BCOC 137 Corporate Accounting Solved Assignment 2022 – 23 [IGNOU BCOMG Solved Assignment 2022 – 23]

BCOC 137 Corporate Accounting Solved Assignment 2022 – 23

IGNOU BCOMG Solved Assignment 2022 – 23

BCOC – 137: CORPORATE ACCOUNTING

TUTOR MARKED ASSIGNMENT

COURSE CODE: BCOC – 137

COURSE TITLE: CORPORATE ACCOUNTING

ASSIGNMENT CODE: BCOC – 137/TMA/2022-23

COVERAGE: ALL BLOCKS

Maximum Marks: 100

Note: Attempt all the questions.

In this Post you will get BCOC 137 Corporate Accounting Solved Assignment 2022 – 23 which is a very important subject in IGNOU BCOMG 2nd Semeter. In order to Secure Handsome Marks in IGNOU BCOMG Solved Assignment 2022 – 23 simply note down the solved assignment and submit it before 15th October 2023.

Section – A

1. Distinguish between partnership and company forms of organizations.      (10)

Ans: Meaning of Partnership: Partnership is an association of two or more people who agreed to do business and share profits and losses arises from it in an agreed ratio. The partners act both as agents and principals of the firm.

In India, Partnership firm is governed by the Indian Partnership Act 1932. Section 4 of this act defines partnership as: “The relationship between persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all.”

Company: A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.

According to Section 2 (20) of the Companies Act 2013 “Company means a company formed and registered under this Act.”

Difference Between Partnership and Company

Basis	Partnership	Company
1.Definition	Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.	A Company means a company formed and registered under this Act or an existing Company.
2.A Legal Person	A firm is not a legal Entity.	A Company on the other hand, is a Legal Person.
3. Liability	In a Partnership, the liability of partners is unlimited.	In case of a company, which is limited, the liability of the members is limited to the extent of its share capital.
4.Transfer of Shares	In a firm, a partner cannot transfer or assign the whole of his share without the consent of all the partners of the firm	In a company, a shareholder can transfer his share subject to the provisions of the Articles of the Company.
5.Mutual Agents	In a firm, all partners are mutual agents.	In a company, a member is not an agent of
6.Registration	Registration of a firm is not compulsory under the Partnership Act, 1932.	Registration of a company is compulsory under the Companies Act, 2013.
7.Management	Management vests in the hands of the Partners except in the case of Sleeping Partners.	Management vests in the board of Directors, elected periodically by the shareholders.
8.Creditors	Creditors of firm are also creditors of the partners individually as well.	Creditors are only the creditors of the company and not of the individual shareholders.
9.Statutory obligations	A partnership has less statutory obligations	A company is strictly regulated under the Companies Act, 2013.
10.Accounts	Accounts of a partnership firm need not be audited by the auditor.	Accounts of a company must be audited by an auditor.

2. What is meant by Book Building? Explain the steps involved in book building process.       (10)

Ans: Book building: Book building is a process of fixing price for an issue of securities on a feedback from potential investors based upon their perception about a company. It involves selling an issue step-wise to investors at an acceptable price with the help of a few intermediaries’/merchant bankers who are called book-runners. Under book-building process, the issue price is not determined in advance, it is determined by the offer of potential investors.

The book runner maintains a record of various offers and the price at which the institutional buyers, mutual funds, underwriters etc. are willing to subscribe to securities. On receipt of the information, the book runner and the issuer company determine the price at which the issue will be made. Thus, book-building helps in determining the price of an issue on more realistic way based on the intrinsic worth of the security. The main objective of book building is to arrive at fair pricing of the issue which is supposed to emerge out of offers given by various large investors like mutual funds and institutional investors.

As per SEBI guidelines, in an issue of securities through a prospectus option of 100% Book Building is also available to an issuer company if Issue of capital is Rs.25 crores and above. In India, there are two options for book building process. One, 25% of the issue has to be sold at fixed price and 75% is through book building. The other option is to split 25% of offer to the public (small investors) into a fixed price portion of 10% and a reservation in the book built amounting to 15% of the issue size. The rest of the book-built portion is open to any investor.

Procedure for the Book Building Process

The modern and more popular method of share pricing these days is the Book Building route. Procedure of book building is stated below:

a) Appointment of merchant banker as a book runner whose main purpose was to maintain the records of various offer prices at which potential investors are willing to subscribe to securities.

b) After appointing a merchant banker as a book runner, the company planning the IPO (i.e., initial public offer), specifies the number of shares it wishes to sell and also mentions a price band.

c) Potential Investors place their orders in Book Building process at a price higher than the floor price indicated by the company in the price band to the book runner.

d) Once the book building period ends, the book runner evaluates the bids on the basis of the prices received, investor quality and timing of bids.

e) Then the book runner and the company conclude the final price at which the issuing company is willing to issue the stock and allocate securities. Traditionally, the number of shares are fixed and the issue size gets determined on the basis of price per share discussed through the book building process.

3. What is meant by issue of Bonus Shares? Discuss the guidelines issued by SEBI for issue of bonus share.        (10)

Ans: Concept of Bonus Shares: The undistributed profits, after the necessary provisions for taxation, are the property of the equity shareholders and the same may be used by the company for distribution as dividends to them. But the sound financial policy demands that some of the profits at least must be ploughed back into the business.

Thus when a company has accumulated substantial amount of past profits as might be found in the credit of capital reserves, revenue or general reserve of profit and loss account; it is desirable to bring the amount of issued share capital closer to the actual capital employed as represented by the net assets (Assets – Liabilities) of the company. This would reflect the true amount of capital invested by the shareholders in the company.

For example, the capital, which the shareholders have contributed for shares, is clearly visible since this was contributed in cash. But the capital, which they have contributed in the form of accumulated profits, remains unknown because this was not a direct contribution in cash.

SEBI GUIDELINES on the issue of bonus shares

There are no guidelines for issuing bonus shares by the private companies or unlisted public companies have been issued by the SEBI. However, the listed public companies for issuing bonus shares to the shareholders must comply with the guidelines issued by the SEBI. The requirements of the guidelines of SEBI are given below:

1. Resolution in the absence of provisions in AOA: The articles of association of the company must contain a provision for capitalisation of reserves, etc.; – If there is no such provision in the articles the company must pass a resolution at its general meeting making provision in the articles of association for capitalization;

2. No default in payment of debt: The company has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption;

3. No default in payment of dues: The company has not defaulted in payment of statutory dues of the employees such as contribution to provident fund, gratuity etc.

4 Fully paid shares: The partly-paid shares, if any, outstanding on the date of allotment are required to be made fully paid-up.

5. (a) No company shall, pending conversion of FCDs/PCDs, issue any by way of bonus unless similar benefit is extended to the holders of such FCDs/though reservation of shares in proportion to such convertible part of FCDs or PCDs.

(b) The shares so reserved may be issued at the time of conversion(s) of such debentures on the same terms on which the bonus issues were made.

6. Free reserves: The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium collected in cash.

7. Revaluation reserve cannot be capitalised: Reserves created by revaluation of fixed assets shall not be capitalised.

8. No bonus in lieu of dividends: The declaration of bonus issue, in lieu of dividend, shall not be made.

9. A company which announces its bonus issue after the approval of the Board of directors must implement the proposal within a period of 15 days from the date of such approval (if Shareholders’ approval is not required) or 2 months (if Shareholders’ approval is required).

10. Non-withdrawal: Once the decision to make a bonus issue is announced, the same cannot be withdrawn.

4. What are the various types of debentures? Describe each one of them briefly.           (10)

Ans: Types of Debentures: Debentures are classified as follows:

1. On the Basis of Repayment

a. Redeemable Debentures: These debentures are paid off or redeemed after the prescribed period.

b. Irredeemable or Perpetual Debentures: These debentures are permanent debentures of a company. They are paid back only in the event of winding up of a company.

2. On the Basis of Transferability

a. Registered Debentures: These are debentures for which the company maintains record of debenture holders.

b. Bearer Debentures: These debentures are transferable by mere delivery. There is no need or registration of transfer with the company.

3. On the Basis of Security

a. Simple Debentures: These are debentures not secured by any asset of the company.

b. Mortgage Debentures: Mortgage debentures are issued on the security of certain assets of the company.

4. On the basis of Conversion

a. Convertible Debentures: These debentures are issued with an option to debenture holders to convert them fully or partly into shares after a fixed period. Where only a part of the debenture amount is convertible into equity shares, such debentures are known as ‘partly convertible debentures’. When full amount of convertible into equity shares, such debentures are known as ‘fully convertible debentures.’

b. Non-Convertible Debentures: These are debentures issued without conversion option.

5. On the Basis of Pre-Mature Redemption Rights:

a. Debenture with “Call” option: A callable debenture is one in which the issuing company has the option of redeeming the security before the specified redemption date at a pre-determined price.

b. Debenture with “Put” option: This is a debenture in which the holder has the option of getting it redeemed before maturity.

6. On the Basis of Coupon Rate (interest rate)

a. Fixed Rate Debentures: Most of the time debentures are issued with a prefixed rate interest. These debentures are called fixed interest debentures

b. Floating rate Debentures: Floating rate as the names suggests keeps changing.

c. Zero Coupon Bonds: These are debentures issued with no interest specified. They are issued at a substantial discount to compensate the investors. These bonds are known as deep discount bonds.

5. What do you mean by Holding Company? How it is different from subsidiary Company?        (10)

Ans: An important development of recent times in the business world is the combining of independent business units into a group or an economic unit. A company may acquire either the whole or majority of shares of another company so as to have a controlling interest in such a company or companies. The controlling company is known as Holding or Parent Company and the company controlled is known as Subsidiary Company.

Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:

1. By holding more than ½ of voting power in the subsidiary company.

2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.

3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.

Difference between Holding Company and Subsidiary Company

Basis	Holding Company	Subsidiary Company
Ownership	Holding Company owns majority voting shares in subsidiary company.	Subsidiary company controlling and owner by holding company.
Financial reporting	It prepares consolidated financial statements.	It prepare standalone financial statements.
Decision making	Holding company takes strategic decisions for it subsidiaries.	Day to day operations managed by subsidiary itself.
Independence	Holding company hold and controls other companies also.	Subsidiary company operates independently with its own activities.
Board of Directors	Holding company can control board of directors of subsidiary companies.	Subsidiary company cannot control the board of directors of holding company.
Liability	Holding company have limited liability for the subsidiary’s action.	Subsidiary company liable for its own debts and obligations.

Section – B

6. What are the various methods of valuation of shares? Explain.            (5)

Ans: Methods of valuation of shares

There are primarily three methods for valuation of shares, namely, Net assets methods which takes into account the net assets employed and earning capacity or yield basis or market method which takes into account the earning capacity of the organisations. Third method of valuation of shares considers both net asset method and earning yield method while calculating value of a share. All these methods are stated below:

1) Net assets method (or Intrinsic value or Break u value method): Under this method value per share is obtained by dividing net value of the company’s assets subtracting therefrom the amount of the outsider’s liabilities and preference shareholders’ claims, with the number of equity shares. Net asset value may be expressed by the following formula:

Net assets value of a shares = (Net value of assets – Outsider’s Liabilities – preference shareholders’ claim)/Number of equity shares.

If goodwill is already given in the question, it is also added with assets while calculating value of a shares.

2) Yield or Earning capacity valuation or income method: In this method the valuation of share is done by comparing expected rate of return of a concern with normal rate of return. If the particular concern is able to give a higher return than the normal yield, its value should be higher. On the other hand, if it gives less return than normal yield, its value will be lower. The following steps are to be followed to find the value of shares:

a) Ascertaining the future maintainable profits.

b) Ascertaining the normal rate of return.

c) Determining the capitalisation factor or the multiplier which is 100 divided by the normal rate of return. If normal rate of return is 10%, multiplier would be 100/10=10.

d) Ascertaining the capitalised value of maintainable profits. This is ascertained by multiplying the future maintainable profits with the multiplier ascertained under step c.

e) The yield value of share is ascertained by dividing capitalised value of maintainable profits under step d) with the number of equity shares.

This method is suitable for growing companies and small investors but this method fails to consider net asset of the company.

3) Fair value or dual method: This method is the combination of both the above methods.

Fair value of share= intrinsic value+ yield value/2

Since this method takes the average of the values obtained in the net assets basis and earning basis, it makes an attempt to minimise the demerits of both net assets basis and earnings basis methods.

7. Differentiate between Amalgamation, Absorption and Reconstruction.        (5)

Ans: Amalgamation: Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company).

There are two types of amalgamation: According to AS-14 amalgamation is divided into the following two categories for accounting purposes:

(A) Amalgamation in the nature of merger; and

(B) Amalgamation in the nature of purchase.

Absorption: Absorption of Company is a business arrangement in which an existing company takes over the business of another entity. It does involve formation of a new company. In such arrangement the absorbed company is liquidated and the purchasing company will continue its operation. Absorption is mainly done with a view to use the strength of an existing company to exploit the opportunities exists in the market.

External Reconstruction: The term ‘External Reconstruction’ means the winding up of an existing company and registering itself into a new one after a rearrangement of its financial position. Thus, there are two aspects of ‘External Reconstruction’, one, winding up of an existing company and the other, rearrangement of the company’s financial position. Such arrangement shall be approved by its shareholders and creditors and shall be sanctioned by the National Company Law Tribunal (NCLT). Such a step usually involves the writing off of a debit balance on Profit and Loss Account, elimination of all fictitious assets if any from the Balance Sheet, and the consequent readjustment of share capital.

Difference between Amalgamation and Absorption:

1) Two or more companies are liquidated in the process of amalgamation. One or more companies are liquidated in absorption.

2) Amalgamation involves formation of a new company. However, Absorption of companies does not involve formation of a new company

3) There is no such matter of size of amalgamating companies. Generally, size of purchasing company is greater than that of vendor company in absorption.

Differences between amalgamation and external reconstruction

1. Amalgamation of companies involves liquidation of two or more companies, while external reconstruction involves liquidation of only one company,

2.  Amalgamation of companies results in combination of companies, but external reconstruction does not result in any such combination.

Differences between absorption and external reconstruction

1. Absorption of companies does not involve formation of a new company; however, external reconstruction involves formation of a new company,

2.  Absorption of companies results in liquidation of one or more companies while external reconstruction results in liquidation of only one company.

3. Absorption of companies involves combination of companies, whereas external reconstruction does not involve any combination.

8. Explain the Books of account generally kept by the Bank.        (5)

Ans: Books of Accounts maintained by a Banking Company

A. Principles Books of Accounts

– The General Ledger contains accounts of all personal ledgers, the profit & loss account and different asset accounts. The accounts in the general ledger are arranged in such an order that a balance sheet can be readily prepared there from. There are certain additional accounts known as contra accounts which are a feature of bank accounting. These are kept with a view to keep control over transaction which has no direct effect on the bank’s position e.g. letters of credit opened, bills received or sent for collection, guarantees given, etc.

– Profit and Loss Ledger: Some banks keep one account for profit and loss in the General Ledger and maintain separate books for the detailed accounts. These are columnar books having separate columns for each revenue or expenses head. Other banks maintain separate books for debits and credits. These books are posted from vouchers. The total of debits and credits posted are entered into the Profit and Loss Account in the General Ledger.

B. Subsidiary Books

– Personal Ledgers: Separate ledgers are maintained by a bank for different types of accounts. For example, there are separate ledgers for Current Accounts, Fixed Deposits (often further classified by length of period of deposit), Cash Certificates, Loans, Overdrafts, etc.

– Bill Registers: Details of different types of bills are kept in separate registers which have suitable columns. For example, bills purchased, inward bills for collection, outward bills for collection etc. are entered serially on day-to-day basis in separate registers. In case of bills purchased or discounted, party-wise details are also kept in normal ledger form.

C. Other Subsidiary Registers:

There are different registers for various types of transactions. Their number, volume and details will differ according to the individual needs of each bank. For example, there will be registers for:

– Demand Drafts, Telegraphic Transfers and Mail Transfers issued on Branches and Agencies.

– Demand Drafts, Telegraphic Transfers and Mail Transfers received from Branches and Agencies.

– Letters of Credit.

– Letters of Guarantee.

9. Describe the functions of modern commercial banks.           (5)

Ans: Functions of Modern commercial banks

A) Primary functions:

– Acceptance of deposits: It is the most important function of a bank. Under this function, bank accepts deposits from individuals and organizations and finances the temporary needs of firms.

– Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.

– Investments of Funds: Besides loans and advances, banks also invest a part of its funds in securities to earn extra income.

– Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.

B) Secondary functions of a bank: This function is divided into two parts

1. Agency functions:

– These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:

– Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

– Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

– Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.

– Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

– Dealings in Gold/Silver: The buying and selling of gold and silver.

– Underwriting: The underwriting of the issues of any stocks, shares, debentures etc.

– Agents of Co-operative Banks: Commercial banks including SBI also acts as an agent of any registered co-operative bank.

2. General Utility functions:

These are certain utility functions performed by the modern commercial bank which are:            

– Locker facility: Banks provides locker facility to their customers where they can their valuables.

– Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

– Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.

– Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.

– Foreign Exchange Business: Banks also deal in the business of foreign currencies.

10. Differentiate between loans and advances.          (5)

Ans: Difference between Loans and advances:

Basis	Loan	Advances
1. Borrower	The borrower of loan may or may not be a customer of the bank.	The borrower of advances becomes customer of the bank when he opens the current account.
2. Security	A loan may be granted against tangible assets or personal guarantee of the borrower.	Advances is always given against some tangible securities.
3. Rate of interest	The rate of interest is lower than that of the cash credit and overdraft.	The interest rate in case of advances is higher than that of the loan and overdraft.
4. Maturity	A loan is repayable after a fixed period to time.	Advances is always repayable on demand or within one year.
5. Number of withdrawals	In case of loan, funds are withdrawn once by the borrower.	In case of advances funds are withdrawn number of times by the borrower.

11. Write short notes on the nature of merger.       (5)

i) Amalgamation in the nature of merger.

Ans: According to AS-14 on Accounting for Amalgamation, the following conditions must be satisfied for an amalgamation in the nature of merger:

a. After amalgamation, all the assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company.

b. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become the equity shareholders of the transferee company by virtue of amalgamation.

c. The business of the transferor company is intended to be carried on after the amalgamation by the transferee company.

d. Purchase consideration should be discharged only by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.

e. No adjustments are required to be made in the book values of the assets and liabilities of the transferor company, when they are incorporated in the financial statements of the transferee company. If any one of the condition is not satisfied in a process of amalgamation, it will not be considered as amalgamation in the nature of merger.

ii) Amalgamation in the nature of purchase.

Ans: Amalgamation in the nature of Purchase: An amalgamation will be treated as “Amalgamation in the nature of purchase” if any of the below mentioned conditions is not satisfied:

a. After amalgamation, all the assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company.

b. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become the equity shareholders of the transferee company by virtue of amalgamation.

c. The business of the transferor company is intended to be carried on after the amalgamation by the transferee company.

d. Purchase consideration should be discharged only by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.

e. No adjustments are required to be made in the book values of the assets and liabilities of the transferor company, when they are incorporated in the financial statements of the transferee company. If any one of the condition is not satisfied in a process of amalgamation, it will not be considered as amalgamation in the nature of merger.

Section – C

12. What do you mean by Non- Performing Assets of a banking company? Explain.       (10)

Ans: Non-performing Assets (NPA)

NPA indicates Non-Performing asset, it means assets of a bank which ceases to generate income for the bank. Non-performing assets means a credit facility in respect of which interest/or principal repayment installment is in arrears for more than 90 days. A non-performing asset (NPA) shall be a loan or an advance where;

– Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,

– The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

– The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

– Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

– Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Difference between Performing and Non-performing assets:

a) Performing assets means assets of a bank which generates regular income for the bank. Performing assets includes those loans and advances in respect of which interest and principal are not due for more than 90 days.

b) NPA indicates Non-Performing asset, it means assets of a bank which ceases to generate income for the bank. Non-performing assets means a credit facility in respect of which interest/or principal repayment installment is in arrears for more than 90 days.

Categories of NPA

A. Standard assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories.

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues:

– Sub-standard Assets

– Doubtful Assets

– Loss Assets

B. Sub-standard Assets: Such assets have been classified as NPA for a period not exceeding one year with effect from 31st March, 2005. The earlier period of 18 months has been reduced to 12 months. The current net worth of the borrower/guarantor or the current market value of the security charged under such cases isn’t enough to ensure recovery of the dues to the bank in full.

C. Doubtful Assets: An asset which has remained NPA for a period of one year. In term loans if the installments of the principal have remained overdue for a period of one year should be treated as doubtful.

D. Loss Assets: Where the loss on an asset has been identified by banks/internal auditor or the RBI inspector but the amount hasn’t been written off wholly/partly is known as loss asset.

Provisions required on various types of NPA

13. Write short notes (any two) on the following:            (10)

a) Goodwill.

b) Capital Reserve.

c) Minority Interest.

a) Cost of Control (Goodwill)

In practice the holding company may pay more or less than the net worth of the subsidiary company. If the holding company feels that a company, the shares of which it wants to acquire enjoys considerable reputation or exceptionary favourable factor it may pay more than the paid up value of shares or net assets.    

The excess of acquisition price over net assets represents goodwill or cost of control. If on the other hand the acquisition price is less than the paid up value of shares the difference is again to the holding company & is known as capital reserve.

Goodwill is calculated as:

a) Cost of investment in Subsidiary company          **********

b) Less: Face value of shares acquired

c) Less: H Ltd share in pre-acquisition profit            **********

Goodwill (if figure is positive a-b-c)                         **********

b) Capital reserve

In practice the holding company may pay more or less than the net worth of the subsidiary company. If the holding company feels that a company, the shares of which it wants to acquire enjoys considerable reputation or exceptionary favourable factor it may pay more than the paid up value of shares or net assets.    

The excess of acquisition price over net assets represents goodwill or cost of control. If on the other hand the acquisition price is less than the paid up value of shares the difference is again to the holding company & is known as capital reserve.

Capital reserve is calculated as:

a) Cost of investment in Subsidiary company         **********

b) Less: Face value of shares acquired

c) Less: H Ltd share in pre-acquisition profit           **********

Capital reserve (if figure is negative a-b-c)             **********

c) Minority Interest

When some of the shares in the subsidiary are held by outside shareholders they will be entitled to a proportionate share in the assets and liabilities of that company. The share of the outsider in the subsidiary is called minority interest.

Amount of minority interest is calculated by adding subsidiary company’s share in pre-acquisition profit, post-acquisition profit and in share capital of the company. Preference share capital to the extent of not purchased by holding company is also added with minority interest. In the consolidated balance sheet all the assets and liabilities of the subsidiary   are consolidated with assets and liabilities of the holding company and the minority interest representing the interest of the outsider in the subsidiary is shown as a liability.

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