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A Limited sold some products to B Limited and is showing US$15,000/- receivable from B Limited. B Limited is also showing US$15,000/- payable to A Limited. Explain how these figures will be reported in consolidated financial statements of A Limited ?
Unrealised Profit Portion of the unsold items remaining from US$15000/ need be lessened from the Revenue in the consildated figures in the Financial statements.
MUTUAL OWING / INTER COMPANY TRANSACTIONS :
The holding company and the subsidiary company may have
number of inter company transactions in any one or more of the
following matters.
1. Loan advanced by the holding company to the subsidiary
company or vice versa.
2. Bill of Exchange drawn by holding company on subsidiary
company or vice versa.
3. Sale or purchase of goods on credit by holding company form
subsidiary company or vice versa.
4. Debentures issued by one company may be held by the other.
As a result of these inter company transactions, certain
accounts appear in the balance sheet of the holding company as
well as the subsidiary company. In the consolidated balance sheet
all these common accounts should be eliminated.
All the above inter company transactions have to be eliminated
while preparing the consolidated balance sheet. These can be done
by deducting inter company transactions from the respective items
on both sides of balance sheet.
UNREALIZED PROFIT:
The problem of unrealized profit arises in those cases where
the companies of the same group have sold goods to each other at
the profits and goods still remain unsold at the end of the year
company to whom the goods are sold.
While preparing the consolidated balance sheet, unrealized
profit has to be eliminated from the consolidated balance sheet in
the following manner.
1. Unrealised profits should be deducted from the current
revenue profits of the holding company.
2. The same should be deducted from the stock of the
company consolidated balance sheet. Minority shareholders
will not be affected in any way due to unrealized profits.
The balances of mutual owing of both the copmanies are the same.Only think about the unrelized profit on sale. if these sales are also made by the purchasing company to outsiders then should be eleminate the entire balances other wise adjustment made on unsold goods accordingly.
the rest rules of consolidation are ase
There are five important rules an accountant must follow when consolidating.
First, the accounting must eliminate all of the subsidiary's shareholders equity accounts, such as common stock and retained earnings.
Second, eliminate the "Investment in Subsidiary" account the company recorded at the time of acquisition. Third, the accountant creates a "Non-Controlling Interest" account if the company owns less than100 percent of the subsidiary.
Fourth, readjust all the subsidiary's balance sheet accounts to the current fair market value of the accounts.
Fifth, recognize a goodwill for the change in the assets value. These five actions are done at the same time in the consolidation journal entry.
