Article on consolidation process part two

This acquisition gives Victory Ltd significant influence over Comfort Ltd

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accountting for associates 549880a65355857b7cbf3eecdc15fa68
article on PROFIT AND LOSS AND ASSOCIATE 4d7f99f62bbee7ec982c1bfd747acff9

Dr (GH¢) Cr (GH¢) Cost of control 29,000 Investment in shares 29,000 Elimination of investment in Happy Ltd’s equity shares
STEP 3 : ADJUST FOR UNREALISED PROFITS
In 2012, Happy Ltd sold goods to Victory Ltd at a markup of 20%. The goods cost Happy Ltd

This acquisition gives Victory Ltd significant influence over Comfort Ltd.

Footnote (ii): On 1 January, 2012, Victory Ltd acquired 32,000 of Happy Ltd’s shares at a total
cost of GH¢29,000.
The first sentence in footnote (ii) is pretty clear on the investment made in the subsidiary’s equity. This investment is an intra-group transaction and should be eliminated from the consolidation process. This elimination is done via the passing of journal entries as follows

Dr (GH¢)
Cr (GH¢)
Cost of control
29,000
Investment in shares
29,000
Elimination of investment in Happy Ltd’s equity shares
JAY: It follows then that, the investment in Comfort Ltd should be eliminated using the same
procedure. KO That is a good observation. However, it is not so. Another difference between a subsidiary
and an associate is that, whereas the financials of a subsidiary are consolidated on line-by-line
basis, those of an associate are accounted for using the equity method of accounting.
The equity method of accounting adjusts the initial investment made in the equity of the associate
to reflect the investor’s share of the post-acquisition reserves of the associate. Hence, we will hold
on to the investment in the equity of Comfort for now.
JAY: Okay. I was going to fall for that trap. My next question. How do I adjust for provision of
unrealised profit
KO: STEP 3: ADJUST FOR UNREALISED PROFITS
Unrealised profit arises when profits are made on intra-group trading and the related inventories have not subsequently been sold to customers outside the group. The identity of the seller is of paramount importance in a situation where the parent company does not have absolute control
(100%) of the subsidiary. This is because, a sale made by the parent is treated distinctly from a similar sale made by the subsidiary. a. If the parent is the seller of the unsold stock of the subsidiary, the treatment is as follows Debit Consolidated Reserves XXX Credit Inventory XXX With the amount of unrealised profit b. If the subsidiary is the seller, then the unrealised profit must be split proportionately between the Parent and the Non-controlling interest. The treatment is as follows Debit Consolidated Reserves with Parent’s share of the unrealised profit XXX Debit NCI with its share of the unrealised profit
XXX Credit Inventory
XXX The treatment gets more complicated if the associate is involved whether it is the buyer or the seller. If the associate is the seller, the treatment is as follows

Debit Cost of sales of the buyer with the group share in the associate XXX Credit Group Inventory XXX If the associate is the buyer, Debit cost of sales of the seller the group share in the associate XXX Credit Investment in Associate XXX The following illustration demonstrates this in the context of the consolidation process. Extract (3) from the Comprehensive Question
In 2012, Happy Ltd sold goods to Victory Ltd at a markup of 20%. The goods cost Happy Ltd

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