Goodwill, NCI and Unrealised Profit in Consolidation
P Ltd acquired 75% of the equity shares of S Ltd on 1 April 2023 for ₹15 crore. On that date, S Ltd's share capital was ₹10 crore and retained earnings were ₹4 crore; the fair value of its identifiable net assets equaled book value. For the year ended 31 March 2024, S Ltd reported profit after tax of ₹3 crore and paid a dividend of ₹1 crore. P Ltd's retained earnings at 31 March 2024 are ₹20 crore, after including the dividend received from S Ltd. During the year, P Ltd sold goods to S Ltd for ₹4 crore at a markup of 25% on cost. One-fourth of these goods remained in S Ltd's inventory at 31 March 2024. P Ltd prepares consolidated financial statements under AS 21. The accountant is unsure how to compute goodwill, non-controlling interest and the unrealised profit adjustment. No impairment of goodwill is indicated.
1. Compute goodwill on acquisition and NCI at acquisition.
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Consideration = ₹15 crore. S Ltd net assets at acquisition = share capital ₹10 crore + retained earnings ₹4 crore = ₹14 crore. P's share = 75% × ₹14 crore = ₹10.5 crore. Goodwill = ₹15 crore − ₹10.5 crore = ₹4.5 crore. NCI at acquisition = 25% × ₹14 crore = ₹3.5 crore. Since the fair value of net assets equals book value, there is no fair-value adjustment.
2. Compute the unrealised profit and state its treatment in consolidation.
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P sold goods for ₹4 crore at 25% markup on cost. Cost = ₹4 crore / 1.25 = ₹3.2 crore; profit = ₹0.8 crore. One-fourth remains in S's closing inventory, so unrealised profit = 25% × ₹0.8 crore = ₹0.2 crore. Because the sale is downstream (parent to subsidiary), the full ₹0.2 crore is eliminated against P's retained earnings; NCI is not affected. In consolidation, reduce inventory and consolidated retained earnings by ₹0.2 crore, and eliminate the intra-group sale and purchase of ₹4 crore.
3. Compute consolidated retained earnings and NCI at 31 March 2024.
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S Ltd closing retained earnings = opening ₹4 crore + profit ₹3 crore − dividend ₹1 crore = ₹6 crore. Post-acquisition retained earnings = ₹6 crore − ₹4 crore = ₹2 crore. P's share = 75% × ₹2 crore = ₹1.5 crore. P's retained earnings of ₹20 crore include dividend received from S = 75% × ₹1 crore = ₹0.75 crore, which must be eliminated. Consolidated retained earnings = ₹20 crore − ₹0.75 crore + ₹1.5 crore − ₹0.2 crore = ₹20.55 crore. NCI at year-end = NCI at acquisition ₹3.5 crore + 25% × post-acquisition retained earnings ₹2 crore = ₹3.5 crore + ₹0.5 crore = ₹4.0 crore. Equivalent check: ₹3.5 crore + 25% × profit ₹3 crore − 25% × dividend ₹1 crore = ₹4.0 crore.