Goup accounting
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.
, Conceptual framworkt.
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
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.
, Conceptual framworkt.
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
