Bonus Shares out of Pre-acquisition and Post Acquisition Profits

Issue of bonus shares by the subsidiary company increases the number of shares held by the holding company without changing the cost of investment. While preparing a consolidated balance sheet, its treatment will differ depending upon the source from where the bonus shares have been issued by the subsidiary company.

Bonus Shares out of Pre-acquisition Profits:

If the subsidiary company issues bonus shares out of pre-acquisition profits, such an issue will not alter the consolidated balance sheet.

Goodwill or capital reserve on acquisition of shares does not change because although the paid up value of the shares held by the holding company increases, the holding company’s share in the pre-acquisition is reduced by an identical amount because of transfer of pre-acquisition profits to Equity Share Capital Account.

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Thus, the total of paid up value of shares held by holding company and share in capital profits of the subsidiary company remains unaltered; the holding company gets the bonus shares without any fresh payment hence the cost of investment also remains unaltered. The result is that there is no change in good will or capital reserve on acquisition of shares.

Minority interest also remains the same because although the paid up value of the shares held by minority shareholders increases, minority shareholders’ share in the pre-acquisition profits decreases by an identical amount because of the reduction in the pre-acquisition profits due to issue of bonus shares.

Illustration 1:

On 1st April 2011, S Ltd. had a subscribed share capital of Rs 5,00,000 divided into 50,000 fully paid equity shares of Rs 10 each. It had accumulated capital and revenue profits to the tune of Rs 3,90,000 by that date when H Ltd. acquired 80% of its shares for Rs 9,00,000.

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The profit earned by S Ltd. amounted to Rs 2,60,000 for the year ended 31st March, 2012 on which date S Ltd. issued, by way of bonus, one fully paid equity share of Rs 10 for every five equity shares held out of its pre-acquisition profits.

Calculate as on 31st March, 2012 cost of control and minority interest:

(i) Just before issue of bonus shares and

(ii) Immediately after issue of bonus shares.

Illustration 2:

H Ltd. acquired 30,000 equity shares of Rs. 10 each in S Ltd. on 31st March, 2012. The balance sheets of H Ltd. and S Ltd. as at that date were as under:—

On 31st March, 2012 the Board of Directors of S Ltd. proposed a dividend of 10% on the share capital of Rs 4,00,000 and made a bonus issue of one equity share for every four equity shares held using General Reserve. Effect of bonus issue is to be incorporated in the abovementioned balance sheets. Ignore divided distribution tax.

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Prepare a consolidated balance sheet as at 31st March, 2012.

Bonus Shares out of Post-acquisition Profits:

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If the subsidiary company issues bonus shares out of post-acquisition profits, it will reduce cost of control or increase capital reserve. It happens because such an issue of bonus shares increases the paid up value of shares held by the holding company without a change in the cost of investment and the holding company’s share in pre-acquisition profits.

Such an issue of bonus shares reduces the post-acquisition profits. Hence holding company’s share in post-acquisition profits also goes down.

Minority Interest does not change by the issue of such shares. Although minority shareholders’ share in post-acquisition profits decreases, the paid up value of shares held by the minority shareholders increases by an identical amount. The result is that minority interest remains unchanged.

Illustration 3:

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On 31st March, 2010 H Ltd. acquired 70,000 equity shares of S Ltd. for Rs 8,00,000 when S Ltd.’s summarised balance sheet stood as follows:—

Illustration 4:

The balance sheets of H Ltd. and S Ltd. as on 31st March, 2012 are as follows:

The following information is also given to you:

(i) 15% dividend on both types of shares was paid by S Ltd. in October, 2012 for the year ended 31st March, 2011. Dividend Distribution Tax @ 17% was also paid in the same month. H Ltd. credited the dividend received to its Profit and Loss Account.

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(ii) S Ltd.’s Plant and Machinery Account showed a balance of Rs 2,00,000 on 1st April, 2011. At the time of purchase of shares in S Ltd., H Ltd. revalued S Ltd.’s plant and machinery upward by Rs 1,00,000.

(iii) There was a bonus issue of equity shares amounting to Rs 40,000 out of post-acquisition profits by S Ltd. which has not been recorded in the books of account as yet. Credit balance of Profit and Loss Account of H Ltd. on 1st April, 2011 was Rs 1,11,220. Included in trade payables of S Ltd. are Rs 40,000 for goods supplied by H Ltd. Also included in S Ltd. ‘s stock are goods of Rs 16,000 which were supplied by H Ltd. at a profit of 25% on sales.

Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2012 giving working notes. [Adapted B.Com.(Hons.) Delhi, 1998]

Illustration 5:

The balance sheets of Sun Ltd. and Moon Ltd. as on 31.3.2012 are given below:

Contingent liability of Sun Ltd.; Bills discounted not yet matured, Rs 2,500. Sun Ltd. purchased the share on 1.4.2009. When the shares were purchased. General Reserve and Profit and Loss Account of Moon Ltd. stood at Rs 30,000 and Rs 16,000 respectively.

Dividends have been paid @10% every year after acquisition of shares, first dividend being paid out of pre-acquisition profits. No dividend has been proposed for 2011-2012 as yet and no provision need be made in consolidated balance sheet. Sun Ltd. has credited all dividends received to Profit and Loss Account.

On 31.3.2012, Moon Ltd. declared bonus shares @1 fully paid share for every 5 shares held. However, no effect has been given to bonus shares in the above accounts. The bonus was declared out of profits earned prior to 1.4.2009 from General Reserve.

When the shares were purchased agreed valuation of fixed assets of Moon Ltd. was Rs 1,08,000. No effect has been given with regard to revaluation of fixed assets in the abovementioned accounts. Depreciation has been charged @10% p.a. on straight line method on the book value as on 1.4.2009; there has been no addition or sale since then.

Every year a sum of Rs 2,000 has been transferred out of current profits to General Reserve. Bills receivable of Sun Ltd. include Rs 2,000 due to Moon Ltd. whereas Sundry Debtors of Moon Ltd. include Rs 4,000 due from Sun Ltd. It is found that Sun Ltd. has remitted a cheque of Rs 2,000, which has not yet been received by Moon Ltd.

Prepare consolidated balance sheet as at 31.3.2012 of Sun Ltd., and its subsidiary.

Contingent Liabilities of Sun Ltd.: Bills discounted but not yet matured, Rs 1,000. Note : As regards bills receivable, one may take total bills receivable of Sun Ltd. as accepted by Moon Ltd. as Rs 2,000 out of which Rs 1,500 have been discounted. If this assumption is made only t 500 will be deducted as mutual indebtedness regarding bills receivable and bills payable.

Consequently net bills receivable will be t 19,500 while net bills payable will be Rs 6,500 and the balance sheet total will be Rs 2,27,100.

Successive Purchases of Shares:

So far, we have dealt with cases where the holding company purchases shares of the subsidiary company once only. Actually, a company may make a succession of purchases of the shares of another company till it acquires the status of the holding company. Also, even though a company may already be enjoying controlling interest, it may still buy more shares of its subsidiary.

Where a holding company has purchased shares of the subsidiary company more than once, the cost of control will have to be calculated by taking into account the cost of shares acquired on different dates and the holding company’s share of capital profits of the subsidiary company on those different dates.

Illustration 6:

On 1st April, 2010 S Ltd. had an issued and subscribed share capital of Rs 5,00,000 divided into 50,000 fully paid equity shares of Rs 10 each. H Ltd. made a succession of purchases of the shares of S Ltd. as detailed below:—

Disposal of Shares:

Holding Company may dispose of some of the shares held by it in the subsidiary company. If there is a loss on disposal, it will be debited to cost of control. On the other hand, if there is a profit on sale, it may be credited to either cost of control or Investment Fluctuation Reserve. Minority interest and cost of control will be calculated on the basis of shares left with the holding company on the date of consolidation.

Illustration 7:

On 1st April, 2010 H Ltd. purchased 85% equity shares of S Ltd. for Rs 2,60,000 when S Ltd.’s accumulated reserves and profits amounted to Rs 70,000.

On 31st March, 2012 the summarised balance sheets of H Ltd. and S Ltd. stood as follows:—

Illustration 8:

The following are the Balance Sheets of H Ltd. and S Ltd. as at 31st March, 2012:

The following further information is furnished:

(1) H Ltd. acquired 30,000 shares in S Ltd. on 1.4.2011 when Reserves and Profit and Loss Position was as follows:

(a) General Reserve-Rs 5,00,000

(b) Profit and Loss Account— Rs 2,00,000

(2) On 1.10.2011, S Ltd. issued 2 shares for every 5 shares held, as bonus shares at a face value of Rs 10 per share. No entry has been made in the books of H Ltd. for the receipt of these bonus shares.

(3) On 30.6.2011, S Ltd. declared a dividend, out of pre-acquisition profits @ 20% and H Ltd. credited the receipt of dividend to its profit and loss account. Assume that there was no dividend distribution tax in force and Rs 50,000 were transferred from Profit & Loss A/c to general Reserve.

(4) S Ltd. owed H Ltd. Rs 1,20,000 for purchase of inventories from H Ltd. The entire stock is held by S Ltd. on 31.3.2011. H Ltd. made a profit of 20% on cost.

(5) H Ltd. transferred a machinery to S Ltd. for Rs 1,00,000. The book value of machine to H Ltd. was Rs 75,000.

Prepare consolidated balance sheet as at 31st March, 2012. [Adapted C.A. (Final)]