In order to qualify the entity as a subsidiary, the required percentage of shareholding is more than 50{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}. However, there is no hard and fast rule as there are some other conditions which could lead you to consider an entity as a subsidiary even if the percentage of holding shares are less than 50{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}. These conditions are as under:
the parent company has the power to rule the financial and operating policies of the subsidiary,
the parent has the majority of voting powers at the general meetings of the company,
the parent has the power to appoint or remove the majority of the directors in the subsidiary.
Example Question
Butco purchased 20,000 shares in Snack at a price of $40,000 on 30th June 2012. At the time of acquisition, Snack’s reserves were $22,000.
The balance sheet of Butco and Snacks as on 30th June 2014 are as follows:
| Butco | Snacks | |
| Non-current assets | ||
| Investment in Snacks | 40,000 | – |
| Plant and Machinery | 60,000 | 40,000 |
| Current assets | 60,000 | 20,000 |
| Total assets | 160,000 | 60,000 |
| Equity | ||
| Issued capital (1$ each) | 80,000 | 25,000 |
| Reserves | 40,000 | 24,000 |
| Current liabilities | 40,000 | 11,000 |
| Total Equity and Liabilities | 160,000 | 60,000 |
Requirement:
Prepare a consolidated balance sheet on 30th June 2014.
Answer/ Solution
Butco
Consolidated Balance Sheet
As on 30th June 2014
| $ | |
| Non-current assets | |
| Goodwill | 2,400 |
| Plant and Machinery | 100,000 |
| Current assets | 80,000 |
| Total assets | 182,400 |
| Capital and Reserves | |
| Issued and subscribed capital | 80,000 |
| Reserves | 41,600 |
| Minority interest | 9,800 |
| Current liabilities | 51,000 |
| Total equity and liabilities | 182,400 |
Workings
Minority interest
20{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 49,000 = 9,800
Goodwill
= 40,000 – 80{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} (25,000 + 22,000) = $2,400
Reserves – Consolidated
H – Reserves 40,000
Post acquisition reserves of S 0.80 X (24,000 – 22,000) = $1600
Total consolidated reserves = 40,000 + 1600 = $41,600