Consols: Buy And Sell Shares & General Rules

Question 1

What is the process we need to follow when doing a consolidation at this point of our knowledge?

Answer 1

Step 1: Perhaps do the translation of SOPLOCIRE (check out the Foreign currency translation cards)
Step 2: perhaps do a translation of a trial balance at the end of year
Step 3: Worksheet (if necessary) (note that your translation might be part of your worksheet
Step 4: Journal Entries
Step 5: Do the statement of profit or loss
Step 6: Do the statement of changes in equity
step 7: Do the statement of financial position

Question 2

What, how and why do we do Pro Forma journal Entries?

Answer 2

• Why?
  we do these in order to Consolidate companies into each other when they own interest in one another
• What?
  These Entries are the entries we make in order to make the accounts equal to what they would be if all the connected companies was just one company
• How?
• Every year we start consolidating from the day that we gained a relevant interest in the company, year by year, we go through all the needed pro forma journal entries, we go one by one in order to keep track of where everything is
• there are multiple methods to account for these Associates, subs and other, namely
  ~ Equity Accounting
  ~ full accounting??? I can’t remember the name (its when they are a sub

Question 3

GO LOOK AT THE ASSIGNMENTS, ITLL BRING EVERYTHING BACK INTO MEMORY

Answer 3

GO LOOK AT THE ASSIGNMENTS, ITLL BRING EVERYTHING BACK INTO MEMORY

Question 4

When you buy a company during the year, how do you calculate the goodwill?

Answer 4

you will need to first calculate the Retained earnings at the date you acquired the sub, to do this you must add the relevant profits and expenses to retained earnings to figure out what the balance is at that point in time

Question 5

What is the Pro forma for the Profit (R5000) of an Associate in the CUrrent and then (R4000) in the past year? While they also earned dividends (R200) in past and current year for the Associate (the parent earned it)

Answer 5

• Past year
  DR Investment in Associate R4000
  CR Retained Earnings R4000
  The reason that we don’t use the dividends amount is because it is has already moved into retained earnings by this time (we are not in the past year)
• Current Year
  DR Dividends Received R200
  DR Investment in Associate R5000
  CR Profit from Associate R5200

Question 6

What does the Pro Forma Journal entry look like that increases a reserve which had an increase in the prior year? and this relates to a SUB

Answer 6

DR Shares in Sub - cost
DR Profit on Sale of Sub
CR NCI

DR Profit on the sale of S limited
Cr Adjustment to equity on sale
(this entry is so that the amount doesn’t go to the profit statement but straight to equity)

DR asset

Question 7

What would the Pro Forma be when you purchase an associate half way through the year?

Answer 7

• there is no cancellation of equity Pro Forma because you add all your stuff together for an Associate, you just use equity accounting, so technically nothing

Question 8

What is the Pro Forma Entry for when you need to allocate some of the Profit to NCI (non-controlling Interest)

Answer 8

DR Non-controlling share of Profit (expense Account)
CR Non-controlling Interest (equity Account)

Question 9

What is the Pro FOrma you need to make when you have dividends (R5000) declared by a subsidiary?(60% ownership)(not an Associate)

Answer 9

DR Dividends Received (in Parent) R3000
DR Non-controlling Interest R2000
CR Dividends Expense (in Sub) R5000
(these are the Expense Accounts

DR Dividends payable R5000
CR Dividends Receivable R5000
(This is ONLY if they haven’t paid the dividends by the time you are doing these Pro Formas

Question 10

What Pro Forma will we need to do if there is debt owing between the Companies?

Answer 10

DR Accounts receivable (Company 2)
CR Accounts Payable (company 1)

Question 11

What are the Pro Forma Journal Entries when inventory is sold between a parent and Subsidiary and then a parent and an Associate?

Answer 11

• When its an Associate
• NIKS
• When it is a subsidiary
• you need to remove the unearned Profit

Question 12

What are the Pro Forma Journal Entries when an asset is sold between a parent and Subsidiary and then a parent and an Associate?

Answer 12

• When its an Associate
• NIKS
• When it is a subsidiary
• you need to remove the unearned Profit
• the Pro formas look like this…
  DR

Question 13

What is the implications of the Land being undervalued when you purchase the Sub or Associate?

Answer 13

• you will increase its value in the Worksheet (which will also affect goodwill and the total value of the sub)
• you will increase it in the Pro Formas as well
  DR Land (difference that it must go up by)
  DR Share Capital
  DR etc…
• Something to note as well is that the increase will be the net amount after Tax effects, there is no DT on this, its just straight of the land amount and remember there is CGT on the land amount because it’ll go above the cost

Question 14

What is a Worksheet in this Context?

Answer 14

Its the worksheet that you use to calculate the equity of the Company and what the value of the accounts should be, this method exists to help you keep track, look in your CTA notes to check what the Worksheet looks like

Question 15

What are the Pro Forma Journal Entries and other things to consider for when you increase your shares in an Associate but it doesn’t become a Sub?

Answer 15

DR Investment in Associate
CR Bank
(remember that now you will earn an increased share of the profit, dividends, etc)

Question 16

What are the Proformas and other implications that you need to make when you increase your share holding from Associate to Subsidiary?

Answer 16

DR Investment in Associate
CR Retained Earnings/ Gain on re-investment
(we make this entry because when we go from associate to Subsidiary we need to make a fair value adjustment to the value of our interest holding and adjust it to the fair value)

DR Dividends received
DR Investment in Associate
CR Retained Earnings
CR Share of Profit of Associate
(We make these entries because below we do the entry of cancelling out the double equity, we need to adjust the retained earnings up, because some of increased before the Associate became a Sub, which means that we want to record that RE (in the parent) and not forget)

DR Share Capital
DR Retained Earnings
DR Sales
DR Goodwill
DR Profit on sale of Property
CR Cost of Sales
CR Operating Expenses
CR Dividends paid (will be closed in RE)
CR Non-controlling Interest
CR Investment in Neptune Ltd ( the full amount up until this point)
(Most of all these accounts are in the sub and some are on the Parent, and we are removing them in order to not double account for these items)

Question 17

What are the Pro Forma Journal Entries and other things to consider for when you increase from a insignificant interest to an Associate?

Answer 17

• Pro Forma
  DR Investment in Associate
  CR Gain on the FV adjustment of Investment
  (you need to make an adjustment on the FV of the existing Interest
• You will also need to start Equity Accounting now

Question 18

What are the Implications and Pro Formas for when you sell shares that a sub becomes an Associate?

Answer 18

• You need to realise that because they are not currently an Associate, there is many consolidation entries that you no longer need to perform
• Pro Forma Journal Entries
• DR retained earnings
  CR Profit on sales of Shares

Question 19

What are the Implications and Pro Formas for when you sell shares that an associate now is just insignificant influence? (less than 20%)

Question 20

What are the Implications and Pro Formas for when you sell shares and it doesnt change from sub or Associate?

Answer 20

~ When its a sub
- Pro FOrma Journal Entries
* DR Shares in Sub
DR Profit on Sales of Sub
CR NCI
(the reason for this entry is,
~ the investment is being debited
here is because we need to bring it to zero since we are a group and we
have it has less in our books than what the acquisition entry is, so this
entry helps even it out
~ then the Profit on sale amount that we are moving to NCI is the value of
the increases in RE and other reserves that we are sending there, because
it is theirs now
~This has the net effect now of instead of transferring the RE that they now
own and OR, RE will still be less by that much at the end of the day)

• DR Profit on sale of Sub
  CR ADjustment to equity on Sale of Sub
  ( the reason for this entry is so that the group profit doesn’t show up on the profit statement but just goes straight to equity
• DR Asset Replacement Reserve
  CR Transfer to Retained Earnings
  (We do this because the Profit on the sale was decreased since we sold reserves and now this ARR was sold but we
  moving it to RE because the net effect will be the same since we moved
  other profit to NCI, instead of the reserve)

Question 21

What are the General Pro Formas for when you sell shares in a Subsidiary?