What is intercompany transaction?
An intercompany transaction occurs when one unit of an entity is involved in a transaction with other unit of the same entity. While these transaction can occur for a variety of reason, they often occur as a result of the normal business relationship that exist between the units of the entity. these unity may be the parent and subsidiary, two subsidiaries, two division, or two department or one entity. 
It is common for vertically integrated organizations to transfer inventory among the units of the consolidated entity. On the other hand, a plant asset may be transferred between organizational units to take advantage of changes in demand across product lines. an inter-company transaction is recognized in the financial records of both units of the entity as if it were and arm's-length transaction with unrelated party. From the consolidated entity's perspective the transaction is initially unrealized because unrelated parties are not involved; therefore, the consolidated statement of financial position (CSOFP)should not disclose any intra group balance.
The CSOFP are to report transaction that have take place with parties outside the group. This avoids the double counting of assets and liabilities that arise through transaction between members of the group. therefore, all Intra group balance have to be eliminated. 


What is the Items in Transit? Items in Transit are cash remittance and dispatch of other asset, such as inventories, by one party but the other party has not received them as at the statement of financial position date. The items is transit are adjusted for in the accounts of the holding company.The adjusted balance derived at cab be cancelled off against the amount will then be settled by payment or receipt of cash. 


What is the Current Accounts? In situation where there are numerous inter-company transaction, it is more convenient to operates a current account to record the amounts due to and from each other. The current account is debited for amounts due and credited for amounts due and credited for amounts owing. The net amount will then be settled by payment or receipt of cash However, balance in the current accounts as at the statement of financial position date are cancelled off, as these are the inter-company balance. At times, balance in the current accounts may differ as only one member might have recorded certain transactions, and the other member may not be aware of the transaction. The differences between the current accounts have to be adjusted before canceling amounts in the current accounts. 


What is Bills receivable/Payable? Bills Receiver or Payable are negotiable financial instruments that the holder can transfer to another party. This legal document can be used by the parents to pay to another party. At times these bills are discounted with discount houses or financial institutions. In the consolidation statement of financial position, if inter is limited to the un-discounted bills only. The bills discounted represented liabilities to third parties.

We will focus our discussion in this scope:
1.  how if intra-group transactions owing money?
     a.  Loans to and from holding      b.  Current accounts and item in transit      c.  Bill receivable/payable      d.  Interest receivable/payable      e.  Dividend receivable/payable 2.  How to eliminate intra group balances? 3.  how to prepare consolidated financial statement after adjustment intra group transactions?

To answer that brilliant question, let us get through these example:

Below are the statement of Financial Position of Bo Bhd and its subsidiary, Be bhd as at 31 December 2008

Bo BhdBe Bhd Investment in Be Bhd: 80,000 unit Ordinary Shares100,000      - Property, Plant & Equipment500,000200,000 Inventory50,00020,000 Trade Receivable30,0005,000 Bill Receivable20,00010,000 Loan to Be Bhd30,000          - Bank20,0002,000 750,000237000 Ordinary shares@RM1.00600,000100,000 Retained Profit120,00055,000 Trade Payable20,00030,000 Bills Payable10,00025,000 Loan from Bo Bhd     -27,000 750,000237,000
Additional Information:
1.  Bo Bhd acquired ordinary shares in Be Bhd on 1.1.2008 when the retained profit of Be Bhd had a credit balance of RM15,000.

2.  Trade receivables of Bo Bhd include RM10,000 due from Be Bhd.  This includes amount due for inventory costing RM2,500 sent by Bo to Be Bhd on 30.12.2008.  Be Bhd only received the inventory on 5.1.2009.

3.   Bills Payable of Be Bhd amounted RM 15 ,0000 were drawn in favour of Bo Bhd. Bo Bhd has discounted RM 8.000 of these bills.

4. Be Bhd had remitted RM3,000 on account of the loan from Bo Bhd, Bo Bhd received the remittance on 2.1.2009.

You are required to prepare:
             
              i)     Cost of control Account
            
             ii)      Non Controlling Interest Account

            iii)      Consolidated Profit and Lost

            iv)      Consolidated Statement of Financial Position as at 31.12.2008



Suggestion Answer:

1.       Journal Entries

          Eliminate all the debts in the group
             Dt    Trade Payable                                                      7,500
                     Inventory in Transit                                             2,500
                     Cr       Trade Receivables                                               10,000

             Dt     Bills Payable                                                       7,000
                      Cr      Bills Receivables                                                  7,000

          Record Cash in Transit
             Dt      Cash in Transit                                                   3,000
                        Loan from Be Bhd                                           27,000
                        Cr        Loan to Be Bhd                                               30,000

2.      Caculation of holding control on subsidiary ( Be Bhd )

         80,000 units of ordinary shares than being bought in Be Bhd =80%
         100,000 units of ordinary shares issued in Be Bhd

3.      Eliminate the investment account, ordinary shares and pre acquisition reserves

                         Cost of Control Account ( 80% )                                            
          Investment in Be Bhd                 100,000  OS                                                80,000
                                                                         Retained Profit                             12,000
                                                                         Goodwill                                        8,000
                                                             100,000                                                   100,000


4.      Record the non controlling interest in the net assets of the subsidiary

                         Non-controlling Interest Profit                                               
        CSOFP                                   31,000  OS                                                 20,000
                                                                 Retained Profit                              11,000
                                                     31,000                                                       31,000


5.      Record the Consolidated Retained Profit

                                                Consolidated Retained Profit                                                     BoBeBoBe COC                          12,000   Balance b/f120,00055,000 NCI11,000 Balance c/f120,00032,000 120,00055,000120,00055,000


6.      Prepare the Consolidated Statement of Financial Position


Bo Group Bhd     Consolidated Statement of Financial Position as at 31 Disember 2008

Non Current Asset: Property, Plant, Equipment (PPE)         700,000 Goodwill                 8,000 Current Asset: Inventory            72,500 Trade Receivable           25,000 Bills Receivable           23,000 Bank           25,000          853,500 Equity: Ordinary Shares         600,000 Retain Profit         152,000 Trade Payable           42,500 Bills Payable           28,000 Non-Controlling Interest           31,000          853,500

Exercise 2:

Below are the statement of Financial Position of  Lobak Ltd and it subsidiary, Labu Ltd as at 31.12.2009


Lobak Ltd Labu Ltd Investment in Labu Ltd: 300,000 ordinary Shares 350,000 RM10,000 Debenture  10,000 PPE 267,000 654,000 Inventories 40,000 35,000 Debtors 55,000 40,000 Bill Receivable 18,000 21,000 Loan to Labu Ltd 22,000 Bank 33,000 795,000 750,000 Ordinary shares @RM1 600,000 400,000 Retained Profit 160,000 100,000 10% Debenture 200,000 Creditors 20,000 15,000 Loan from Lobak Ltd 20,000 Bill Payable 15,000 12,000 Overdraft 3,000 795,000 750,000
Additional information:

1.  Lobak Ltd acquired 10% Debenture and ordinary shares in Labu Ltd on 1.1.2008 when the retained profit of Labu Ltd had credit balance of RM40,000.

2.  Include in Debtors Lobak Ltd is RM6,000 debt from Labu Ltd. This amount include RM1,000 of inventories that had been sent to Labu Ltd on 31.12.2009.

3.Bill payable amounted of RM10,000 is from Lobak Ltd and Labu Ltd discounted the bill for RM3,000.

4.  Labu Ltd had remitt RM2,000 to Lobak Ltd for payment of the loan but Lobak Ltd received it at 4.1.2010.

5.  Any goodwill or reserves on consolidated is to be amortized for 4 years.

You are required to prepare:
i.  Cost of control Account (Key:Goodwill RM20,000)
ii.  Non Controlling Interest Account (Key:COSP RM125,000)
iii.  Consolidated Profit and Loss(Key:RM195,000)
iv. Consolidated Statement of Financial Position as at 31.12.2009. (Key:RM1,160,000)


Exercise 3:

Below are the statement of Financial Position of Kelam Ltd and it subsidiary, Malam Ltd as at 31.12.2008


Kelam Ltd   MalamLtd  Non Current Assets: Land and Building 606,600 464,600 Investment in Malam: Ordinary Share 400,000                                               Preference Shares 200,000 Current Assets: Inventories 87,400 75,700 Bill Receivable 66,800 50,400 Current Account - Kelam 19,400 Debtors 58,000 52,000 Bank 89,000 79,300 1,507,800 741,400 Equity: Ordinary Share@RM4 280,000 Ordinary Share@RM1.5 400,000 300,000 9% Preference Shares @RM2 400,000 100,000 General reserves 38,000 35,000 Retained Profit 91,000 82,500 Premium Shares 44,900 29,600 12% Debentures 110,000 90,000 Current Liabilities: Creditors 65,900 45,500 Bill Payable 24,000 46,800 Current Account - Malam 12,000 Loan 42,000 12,000 1,507,800 741,400
Additional Information:
I.  On 1.01.2006 Kelam acquired 160,000 ordinary shares and 42,500 Preference Shares of Malam Ltd when the balances of the profit and loss account, share premium and general reserves were RM30,000, RM20,000 and RM30,000 respectively.

2.  Debtors in Kelam Ltd are include RM29,000 from Malam Ltd. However on 29 December 2008, Malam had remitted RM15,000 but only been received by Kelam Ltd on 5 January 2009.

3.  Bill Payable amounted of RM25,400 are from Malam Ltd and RM5,000 had been discounted from the bills.

4.  The differences between current account is inventories in transit.

5.  Goodwill on consolidated is to be amortized for 10 years.


Required:
1. Cost of Control Account (key:RM211,00)
2.  Non Controlling Interest Account(key:RM104,420)
3.  Consolidated Profit and Loss Account(Key: Kelam-RM27,700; Malam-RM42,000)
4.  Consolidated Statement of Financial Position as at 31.12.2008.(ley:RM1.7505 mill)



How to treat intra-group sale of trading inventories?
Adjustment for unrealized profits is only required if the trading inventories purchased from a member still remain unsold on the statement of financial position date.
  The unrealized profits on the inventories unsold are to be eliminated in full and value of the inventories reduced to cost to the group.

 Example:
 Below are the statement of Financial Position of Baby and Bobo as at 31.12.2009 Baby Bobo Property, Plant & Equipment 180,000 155,000 Investment in 100,000 Orinary shares in Bobo 108,000 Inventories 40,000 30,000 Debtors 12,000 20,000 Bank 10,000 15,000 350,000 220,000 Equity: Ordinary Share@RM0.50 200,000 150,000 Retained Profit 100,000 48,000 Creditors 50,000 22,000 350,000 220,000
Additional information;

1.  Baby acquired 100,000 ordinary shares of Bobo Ltd when the retained profits of Bobo Ltd had a credit balance of RM12,000. 2.  Throughout the year 2005, Bobo Ltd had sold inventory costing RM50,000 to the Baby Ltd.  Bobo Ltd invoiced the goods at cost plus 25%.  RM20,000 of these goods still remain in the closing inventories of Baby Ltd.
Your are required to prepare:

1.  Cost of control Account 2.  Non Controlling Interest Account 3.  Consolidated Profit and Loss 4.  Consolidated Statement of Financial Position as at 31.12.2009.
Working:
1.  Calculation of unrealized profits: Inventories unsold x mark up (in percentage) invoice price (in percentage) RM20,000 x 25% = RM4,000 125%

Journal: Dr    Consolidated Profit and Loss             4,000
                    Cr     Inventories                                      4,000

2. Calculation of holding control on subsidiary:
100000 OS bought in Bobo Lt = 2 150000 OS issued in Bobo Ltd 3
3.  Eliminate the Investment account, ordinary shares and pre-acquisition reserve:
                                                  Cost of Control Account (2/3) Investment in Bobo 108,000    OS 100,000    Retained Profit 8,000 108,000 108,000
4.  Record the non controlling interest in the net assets of the subsidiary

Adjustment Profit and Loss Bobo:

Balance b/d                    RM 48,000
URP                                RM   4,000

                                      RM 44,000

Retained Profit to NCI   2/3 * 44,000 = RM14,667

 
                                                    Non Controlling Interest (1/3) CSOFP       64,667      OS 50,000 Retained Profit 14,667 64,667   64,667

5.  Record the Consolidated Retained Profit

                                               Consolidated Retained Profit                                                    Baby Bobo Baby Bobo COC                          8,000  Balance b/f 100,000 48,000 NCI 14,667 Unrealized Profit   4,000 Balance c/f 100,000 21,333 100,000 48,000 100,000 48,000
6.  Prepare the Consolidated Statement of Financial Position
BabyGroup Bhd    Consolidated Statement of Financial Position as at 31 Disember 2009 Non Current Asset: Property, Plant & Equipment (PPE)          335,000    Current Asset: Inventory            66,000 Debtors            32,000 Bank            25,000             458,000 Equity: Ordinary Shares          200,000 Retained Profit          121,333 Creditors            72,000 Non-Controlling Interest            64,667             458,000
Example 2: 
Below are statement of Financial Position of MSD Ltd and OMD Ltd as at 31.12.2010.

MSD OMD '000 '000 Non Current Assets: Property, Plant & Equipment 670 590 Investment in OMD 480 Inventories 70 40 Bank 80 50 1300 680 Equity: Ordinary Share@RM0.50 1,000 500 Retained Profit 300 180 1,300 680
 Additional information:

1.  MSD acquired 800,000 ordinary shares of OMD Ltd when the retained profits of OMD Ltd had a credit balance of RM100,000.

2.  During the year 2004, MSD sold inventories costing RM20,000 to OMD for RM30,000.  All of these goods remain unsold in holding.

Required:
The consolidated statement of Financial Position of the group as at 31.12.2010.
(key: RM1,490,000)
Example 3:

Below are the statement of financial position of Leman Ltd and Tijah Ltd as at 31 December 2008

Leman Ltd Tijah Ltd '000 '000 Non Current Assets: Land         400,000          115,000 Plant & Machinery         420,000          260,000 Depreciation       (120,000)          (60,000) Research         100,000 Investment in subsidiary: 170,000 Ordinary Shares 210,000     50,000 Preference Shares 50,000     Current Assets: Inventories            40,000            20,000 Debtors            20,000            30,000 Bank            30,000            46,000      1,150,000          411,000 Finance By: Ordinary Shares @RM1         800,000          200,000 7% Preference shares@RM1         100,000          100,000 Retained Profit         200,000            81,000 Current Liabilities: Creditors            50,000            30,000      1,150,000          411,000
Aditional Information:

1.  Leman Ltd has acquired 170,000 ordinary shares and 50,000 Preference shares, especially in the Tijah Ltd on January 1, 2007.  At the time of possession, the Tijah Ltd has retained profit of RM30,000.

2.  in the current accounting period, Tijah Ltd sold stock at the sale price of RM24,000 to the Leman Ltd.  Tijah Ltd sell these stocks at cost plus 20% .  Leman Ltd could not sell the stock 50% purchased from Tijah Ltd until the end of the accounting period.

3.  Goodwill is amortized for RM4,500

You are required to prepare:
1.  Cost of Control Account (key: RM14,500)
2.  Non Controlling Interest Account (key: RM91,850)
3.  Consolidated Profit and Loss(key: L-RM195,500;T-RM41,650)
4.  Consolidated Statement of Financial Position as at 31.12.2008(key: RM1.3098mill)

How to treat the interest and dividends from subsidiary?

 What is it?  Tell me more...!!

* The subsidiary will from time to time declare and pay dividends on its issued shares, ordinary and preferences.  The holding company, being the shareholder, will receive dividends declared and paid by the subsidiary.

For the subsidiary, payment of dividends is an appropriation of profits while interest is an expense and must be provided even if the company is making a loss!

For the holding company, they may record the investment income (dividends or debenture's interest) as a part of income...

The consolidation adjustments depend on how this intra group expense/income has been dealt by both the holding and subsidiary in 3 situation.

1.  Both the subsidiary and holding companies have recorded the interest & dividend.
2.  The subsidiary and holding companies have not recorded the interest & dividend yet.
3.  The subsidiary has recorded the interest & dividend payable but the holding company has not taken credit for its share of interest/dividend receivable.


Situation 2:
The subsidiary and holding companies have not recorded the interest & dividend yet

Given below are the statement of financial position of Semah Ltd and Markonah Ltd as at 31.12.2009

Semah Ltd  Markonah Ltd Non Current Assets: "'000 '000 Land & Building 380 100 Plant & Machinery 230 210 Investment in Markonah 160,000 OS 210 Investment in Siah Ltd 85 Investment in Temah Ltd 90 Current Assets: Inventories 40 35 Debtors 42 25 Bank  54 38 Bill Receivable  18 15 1059 513 Equity: Ordinary shares@RM1 600 200 Premium Shares 60 20 Retained Profit 150 50 General Reserve 108 100 Current Liabilities: Creditors 44 36 Bill Payable 12 17 Long term Liabilities: Loan 85 90                 1,059 513 Additional information:
a.  Semah Ltd has acquired ordinary shares in Markonah Ltd on January 1, 2009 when Markonah LTd has the following balances:
Share premium of RM20,000
General Reserve RM40,000
Profit and Loss Account of RM30,000 (dt)

b.  BIll payable Markonah Ltd include bill to be paid to Semah Ltd amounting to RM15,000.

c.  Included in debtors Semah Ltd is from Markonah Ltd amounting to RM5,000.

d.  During the year ended December 31, 2009 Semah Ltd has been selling inventory to Markonah Ltd worth RM20,000. Inventory sales by Semah Ltd are at cost plus 25%. Half of the inventory is sold by Markonah Ltd.

e.  On December 31,2009, Chairman Markonah Ltd has announced 10% dividend on ordinary shares.  Both companies have not yet to record the transaction.

Required to prepare:
1.  Cost of control Account (GW:RM26,000)
2.  Non controlling interest account(key: RM70,000)
3.  Consolidated Profit and loss (S-RM164,000;M-RM48,000)
4.  Consolidated Statement of Financial Position as at 31.12.2009(key: RM1.366mil)


I want more...!

Given below are the statement of financial position of Joe Ltd and its subsidiary Jambul Ltd as at 31 December 2009


Joe Ltd  Jambu     Ltd Financed By: "000 "000 Ordinary Shares@RM1 5,000 1,000 Capital Reserves 50 100 Revenue Reserves 700 150 General Reserves 100 20 Current Liabilities: Creditors 40 50 Rent Payable 30 5,890 1,350 Non Current Assets: Investment In Jambul Ltd:  800,000 OS 890 Investment In Sambul Ltd: 100,000 OS 120 Land & Building 2,500 550 Plant & Machinery 1,330 200 Vehicle 40 100 Current Assets: Inventories 500 200 Debtors 120 60 Rent Receivable 50 Bank 340 240 5,890 1,350 Additional Information:

1.  Joe Ltd has bought shares in Jambul Ltd as at 31.12.2005 in which the SOFP's Jambul Ltd showed the following balances:
Revenue Reserve  RM30,000 (dr)
Capital Reserve Account RM100,000 (cr)
General Reserve Account of RM20,000 (cr)

2.  Included in creditors Jambul Ltd is a debt outstanding to Joe Ltd amounting to RM30,000.

3.  60% of the current inventory balance Jambul Ltd is bought from Joe Ltd.  These goods were invoiced at cost plus 50% by Joe Ltd.

4. 50% of the rent receivables are from Jambul Ltd.

5. On December 31, 2009 the board Jambul Ltd has declared 5% on its ordinary shares.

Required:
1. Cost of Control Account(key: GW-RM18,000)
2. Non Controlling interest account(key: RM244,000)
3.  Consolidated Profit and Loss Account(key: Joe-700,000;Jambul-RM104,000)
4.  Consolidated statement of financial Position as at 31.12.2009(key: RM6.273 mil)


Let's try this...
Below are the statement of financial position of Mama Bhd and its subsidiaries as at 31 December 2010

Mama Bhd Mamu
Bhd Momo
Bhd "000 "000 "000 Non Current Assets: Land             4,200                950                  480 Plant & Machinery            2,500                530                  220 Vehicle                800                200                  140 Investment in Subsidiaries: OS in Mamu Bhd            1,500 OS in Momo Bhd                650 Current Assets: Stock                350                320                  100 Debtors                230                  70                    60 Rent Receivable                100 Bank                250                220                  110          10,580            2,290              1,110 Finance By: OS @RM1          10,000            2,000              1,000 Retained Profit                310                180                    50 Capital Reserves                150                  40                    20 Current Liabilites: Creditors                120                  40                    30 Rent Payable                  30                    10          10,580            2,290              1,110

Additional information:
1.  Mama Bhd has 1,400,000 ordinary shares of Mamu Bhd on 1 January 2005 where Mamu Bhd Profit and Loss Account shows a credit balance of RM40,000 and RM20,000 in Capital Reserve Account.

2.  Mama BHd has 600,000 ordinary shares Momo Bhd on January 1, 2007 where Momo Bhd Profit and Loss Account has a credit balance of RM20,000 and the capital Reserve account had a credit balance of RM20,000.

3.  50% of the current inventory of Mama Bhd is from the Mamu Bhd and 30% is from Momo bhd.

4.  Mamu Bhd and Momo Bhd invoiced all the inventories to Momo bhd at cost plus 25% profit.

5.  Rent Payable of Mamu Bhd is for the building of the Mama Bhd.

6.  At the end of the year, the Board of Directors of Mamu Bhd has declared 5% dividend of ordinary shares but not yet recorded by Mama Bhd.

Prepare:
1. Cost of Control Account (GW: Mamu RM58,000; Momo RM26,000)
2. Non Controlling interest account(Mamu RM666,000; Momo RM428,000)
3.  Consolidated Profit and Loss Account(RM340,000)
4.  Consolidated statement of financial Position as at 31.12.2010 (RM11,828)


Situation 3: 
The subsidiary has recorded the dividend payable but the holding company has not recorded its share of dividend receivable.

Saemah bhd acquired 80% ordinary shares on Saerah Bhd on 1 January 2008 for the price of RM300,000 and 60% preference shares of Saerah Bhd for RM65,000.  Below is the statement of financial Position of the two companies as at 31 December 2008.

Saemah Bhd Saerah Bhd "000 "000 Equity: 400,000 OS @RM1 400 300,000 OS @RM0.50 150 100,000 10% Preference Shares @RM1 100 Retained Profit  240 108 General Reserves 30 30 Current Liabilities: Creditors 100 50 Tax Payable 30 14 Ordinary Shares dividend 20 10 Preference Shares dividends 10 Current Account 14 820 486 Non-Current Assets: Freehold Land 88 254 Plant Machinery (cost) 98 50 Investment in Saerah Bhd 365 Current Assets: Inventories 80 70 Debtors 160 100 Bank 10 12 Current Account 19 820 486
Additional Information:
1.  The balances in retained profit on 1 jan 2008 for Saerah Bhd is a credit of RM90,000 while the balances in general reserve account is RM30,000.

2.  Saerah Bhd remit of RM2,000 to Saemah Bhd on 31 Dec 2008 was nto accepted by Saemah Bhd until 2008.

3.  Goods valued at invoice RM3,000 were sent by Saemah Bhd on December 2008 but only received by Saerah Bhd in January 2009.  The profit included in the goods is RM400.

4.  Included in stock at 31 December 2008 of Saerah Bhd is purchased goods from Saemah bhd amounted RM10,000. The element of profit included in this amount is RM2,000.


Prepare:
1. Cost of Control Account (GW RM89,000)
2. Non Controlling interest account (RM97,600)
3.  Consolidated Profit and Loss Account (Saemah-RM251,600; Saerah RM14,400)
4.  Consolidated statement of financial Position as at 31.12.2010 (RM1,0136 mil)


* since declaration made by subsidiary, as seen in the question the ordinary share dividend and preference share dividend just appear in the subsidiary statement not in the holding.

* so, you are required to do treatment on this situation.


More exercise question:

Hage Bhd acquired interests in Maru Bhd on 31 December 2009.  Below are the statement of financial Position of both companies at the current date.

Statement of Financial Position As At 31 December 2009 Hage BhdMaru Bhd Non Current Assets:"'000'000 Land Building270340 Plant210170 Investment in Maru Bhd: 400,000 unit OS440 50,000 10% Preference Shares50 Current Assets: Cash12090 Inventories16070 Debtors160100         1,410 770 Financed By: Ordinary Shares@RM1         1,000 500 10% Preference Shares            200 100 Retained Profit              70 50 Current Liabilities: Creditors              90 80 Dividends Payable-Ordinary Shares              50 40         1,410 770 Additional Information:
a) The Board director of Hage Bhd declared dividend for the year ordinary shares of 5% and have been recorded.
 b) Hage and Maru also announced its dividend payment of 10% Preference Shares for the respective year.
c)  Include in the inventories of Maru Bhd are the products purchased from Hage Bhd at a price of RM50,000.  Hage Bhd has made a profit from the stock sales of RM10,000.  Till the end of accounting period, these products have yet to be sold to outside parties.

Prepare as follow:
1. Cost of Control Account (GW RM40,000)
2. Non Controlling interest account (RM160,000)
3.  Consolidated Profit and Loss Account (H-RM77,000; M- RM30,000)
4.  Consolidated statement of financial Position as at 31.12.2010 (RM1,720 mil)


INTRA-GROUP SALES OF NON CURRENT ASSETS

In the consolidated accounts the non current assets purchased from member companies should be disclosed at carrying value to the seller.

Adjustments have to be made to remove the unrealized profits and disclose the asset at carrying value to the group.

1.  Sale of Non-Depreciable Assets
Where the sale price is above carrying value (cost or book value), and the assets still remains with the buyer then the profit recognized by the seller is unrealized profit from the standpoint of the group.

                      unrealized profit = sale price > book value


2.  Sale of Depreciable Assets
If the asset sold is a depreciable assets, then besides adjusting for unrealized profits, adjustments have to be made for depreciation.  The buyer of the assets would have depreciated the asset acquired base on the carrying value to the buyer.  However, for consolidation purpose depreciation has to be based on carrying value to the group.


workings:

1.  Calculate unrealized Profit
                    Unrealized profit = sale price > book value


              Adjustments:              Dr             CSOCI
                                                        Cr                NCA

2.  Compare if there is a difference in depreciation that shall be adjusted.  Depreciation group is in accordance with the depreciation on the carrying value.

If depreciation of sale price > depreciation of book value; adjustment has to be made.

                                                   Dr             Accumulated Depreciation
                                                             Cr             SOCI (buyer)


3.  Calculate new balance for profit and loss of subsidiary, where the new balance is to be calculate to NCI Account

4.  Find the new value of non current asset to be included in the CSOFP


                                                          NCA       Balance b/f Unrealised Profit c/f         Accumulated  Depreciation     Acc     P&L Balance c/f Balance b/f    
5.  Find out if subsidiary sold to Holding - calculate for NCI portion; but if holding sold to subsidiary, there are NO NCI's portion.


Exercise:

Below are the statement of Financial position of Baba Bhd and Saba Bhd as 31.12.2010.

Baba Bhd Saba Bhd Ordinary Shares@RM1 500,000 400,000 Retained Profit 200,000 100,000 Creditors 40,000 50,000 Overdraft 10,000   750,000 550,000 Non Current Assets: Investment in Saba Bhd 350,000 Land & Building 200,000 200,000 Plant & Machinery 100,000 250,000 Acc. Dep -20,000 -50,000 Vehicle 90,000 50,000 Acc. Dep -30,000 -10,000 Current Assets: Debtors 20,000 30,000 Inventories 40,000 30,000 Bank   50,000 750,000     550,000
Addition Information:
1.  On 1/1/2009 Baba bhd acquired 300,000 ordinary shares in Saba Bhd, where the balance of retained earnings at that time was RM60,000.

2.  During 2010, Saba Bhd sold a piece of land worth RM40,000 for RM60,000.

3.  At the beginning of 2010, Baba sold to Saba Plant a& Machinery of book value RM20,000 for RM30,000.  The remaining useful life of the Plant & Machinery on the date of sale was 10 years.  Depreciation policy of the group is to depreciate Plant & Machinery on a straight line basis and to give full year's depreciation in the year of purchase.

4.  Goodwill on consolidation is amortized over 2 years.


Prepare as follow:
1. Cost of Control Account (GW RM5,000)
2. Non Controlling interest account (RM120,000)
3.  Consolidated Profit and Loss Account (B-RM170,000; S- RM31,000)
4.  Consolidated statement of financial Position as at 31.12.2010 (RM921,000)








Question

Given below are the statement of Financial position of Jaja Bhd and Fafa Bhd as at 31.12.2009



Jaja Bhd Fafa Bhd Non Current Assets: "'000 '000 Land & Building          7,275          1,425 Plant & Machinery          4,000          1,000 Acc. Dep            (250)            (205) Vehicles          1,600             400 Acc. Dep            (400)            (100) Investment in Fafa Bhd          2,250 Current Assets: Rent Receivable             150 Inventories             520             480 Debtors             350             105 Bank             375             330       15,870         3,435 Financed By: Ordinary Shares @RM1        15,000          3,000 Capital Reserve             225               60 Retained Profit             465             270 Current Liabilities: Creditors             180               60 Rent Payable               45       15,870         3,435          Additional Information:

1.  Jaja Bhd acquired 2,100,000 ordinary share in Fafa Bhd on 1/1/2007.  Retained profit balances at that time was RM60,000 and balance in capital reserves was RM30,000.

2.  Jaja Bhd sold machines to Fafa Bhd at cost price RM20,000 (sale price of RM28,000)  in the accounting period above, and the depreciation is 25%.

3.  65% inventory in Fafa Bhd is purchased from Jaja Bhd.

4.  Jaja Bhd sold the inventories with the cost price plus 25%.

5.  Including debtor's of Jaja Bhd is a debt to Fafa Bhd amounted of RM14,000.

6.  Rent payable of Fafa Bhd is a rental to Jaja Bhd.

7.  Board of director of Fafa Bhd agreed to declare a dividend of 5% on 31/12/2009, and has not yet been recorded by both companies.



Prepare as follow:
1. Cost of Control Account (GW RM87,000)
2. Non Controlling interest account (RM999,000)
3.  Consolidated Profit and Loss Account (J-RM499,600; F- cr RM1,000)
4. Consolidated General Reserve Account (J-RM225,000; F- RM21,000)
5.  Consolidated statement of financial Position as at 31.12.2009 (RM17,014,600)                                 

FIXED ASSET REVALUATION OF SUBSIDIARY

In any business acquisition, the parent company usually will re-evaluate the assets of the subsidiary.  Any surplus or deficit that occurs in the revaluation of these assets will be transferred to Revaluation Reserve Account.

Asset revaluation reserve in this group treated as pre-acquisition reserves.

Revaluation of the group are in accordance with the price evaluation

Adjustments:

Dr   Non Current Assets
        Cr Assets Revaluation Reserve


Dr  Assets Revaluation Reserve
       Cr Cost Of Control
             Non Controlling Interest Acc 


Example:

Given below are the statement of Financial Position of Haha Bhd and Titi Bhd as at 31.12.2009:


Haha Bhd Titi Bhd "'000 '000 Land                  100                  100 Building at cosst                  450                  400 Accumulatd Depreciation                  (50)                (100) Other non Current Assets                  100                  200 Investment in Titi Bhd                  750 Current Assets                  150                    30              1,500                  630 Ordinary Shares @RM1              1,000                  500 Retained Profit                  400                  110 Current Liabilities                  100                    20              1,500                  630                          Additional Information:
                       a.  Haha Bhd acquired 450,000 ordinary shares in Titi Bhd on 1.1.2009

b.  On the date of acquisition, Land and Buildings of Titi Bhd were revalue for RM120,000 and RM500,000 respectively.  Titi Bhd did not adjust its book to reflect the new value.

c.  The depreciation policy of the group is to depreciate buildings on 10% using reducing balance.  Accumulated depreciation includes current depreciation.

d.  Goodwill on consolidation is to be amortized over three years.                                  Prepare as follow:
1. Cost of Control Account (GW RM183,000)
2. Non Controlling interest account (RM73,000)
3.  Consolidated Profit and Loss Account (H-RM339,000; T-70,000 )
4.  Consolidated statement of financial Position as at 31.12.2009 (RM1,602,000)              

Key:

Non Current Assets: Land               20,000

                                  Building     100,000

             Asset Revaluation Reserve                120,000


Assets Revaluation Reserve            120,000
             Cost of Control                                   108,000
             Non Controlling Interest                       12,000

Profit & Loss                                      20,000
             Accumulated Depreciation                    20,000                        



Let's Us doing some Comprehensive Exercise!
 
Below are the statement of Financial Position of Sinchan  Bhd and Hagemaru Bhd as at 31 Dec 2007:                       
Sinchan
Bhd Hagemaru Bhd Non Current Assets: Land 400,000 115,000 Plant & Machinery 420,000 310,000 Acc. Dep -120,000 -110,000 R&D  150,000 Investment in Hagemaru Bhd: 170,000 OS 210,000   50,000 Preference Share 50,000       Current Assets: Inventories 40,000 22,000 Debtors 20,000 35,000 Bank 30,000 46,000 1,200,000 418,000 Financed By: OS @RM1 700,000 200,000 7% Preference Shares@RM1 200,000 100,000 Retained Profit 250,000 85,000 Current Liabilities: Creditors 50,000 33,000 1,200,000 418,000
Additional Information:
1.  Singa Bhd acquired 170,000 units of Ordinary Shares and 50,000 units of preference shares in Hagemaru Bhd on 1 January 2007.  At that date, Hagemaru Bhd had a balance in Retained profit amounted to RM20,000.

2.  On 30 June 2007, Sinchan Bhd sold a piece of land at RM100,000 to Hagemaru Bhd.  The cost price of this asset was RM70,000.

3.  During the current year, Hagemaru Bhd sold inventories to Sinchan Bhd at cost plus 20%.  Cost of the inventories amounting RM30,000.  50% of the inventories were unsold and remain in the closing inventories of Sinchan Bhd.

4.  At the year end, the director of Sinchan Bhd and Hagemaru Bhd declared ordinary dividend of 8% and preference dividend which has not been provided for in both company.

5.  Goodwill on consolidation will be amortized for RM5,000.


You are required to prepare:

1. Cost of Control Account
2. Non Controlling interest account
3.  Consolidated Profit and Loss Account
4.  Consolidated statement of financial Position as at 31.12.2007  

































                                                                                                                                            
 
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