SPL) x
Tax implications of realisation of unrealised profit on sale of a vacant piece of land to the joint venture
Profit in joint venture or associate
JV4 Debit Credit
Investment in joint venture (SFP) x Take the profit
Share of profit in joint venture (SPL) x
Recording of the joint venture’s profit for the current year
INVENTORY
Parent sells to joint venture or associate
When markup is on cost
JV5 Debit Credit
Revenue (SPL) x (Closing balance x % Interest)
Cost of sales (SPL) x (Closing balance x markup/(100+markup) x % interest
Investment in Joint venture (SFP) x (Closing balance x (100-markup)/100) x % interest
Recording of the joint venture’s profit for the current year
Tax journal on J5
Debit Credit
Deferred tax (SFP) x Take the amount in Investment in Joint venture above marked in pink x Tax rate
Income tax expense (SP) x
Tax on the elimination of unrealised profit resulting due to sale of inventory to the associate
Parent sells to joint venture or associate
When markup is on selling
JV6 Debit Credit
Revenue (SPL) x (Closing balance x % Interest)
Cost of sales (SPL) x (Closing balance x (100-markup)/100 x % interest
Investment in Joint venture (SFP) x (Closing balance x (Markup /100) x % interest
Recording of the joint venture’s profit for the current year
Tax journal on J6
Debit Credit
Deferred tax (SFP) x Take the amount in Investment in Joint venture above marked in pink x Tax rate
Income tax expense (SP) x
Tax on the elimination of unrealised profit resulting due to sale of inventory to the associate
Associate or joint venture sells to parent
When markup is on cost
JV7 Debit Credit
Share of profit in associate or joint venture (SPL) x (Closing balance x markup /(100+markup) )x % interest
Inventory (SFP) x
Elimination of unrealised profit in closing inventory
When markup is on cost - TAX effect
JV8 Debit Credit
Deferred tax (SFP) x Take the amount in J7 x tax rate
Share of profit in associate or joint venture (SPL) x
Tax implication on unrealised profit
, Associate or joint venture sells to parent
When markup is on Selling
JV9 Debit Credit
Share of profit in associate or joint venture (SPL) x (Closing balance x markup /(100) )x % interest
Inventory (SFP) x
Elimination of unrealised profit in closing inventory
When markup is on cost - TAX effect
JV10 Debit Credit
Deferred tax (SFP) x Take the amount in J7 x tax rate
Share of profit in associate or joint venture (SPL) x
Tax implication on unrealised profit
Joint venture or associate - bargain gain purchase (They do not have goodwill)
Acquired before the current financial year
JV10 Debit Credit Share capital + retained earnings - consideration paid - Non-controlling interest
Investment in joint venture (SFP) x If this is in a minus do not record. It will indicate goodwill. There is no goodwill for Joint ventures or associates. As they are using the equity method.
Retained earnings (SFP) x
Recording of gain on bargain purchase (given)
If the joint venture or associate was acquired in the current year you would have credited share of profit (SPL)
Interest since acquisition for joint ventures or associates
JV11 Debit Credit
Investment in joint venture (SFP) (Balancing) x
Retained earnings (SFP) x (Retained earnings at beginning of the year - at acquisition) x % interest
Mark-to mark reserve (SFP) x (Mark-to-market reserve at the beginning of the year - at acquisition) x % interest
Recording of interests in retained earnings and MTMR since acquisition to beginning of the current year
JV12 Debit Credit
Investment in joint venture (SFP) x
Share of profit of joint venture (SPL) x (Revenue + Other income -Cost of sales - Other expenses) x % interest
Share of other comprehensive income of joint venture (SPL) x Mark to market reserve during the current year x % interest
Recognition of share in profit of joint venture
Do not take out the loan, trade payables and receivables of associate or joint venture - Interest and loan
1. Only realised transactions are eliminated for associates and joint ventures.
Loans, trade receivables, payables effect the SFP in BOTH entities and are therefore NOT eliminated under the equity method. Interest, accounting fees effect the SPL in BOTH entities and are
therefore also NOT eliminated under the equity method.
2. In other words if a transaction only effect SPF transactions or SPL transactions it is not eliminated.
Only eliminated if a SPL and SFP transaction is eliminated.
3. Loans between the investor and an associate and the interest paid (or received) on such loans is not
eliminated under the equity method.
Management fees paid by associate to investor
Only unrealised transactions are eliminated for associates. This means that only transactions that
effect the SPL in one entity and the SFP in the other are eliminated under the equity
method. Loans, trade receivables, payables effect the SFP in BOTH entities and are therefore NOT
eliminated under the equity method. Interest, accounting fees effect the SPL in BOTH entities and are
therefore also NOT eliminated under the equity method.
As the management fees paid and received affect only the SPL in the accounting records of both Fly Ltd
and By Ltd (‘other income’ and ‘other expenses’, they are realised transactions and are therefore not eliminated under the equity method.
The management fees received from the associate will be included in “other income” in the consolidated statement
of profit or loss and other comprehensive income (as they will not be eliminated).
Subsidiaries
An investee is a subsidiary when they say in the scenario that they have control or if they have more than 50% of the shares or more than 50% of the voting rights.
The consolidated method is used.
This means that transactions of the subsidiary and the parent needs to be consolidated. (Plus all the assets, labilities and equity)
And then eliminate the intercompany transactions.
Non-controlling interest needs to be disclosed
Goodwill or bargain gain purchase needs to be recognised.
1. Use the journal method to take out intergroup transactions.
All possible journals
J1
At acquisition - When proportionate method is use
Debit Credit
Share capital (Equity / SFP) x This is the total amount on trail balance (You take the whole amount out, because intergroup transactions needs to be eliminated)
Retained earnings (Equity/SFP) x They will give this or if acquisition was in the beginning of year they will display it on the Trail balance and say it is in the beginning)
Goodwill (Balancing) (SFP) x This is the balancing figure. (When the credits is more than the debits)
Investment in subsidiary (SFP) x This is the total amount they paid for the shares, if they trade a asset for the shares, include the value of the asset.
Bargain gain purchase (Balancing) (Equity) x This is the balancing figure. (When the debits is more than the credits)
Non-controlling interest (Equity / SFP) x When it is proportionate method take the share capital + retained earnings and any other transactions like mark to mark reserve and revaluations and multiply with the non-controlling %.
Elimination of owner’s equity in Subsidiary at acquisition date
Only include goodwill or bargain gain purchase.
Things to remember:
1. When the non controlling interest is measured at fair value, they will give and amount that it is worth, take the shares that they parent does not have and multiply with
the amount.
2. When the proportionate method is used they will say this:
Elected to measure non-controlling interests in an acquiree at
their elected to measure non-controlling interests in an
acquiree at their
proportional share
of the acquirees identifiable net assets.
3. When the fair value is used
Measure non-controlling interests at fair value at acquisition
The market value of shares a was R1,75 per share.
Preference shares If there is no preference shares do not do this journal
J2 Debit Credit
Share capital - preference shares (SFP) x Total preference shares on the Trail balance.
Investment in subsidiary (SFP) x This is what they paid for the shares.
Non-controlling interest (SFP) (Balancing) x
Elimination of owner’s equity subsidiary at acquisition date
Since acquisition (Only do this if the subsidiary was acquired before the financial year)
J3 Debit Credit
Retained earnings (Equity / SFP) x This is the retained earnings at beginning of the financial year minus the retained earnings at acquisition multiply with the non-controlling %
Non-controlling interest (Equity / SFP) x Use the amount above
Recognition of NCI’s interest in since acquisition retained earnings
Non-controlling interest - Profit for the year
J4 Debit Credit
Non-controlling interest (SPL) x This is the profit for the current financial year multiply with the non-controlling %
Non-controlling interest (SFP) x This is the profit for the current financial year multiply with the non-controlling %
Recording of NCI’s interest in current year’s profit
,Please remember
When the subsidiary sells inventory or assets to the parent include the movement in the transaction above.
Example
Subsidiary sold inventory at a margin of 25% on cost to parent. During the current year parent purchased R750,000 of inventory. The balance of the inventory was
R140,000 at the end of the financial year that was purchased from the subsidiary and the previous year the closing inventory that was purchased form the subsidiary
was R110,000. The parent owns 85% of the subsidiary.
1st calculate the profit for the year. This is before any additional information is considered. The amounts will be displayed on the trail balance. They will
give you the profit for the year or they will give the revenue, cost of sales, other expenses, Income tax expense, Other income. Let say the Trail balance is as follows.
Remember only use subsidiaries amounts.
Trail balance
Parent Subsidiary
Revenue 4,114,000 2,200,000
Other income 386,000 96,000
Cost of sales - 1,600,000 - 950,000
Other expenses - 480,000 - 423,600
Income tax expense - 677,600 - 258,272
Profit for the current year 1,742,400 664,128
Adjusted for:
Unrealised profit in opening inventory (1) 15,840 This is realised profit. They will sell the opening inventory first so it will be sold.
Unrealised profit in closing inventory - 27,360 This is the unrealised profit. They did not sell this.
Profit for the year after adjusted 652,608
Non-controlling interest (652,608 x 15%) 97,891 Use this amount in the journal J4.
,Calculation of adjusted for:
1.Unrealised profit in opening inventory:
If they say that inventory was sold by the subsidiary before year end you need to do this. DO not do this
if the parent sells inventory to the subsidiary. If they say that inventory is sold at a markup of 25% on
(110,000 x 25/125) 22,000 selling take opening inventory x 25/100.
Tax effect (22,000 x 28%) - 6,160
15,840
2. Unrealised profit in closing inventory:
(190,000 x 25/125) 38,000
Tax effect (38,000 x 28%) - 10,640
27,360
Intergroup transactions
1. Selling inventory or assets
Inventory being sold between the subsidiary and parent - Opening
Does not matter who is selling parent or subsidiary the journal will look the same.
J5 Debit Credit
Retained earnings (SFP) x This is balancing.
Deferred tax (SFP) x Take cost of sales balance bellow x 28%or 27% (What the tax rate is)
This is the opening inventory balance x margin % / 100 + margin % (Let say the margin was 25% on cost or selling) If based on selling take opening balance x 25/100 if on cost take
Cost of sales (SPL) x 25/125.
Elimination of unrealised profit in opening inventories
You need to do the tax Aswell.
J6 Debit Credit
Income tax expense (SPL) x (Opening inventory x 25/125 or 25/100) x 28% (Tax)
Deferred tax (SFP) x (Opening inventory x 25/125 or 25/100) x 28% (Tax)
Deferred tax implication on unrealised profit in opening inventories
Inventory being sold between the subsidiary and parent - Closing
J7 Debit Credit
Cost of sales (SPL) x Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)
Inventory (SFP) x Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)
Elimination of unrealised profit in closing inventory
J8 - Tax Debit Credit
Deferred tax (SFP) x (Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)) x 28%
Income tax expense (SPL) x (Closing inventory x margin / margin + 100 (Lets say 25/125 or if on selling 25/100)) x 28%
Tax implication of unrealised profit in closing inventory
J9 - Revenue Debit Credit
Revenue (SPL) x If they say in the scenario the amount of sales during the year in a separate line. Not just the balance of closing (Take the whole amount)
Cost of sales (SFP) x If they say in the scenario the amount of sales during the year in a separate line. Not just the balance of closing (Take the whole amount)
Elimination of realised intra-group sales during the current year (Only do this journal if the parent sells to subsidiary)
Dividends - ordinary
J10 Debit Credit
Other income (SPL) x Take the total ordinary dividends paid multiply by the parents interest.
Non-controlling interest (SPL) x Take the total ordinary dividends paid multiply by the Non-controlling interest.
Ordinary dividends paid x This is the total dividends the subsidiary paid, displayed on the trail balance.
Elimination of ordinary dividends received from subsidiary
,Dividends - preference
J11 Debit Credit
Other income (SPL) x Take the total preference dividends paid multiply by the parents interest.
Non-controlling interest (SPL) x Take the total preference dividends paid multiply by the Non-controlling interest.
Preference dividends paid (SFP) x This is the total preference dividends the subsidiary paid, displayed on the trail balance.
Elimination of preference dividends received from subsidiary
Impairment of goodwill - When goodwill is made less. When it is more than at acquisition debit goodwill and credit Other expenses.
J12 Debit Credit
Other expenses (SPL) x They will say in the additional information if goodwill was impaired. Use that amount.
Goodwill (SFP) x They will say in the additional information if goodwill was impaired. Use that amount.
Impairment of goodwill in current year
Change of ownership - When the parent disposes of shares (In other words the non-controlling interest gets more)
J13 Debit Credit
Investment in subsidiary (SFP) x Take the consideration paid originally dividend by shares acquired x shares disposed.
Other income (SPL) x Balancing figure
Change of ownership equity reserve (SFP) x Take consideration received minus non-controlling interest.
Non-controlling interest (SFP) x Non-controlling interest at acquisition date.
Recording of change in control due to sale of shares to NCI
Goodwill (When the subsidiary impairs goodwill if they acquired shares in another company)
J14 Debit Credit
Impairment loss (SPL) x They will say if the subsidiary impaired its goodwill
Goodwill (SFP) x
Recording of associates interest in since acquisition revaluation surplus
J15 Debit Credit
Non-controlling interest (SFP) x Take the amount above and multiply it with the non-controlling interest %.
Goodwill (SFP) x Rember when you calculate your non-controlling interest for your current years profit you need to deduct this amount.
Recording of associates interest in since acquisition revaluation surplus
When a subsidiary is obtained and the there is a asset that needs to be revalued - do that first
Example - Equipment was R9000,more than carrying amount.
J16 Debit Credit
Equipment (SFP) 9,000 Take the whole amount
Revaluation surplus (SFP) (9000 x 72%) 6,480 Amount x 100% - Tax rate
Deferred tax (SFP) (9000 x 28%) 2,520
Revaluation of equipment at acquisition
So after you did the J16 journal you need to include your Revaluation surplus in your acquisition journal
J17 Debit Credit
Share capital (Equity / SFP) 100,000 Lets say the share capital was R100,000
Retained earnings (Equity/SFP) 120,000 Retained earnings R120,000
Revaluation surplus (SFP) 6,480 Acquired 70%
Goodwill (Balancing) (SFP) 1,464 Acquired for R160,000
Investment in subsidiary (SFP) 160,000
Non-controlling interest (Equity / SFP) 67,944 (100,000 + 120,000 + 6480) x 30%
Elimination of owner’s equity in Subsidiary at acquisition date
,As it was a depreciable asset depreciation needs to be calculated on the revaluation
J18 Debit Credit
Retained earnings (SFP) x Take revaluation amount x depreciation rate x years before it was sold
Accumulated depreciation (SFP) x
Additional depreciation due to revaluation of equipment
Tax on journal 18
J19 Debit Credit
Deferred tax (SFP) x
Retained earnings (SFP) x
Tax effect of additional depreciation
Inter-group loans between subsidiary and parent
Interest
J20 Debit Credit
Interest income (SLP) x
Finance charges (SPL) x
To eliminate intragroup interest on the loan from subsidiary to parent
Loan
J21 Debit Credit
Loan from Subsidiary (SFP) x
Loan to Parent (SFP) x
To eliminate intragroup interest on the loan from subsidiary to parent
Example of change in ownership.
1. Parent exposes of 52,500 shares on 1 May 2017.
2. Acquired 85% of shares of subsidiary on 1 January 2014 when the retained earnings was R300,000.
3. Subsidiary has a total of 350,000 ordinary shares.
4. Parent paid R710,000 for the shares.
5. Parent received R255,000 for the 52,500 shares it disposes off.
6. Year end is 31 December 2017.
7. Subsidiary sold inventory at a margin of 25% on cost to parent. During the current year parent purchased R750,000 of inventory. The balance of the inventory was
R140,000 at the end of the financial year that was purchased from the subsidiary and the previous year the closing inventory that was purchased form the subsidiary
was R110,000. The parent owns 85% of the subsidiary.
Trail balance on 31 December 2017.
Parent Subsidiary
Revenue 4,114,000 2,200,000
Other income 386,000 96,000
Cost of sales - 1,600,000 - 950,000
Other expenses - 480,000 - 423,600
Income tax expense - 677,600 - 258,272
Profit for the current year 1,742,400 664,128
Retained earnings - 1 January 2017 2,777,600 960,000
Share capital 1,000,000 500,000
Preference shares (80,000 (8% cumulative) 80,000
,1.Investment in subsidiary:
Consideration paid 710,000
Total shares acquired (350,000 x 85%) 297,500 Acquired 85% of the shares and there is total of 350,000 shares.
(710,,500) = 2.39
Shares disposed of 52,500 x 2.39 125,294
Use the R125,294 in your journal Investment in subsidiary
2. Non-controlling interest
2.1 At acquisition
Share capital 500,000
Retained earnings - when acquired 300,000
Total 800,000
Non-controlling interest (800,000 x 15%) 120,000
2.2 Since acquisition
Retained earnings 1 January 2017 (960,000 - 300,000) 660,000 Amount of retained earnings at the beginning of the year minus retained earning at acquisition
Unrealised profit in opening inventory - 22,000 (110,000 x 25/125) - Only include if subsidiary sells to parent
Tax effect on unrealised profit 6,160
Total 644,160
Non-controlling interest (644,160 x 15%) 96,624
2.3 Current year
Profit for the current year: Take the amounts on the trail balance - before additional information
Revenue 2,200,000
Other income 96,000
Cost of sales - 950,000
Other expenses - 423,600
Income tax expense - 258,272
Preference dividends paid (80,000 x 8%) - 6,400 Take amount of preference shares x % of cumulative
Profit for the current year 657,728
4 Months (Was disposed on 1 May 2017) 219,243 (657,728 x 4/12)
Unrealised profit in opening inventory 22,000 (R110,000 x 25/125)
Tax effect on opening inventory (22,000 x 28%) - 6,160
(219,243 + 22,000 -3300) 235,083
Non-controlling interest (237,943 x 15%) 35,262
Total non-controlling interest
At acquisition (2.1) 120,000
Since acquisition (2.2) 96,624
Current year (2.3) 35,262
Total non-controlling interest at acquisition 251,886
3. Change in ownership
Consideration received for shares 255,000
Non-controlling interest at disposal - 251,886
Change in ownership 3,114
Journal will look as follow:
Debit Credit
Investment in subsidiary (SFP) (1) 125,294
Other income (SPL) (Balancing) 129,706
Change of ownership equity reserve (SFP)(3) 3,114
Non-controlling interest (SFP) (2) 251,886
Recording of change in control due to sale of shares to NCI
,When the investment of the subsidiary is under equity instruments it needs to be reclassified. It is not an equity instrument.
J14 Debit Credit
Investment in subsidiary (SFP) x Amount of consideration paid under equity instrument.
Investment in equity instrument (SFP) x Amount of consideration paid under equity instrument.
Reclassify equity instrument
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEFOR THE YEAR ENDING XX
When they ask you to do a statement of profit or loss
Steps
1. Add just the parent and subsidiaries income statement amounts in the consolidated statement of profit or loss. This is easy marks.
(Do not add the joint venture or associate, they have a separate line item. Will explain this later.)
2.Now take all the journals you did with SPL after it and add or deduct it from the amounts.
2.1 Income is credited and expenses is debited.
XXX LTD Group (This will be the parents name and just add group)
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEFOR THE YEAR ENDING XX
Revenue
Cost of sales
Gross Profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income for the year attributable to:
Owners 'of the parent Take the profit for the year and deduct the non-controlling interest
Non-controlling interest This will be the amount on the J4 journal.
XXX LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED XXX
Retained Non-controlling
Share capital earnings Change in ownership interest
Balance at 1 Beginning
Total comprehensive income:
Profit for the year
Disposal of interest
Ordinary dividends paid
Preference dividends paid
Balance at end
,XXX LTD
Consolidated Statement of Financial Position of
the XX Ltd Group as at XX
ASSETS
Non-current assets
Property, plant and equipment
Investment
Goodwill
Total non-current assets -
Current asset
Trade and other receivables
Cash and cash equivalents
Total current assets -
Total assets -
EQUITY AND LIABILITIES
Equity
Share capital
Retained earnings
Non-controlling interest
Total equity -
Liabilities
Current liabilities
Trade and other payables
Total current liabilities -
Non-current liabilities
Deferred tax
Total Non-current liabilities -
Total equity and liabilities -
Joint venture and associate - Journals
Dividends received from Associate and joint venture
JV 1 Debit Credit
Other income (SPL) x Take total dividends of joint venture on trail balance x % interest
Investment in joint venture or associate x
Elimination of dividend received from joint venture or associate
Parent sold land to associate or joint venture
JV2 Debit Credit
Other income (SPL) x (Proceeds minus cost) x % interest
Investment in joint venture or associate x
Elimination of unrealised profit on sale of a vacant piece of land to the joint venture
,Parent sold land to associate or joint venture - Tax effect
JV3 Debit Credit
Deferred tax (SFP) x
Income tax expense (SPL) x
Tax implications of realisation of unrealised profit on sale of a vacant piece of land to the joint venture
Profit in joint venture or associate
JV4 Debit Credit
Investment in joint venture (SFP) x Take the profit
Share of profit in joint venture (SPL) x
Recording of the joint venture’s profit for the current year
INVENTORY
Parent sells to joint venture or associate
When markup is on cost
JV5 Debit Credit
Revenue (SPL) x (Closing balance x % Interest)
Cost of sales (SPL) x (Closing balance x markup/(100+markup) x % interest
Investment in Joint venture (SFP) x (Closing balance x (100-markup)/100) x % interest
Recording of the joint venture’s profit for the current year
Tax journal on J5
Debit Credit
Deferred tax (SFP) x Take the amount in Investment in Joint venture above marked in pink x Tax rate
Income tax expense (SP) x
Tax on the elimination of unrealised profit resulting due to sale of inventory to the associate
Parent sells to joint venture or associate
When markup is on selling
JV6 Debit Credit
Revenue (SPL) x (Closing balance x % Interest)
Cost of sales (SPL) x (Closing balance x (100-markup)/100 x % interest
Investment in Joint venture (SFP) x (Closing balance x (Markup /100) x % interest
Recording of the joint venture’s profit for the current year
Tax journal on J6
Debit Credit
Deferred tax (SFP) x Take the amount in Investment in Joint venture above marked in pink x Tax rate
Income tax expense (SP) x
Tax on the elimination of unrealised profit resulting due to sale of inventory to the associate
Associate or joint venture sells to parent
When markup is on cost
JV7 Debit Credit
Share of profit in associate or joint venture (SPL) x (Closing balance x markup /(100+markup) )x % interest
Inventory (SFP) x
Elimination of unrealised profit in closing inventory
When markup is on cost - TAX effect
JV8 Debit Credit
Deferred tax (SFP) x Take the amount in J7 x tax rate
Share of profit in associate or joint venture (SPL) x
Tax implication on unrealised profit
, Associate or joint venture sells to parent
When markup is on Selling
JV9 Debit Credit
Share of profit in associate or joint venture (SPL) x (Closing balance x markup /(100) )x % interest
Inventory (SFP) x
Elimination of unrealised profit in closing inventory
When markup is on cost - TAX effect
JV10 Debit Credit
Deferred tax (SFP) x Take the amount in J7 x tax rate
Share of profit in associate or joint venture (SPL) x
Tax implication on unrealised profit
Joint venture or associate - bargain gain purchase (They do not have goodwill)
Acquired before the current financial year
JV10 Debit Credit Share capital + retained earnings - consideration paid - Non-controlling interest
Investment in joint venture (SFP) x If this is in a minus do not record. It will indicate goodwill. There is no goodwill for Joint ventures or associates. As they are using the equity method.
Retained earnings (SFP) x
Recording of gain on bargain purchase (given)
If the joint venture or associate was acquired in the current year you would have credited share of profit (SPL)
Interest since acquisition for joint ventures or associates
JV11 Debit Credit
Investment in joint venture (SFP) (Balancing) x
Retained earnings (SFP) x (Retained earnings at beginning of the year - at acquisition) x % interest
Mark-to mark reserve (SFP) x (Mark-to-market reserve at the beginning of the year - at acquisition) x % interest
Recording of interests in retained earnings and MTMR since acquisition to beginning of the current year
JV12 Debit Credit
Investment in joint venture (SFP) x
Share of profit of joint venture (SPL) x (Revenue + Other income -Cost of sales - Other expenses) x % interest
Share of other comprehensive income of joint venture (SPL) x Mark to market reserve during the current year x % interest
Recognition of share in profit of joint venture
Do not take out the loan, trade payables and receivables of associate or joint venture - Interest and loan
1. Only realised transactions are eliminated for associates and joint ventures.
Loans, trade receivables, payables effect the SFP in BOTH entities and are therefore NOT eliminated under the equity method. Interest, accounting fees effect the SPL in BOTH entities and are
therefore also NOT eliminated under the equity method.
2. In other words if a transaction only effect SPF transactions or SPL transactions it is not eliminated.
Only eliminated if a SPL and SFP transaction is eliminated.
3. Loans between the investor and an associate and the interest paid (or received) on such loans is not
eliminated under the equity method.
Management fees paid by associate to investor
Only unrealised transactions are eliminated for associates. This means that only transactions that
effect the SPL in one entity and the SFP in the other are eliminated under the equity
method. Loans, trade receivables, payables effect the SFP in BOTH entities and are therefore NOT
eliminated under the equity method. Interest, accounting fees effect the SPL in BOTH entities and are
therefore also NOT eliminated under the equity method.
As the management fees paid and received affect only the SPL in the accounting records of both Fly Ltd
and By Ltd (‘other income’ and ‘other expenses’, they are realised transactions and are therefore not eliminated under the equity method.
The management fees received from the associate will be included in “other income” in the consolidated statement
of profit or loss and other comprehensive income (as they will not be eliminated).
