Holding Company Accounts: Consolidated Financial Statements (Basics) and Minority Interest (Overview) Questions

Question 1

Pre-acquisition profits are capital profits.

Accepted Answer

True. Profits existing at the date of acquisition are treated as **capital** (pre-acquisition) profits in consolidation.

Question 2

Define holding company.

Accepted Answer

A holding company is a company that **controls** another company (subsidiary), usually through majority voting power.

Question 3

Define subsidiary company.

Accepted Answer

A subsidiary company is a company that is **controlled** by another company (the holding/parent).

Question 4

What is meant by consolidated financial statements (CFS)?

Accepted Answer

Consolidated Financial Statements are financial statements prepared for a group showing the holding company and its subsidiaries as **one economic entity**.

Question 5

What is minority interest (NCI)?

Accepted Answer

Minority interest (Non-controlling interest) is the share of subsidiary’s net assets/profits attributable to **non-parent shareholders**.

Question 6

State the formula for NCI percentage when parent holding percentage is given.

Accepted Answer

NCI% = **100% – Parent holding %**.

Question 7

Differentiate between pre-acquisition and post-acquisition profits (any three points).

Accepted Answer

Pre-acquisition vs post-acquisition profits:

| Basis | **Pre-acquisition** | **Post-acquisition** |
|---|---|---|
| Time | before acquisition date | after acquisition date |
| Nature | **capital** profit | **revenue** profit |
| Treatment | used in net assets at acquisition | shared between parent & **NCI** |

Hence, pre-acquisition affects goodwill/capital reserve, post-acquisition affects group reserves.

Question 8

Compute NCI: Parent holds 80% in S Ltd. Subsidiary net assets at reporting date = ₹10,00,000.

Accepted Answer

Parent holding = 80% ⇒ **NCI% = 20%**.

NCI = 20% × 10,00,000 = **₹2,00,000**.

| Item | Amount |
|---|---:|
| Net assets (S) | 10,00,000 |
| NCI% | 20% |
| **NCI** | **2,00,000** |

Question 9

Explain why inter-company balances and profits are eliminated in consolidation (any three points).

Accepted Answer

Inter-company items are eliminated to avoid **double counting** and to show the group as one entity:

- eliminate inter-company debtors/creditors (group cannot owe itself)
- eliminate inter-company sales/purchases (avoid inflating group turnover)
- remove **unrealised profit** in closing stock from intra-group sales

Flow: Intra-group item → **Eliminate** → True group figures

Question 10

Compute goodwill or capital reserve on consolidation (basic): Cost of investment = ₹8,40,000; Parent share of net assets at acquisition = ₹8,00,000.

Accepted Answer

Compare **cost** with parent share of net assets:

Cost (₹8,40,000) > Parent share (₹8,00,000)
So **Goodwill = ₹40,000**.

| Item | Amount (₹) |
|---|---:|
| Cost of investment | 8,40,000 |
| Parent share of net assets | 8,00,000 |
| **Goodwill** | **40,000** |

Question 11

State any three basic steps involved in consolidation (CFS preparation) and present them as a short flow.

Accepted Answer

Any three basic consolidation steps:

- determine **holding %** and **NCI %**
- split subsidiary reserves into **pre** and **post** acquisition
- compute **goodwill/capital reserve** and compute **NCI**
- eliminate inter-company balances/profits

Flow (write): Holding% → NCI% → Pre/Post split → Goodwill/NCI → **Eliminations** → CFS

Question 12

Explain goodwill/capital reserve on consolidation (basic) with a table and conclusion.

Accepted Answer

### Basic idea
In consolidation, the parent’s investment in subsidiary is compared with the parent’s share of subsidiary’s net assets at acquisition.

### Steps
1) Compute parent share of net assets at acquisition:  
Parent % × (Share capital + **pre-acquisition reserves**).
2) Compare with **cost of investment**.

| Comparison | Result |
|---|---|
| Cost > parent share | **Goodwill** |
| Cost < parent share | **Capital reserve** |

### Conclusion
Thus, goodwill represents the premium paid for control/benefits, while capital reserve represents a bargain purchase in basic consolidation problems.

Question 13

Explain minority interest (NCI) and show a basic computation format with a table.

Accepted Answer

### Meaning
**NCI** is the portion of subsidiary’s net assets and profits that belongs to shareholders other than the parent.

### Basic computation format
NCI% = 100% – parent%  
NCI at reporting date ≈ NCI% × (Subsidiary share capital + reserves at reporting date)

| Item | Amount |
|---|---:|
| Subsidiary net assets (at reporting date) | xxx |
| NCI% | xx% |
| **NCI** | xxx |

### Conclusion
NCI is shown separately in consolidated balance sheet to reflect the non-parent ownership in the subsidiary.

Question 14

Explain the consolidation process at a basic level using a flowchart (from holding% to CFS).

Accepted Answer

### Basic consolidation flow
1) Determine parent% and **NCI%**.
2) Split subsidiary reserves: **pre-acquisition** vs **post-acquisition**.
3) Compute **goodwill/capital reserve**.
4) Compute **NCI**.
5) Combine line items and eliminate inter-company balances/profits.

Flowchart (write/draw):
Holding% → NCI% → Pre/Post split → Goodwill/CR → NCI → Combine & **Eliminate** → CFS

### Conclusion
Following this sequence ensures correct goodwill and correct presentation of NCI and group reserves.

Question 15

Prepare an exam-style table showing what happens to subsidiary reserves in consolidation (pre vs post) and who shares them.

Accepted Answer

Subsidiary reserves are split as:

| Portion | Nature | Basic treatment |
|---|---|---|
| **Pre-acquisition** | capital | included in net assets at acquisition (affects goodwill/CR) |
| **Post-acquisition** | revenue | shared between parent and **NCI** |

Thus, **pre** is capital and **post** is revenue for consolidation purposes.

Basis	Pre-acquisition	Post-acquisition
Time	before acquisition date	after acquisition date
Nature	capital profit	revenue profit
Treatment	used in net assets at acquisition	shared between parent & NCI

Holding Company Accounts: Consolidated Financial Statements (Basics) and Minority Interest (Overview)

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