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Question 5 (a) Birds Ltd. and its subsidiary Rooster Ltd provided the following information for the year ended 31/03/2025. Particulars Birds Ltd. (`) Rooster Ltd. (`) Equity Share Capital 10,00,000 3,00,000 Sales 28,40,000 10,40,000 Purchases (Finished Goods) 9,15,000 1,75,000 Salaries 7,75,000 3,78,000 Rent received 5,40,000 General and Administration expenses 2,81,500 1,98,000 Selling and Distribution Expenses 2,21,000 90,000 Dividend Income 1,35,000 28,000 Finished Goods Inventory on 01/04/2024 3,35,000 1,20,000 Finished Goods Inventory on 31/03/2025 7,85,000 2,90,000 Other Non-operating Income 2,38,000 57,000 Other Information: • On 1st April 2022 Birds Ltd. acquired 2,500 shares of ` 100 each fully paid up in Rooster Ltd. • Rooster Ltd. paid a dividend of 12% for the year ended 31/03/2024. The dividend was correctly accounted for by Birds Ltd. • Rooster Ltd. pays ` 11,250 per month to Birds Ltd. towards rent for the portion of premises occupied. Selling and Distribution Expenses of Rooster Ltd. include ` 15,000 received from Birds Ltd. Prepare Consolidated Profit and Loss Account of Birds Ltd. and its subsidiary Rooster Ltd. for the year ended 31/03/2025. (10 Marks) (b) Rubber Ltd. purchased 70% of shares of Tyre Ltd. on 31/03/2024 for ` 4,05,000. The following is the position of Tyre Ltd. as on that date: Particulars Amount (`) Issued share capital of Tyre Ltd. on 31/03/2024 5,00,000 Balance in Profit and Loss A/c of Tyre Ltd. on 31/03/2024 70,000 Profit earned during the year 2024-25 45,000 5% Dividend declared and paid by Tyre Ltd. for 2023-24 25,000 You are required to calculate: • The capital reserve / goodwill at the date of acquisition. ADVANCED ACCOUNTING The calculations are to be made under the following assumptions: Case (i) It is assumed that the dividend is paid out of post-acquisition profits. Case (ii) It is assumed that the dividend is received for pre-acquisition period. (4 Marks)

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Detailed Solution & Explanation

(a) Consolidated statement of profit and loss of Birds Ltd. and its subsidiary Rooster Ltd. for the year ended on 31st March, 2025 Particulars Note No. ` Revenue from operations 1 38,80,000 Other Income 2 8,33,000 Total revenue (I) 47,13,000 Expenses: Cost of material purchased/consumed 3 10,90,000 Changes (Increase) in inventories of finished goods 4 (6,20,000) Employee benefit expense 5 11,53,000 Other expenses 6 6,55,500 Total expenses (II) 22,78,500 Profit before tax (II-III) 24,34,500 Notes to Accounts ` ` 1. Revenue from operations Sales and other operating revenues Birds Ltd. 28,40,000 Rooster Ltd. 10,40,000 38,80,000 2. Other Income Dividend income: Birds Ltd. 1,35,000 Less: Dividend received from Rooster Ltd. (2,50,000 × 12%) (30,000) Rooster Ltd. 28,000 1,33,000 Other Non-operating Income Birds Ltd. 2,38,000 Rooster Ltd. 57,000 2,95,000 Rent received Birds Ltd. 5,40,000 Less: Rent received by Birds Ltd. from Rooster Ltd. (11,250 x 12) (1,35,000) 4,05,000 8,33,000 3. Cost of material purchased/ consumed Birds Ltd. 9,15,000 Rooster Ltd. 1,75,000 10,90,000 4. Changes (Increase) in inventories of finished goods Birds Ltd. (7,85,000 - 3,35,000) 4,50,000 Rooster Ltd. (2,90,000 -1,20,000) 1,70,000 6,20,000 5. Employee benefits and expenses Salaries: Birds Ltd. 7,75,000 Rooster Ltd. 3,78,000 11,53,000 6. Other expenses General & Administrative expenses: Birds Ltd. 2,81,500 Rooster Ltd. Less: Rent paid to Birds Ltd. 1,98,000 (1,35,000) 3,44,500 Selling and distribution Expenses: Birds Ltd. 2,21,000 ADVANCED ACCOUNTING Less: paid to Rooster Ltd (15,000) Rooster Ltd. 90,000 Add: Received from Birds Ltd. 15,000 3,11,000 6,55,500 Note: An amount of ` 15,000 was added under Selling and Distribution Expenses of Rooster Ltd. due to a rectification entry, while ` 15,000 was deducted from Birds Ltd. under the same head to account for the set-off of inter- company transactions. (b) Calculation of capital reserve/goodwill at the date of acquisition Case (i) it is assumed Dividend is paid out of post-acquisition profits Total dividend paid is ` 25,000 hence dividend received by Rubber will be credited to P & L. Rubber Ltd.’s share of dividend = ` 25,000 X 70% = ` 17,500 Goodwill on consolidation (at the date of acquisition): ` ` Cost of shares 4,05,000 Less: Face value of capital i.e. 70% of capital 5,00,000 3,50,000 Add: Share of capital profits [70,000X 70%] 49,000 (3,99,000) Goodwill 6,000 Case (ii) it is assumed Dividend is received out of pre-acquisition profits. Since dividend received is for pre-acquisition period, it has been reduced from the cost of investment in the subsidiary company. Goodwill on consolidation (at the date of acquisition): ` ` Cost of shares 4,05,000 Less: dividend received (17,500) 3,87,500 Less: Face value of capital i.e. 70% of capital 5,00,000 3,50,000 Add: Share of capital profits [70,000 X 70%] 49,000 (3,99,000) Capital reserve 11,500

Key Concepts to Understand

Profit and Loss Account

The second part of the final accounts that records all indirect incomes and indirect expenses to determine the Net Profit or Net Loss for the accounting period. It starts with Gross Profit from the Trading Account.

Goodwill

An intangible asset representing the good reputation, brand name, customer loyalty, and earning capacity of a business over and above its net tangible assets. It arises in accounting during partnership changes or business acquisitions.

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