In this session we shall continue with the Consolidated Statement of Profit or Loss. This time we shall look at the elimination of the effects of intragroup interest and the elimination of dividends paid by the subsidiary to the parent.
Intragroup interest on loans and debentures
Companies within a group often lend money to each other in the form of loans or as debentures. Where this occurs interest may be paid or received between group companies and this must be eliminated when we prepare the consolidated statements since it is not possible for a single entity to lend money to itself.
In order to eliminate the interest we will:
- Identify the intragroup interest paid and received
- Deduct the intragroup interest from the group’s finance income
- Deduct the intragroup interest from the group’s finance costs
Intragroup dividends
The statements of profit or loss will record the dividends receivable by one company from another but will not record the dividends payable by a company. This is because dividends payable are not treated as expenses of a company but as distributions of a company’s retained earnings.
When preparing the consolidated statement of profit or loss we must eliminate the parent’s share of the dividends paid by the subsidiary company.
Illustration
Hera Ltd owns 100% of the share capital of Hebe Ltd. During the year ended 31/10/2020, Hebe Ltd paid dividends totalling £250,000. In addition, Hera Ltd owns £700,000 of 7% debentures in Hebe Ltd. Hebe Ltd paid interest on these debentures as normal during the year.
The companies’ statements of profit or loss for the year ended 31/10/2020 are shown below.
The calculation of revenue, cost of sales, administration expenses and taxation in the consolidated statement of profit or loss is straightforward as there was no trading between the companies.
We can now calculate and record the dividends receivable. This is the dividends received by both Hera Ltd and Hebe Ltd less the dividends paid by Hera Ltd to Hebe Ltd. The dividends paid by Hebe Ltd to Hera Ltd are the total dividends paid multiplied by Hera Ltd’s shareholding in Hebe Ltd; that is £250,000 x 100%, or £250,000.
The group’s interest receivable and finance costs are both calculated in the same way. We will add the parent and subsidiary’s figures together and then deduct the interest paid by Hebe Ltd to Hera Ltd in the year from both. The interest is £700,000 multiplied by 7%, or £49,000.
The above amounts can now be entered into the consolidated statement and the profits calculated.
The statement is now complete.
Question 1
The finance costs of a parent company were £183,489 last year. The finance costs of its subsidiary were £71,505. The parent company owns £310,000 of 12% debentures in the subsidiary.
a) Calculate the interest the subsidiary will have paid to the parent company in the year
b) Calculate the finance costs to be recorded in the consolidated statement of profit or loss.
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a) The interest on the debenture will have been £37,200 (i.e. £310,000 x 12%)
b) The finance costs in the consolidated statement of profit or loss is £217,794 (i.e. 183,489+71,505-37,200)
Question 2
In the year ended 31/10/2020, a subsidiary company paid dividends of 28p and 34p per ordinary share to its shareholders. Its parent company held 263,900 ordinary shares in the subsidiary.
In their financial statements for the year ended 31/10/2020, the parent company recorded dividend income of £506,998 and the subsidiary company recorded dividend income of £24,765
a) Calculate the dividends paid by the subsidiary to the parent company in the year ended 31/10/2020
b) Calculate the consolidated dividend income in the year ended 31/10/2020
a) The dividends paid by the subsidiary to the parent in the year ended 31/10/2020 are £163,618 (i.e. £0.28 x 263,900 + £0.34 x 263,900)
b) The consolidated dividend income is £368,145 (i.e. £506,998 + £24,765 – £163,618)
Question 3
G Ltd is the parent company of H Ltd and owns 5,000 ordinary shares in H Ltd. It also owns £200,000 15% of debentures in H Ltd. During the year ended 30 June 2020, H Ltd paid dividends of £8 per ordinary share.
The statements of profit or loss for both companies are shown below.
Prepare G Ltd’s consolidated statement of profit or loss for the year ended 30/06/2020.
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