Chapter 10: Consolidated Financial Statements - Test 3: answer key

Question 1 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Sterling Garments Ltd. (SGL) acquired 80% of the equity shares of Eastern Weaves Ltd. (EWL) on 1 April 2025. Both companies prepare financial statements on 31 March. During 2026-27, the following inter-company transactions took place (₹ in lakh). SGL's trade receivables include ₹18 lakh due from EWL, which exactly corresponds to EWL's trade payables. SGL also holds a bill of exchange for ₹6 lakh accepted by EWL, which is recorded as bills receivable by SGL and bills payable by EWL. Further, SGL granted a loan of ₹24 lakh to EWL. At 31 March 2027, interest of ₹1.20 lakh had accrued on this loan and was recorded as interest receivable by SGL and interest payable by EWL. Both companies have correctly recorded all the above balances. During the year, SGL sold goods costing ₹80 lakh to EWL at a profit of 25% on cost. The entire consignment was invoiced at the appropriate transfer price. At 31 March 2027, EWL's closing inventory included 40% of the goods purchased from SGL, valued at the transfer price. EWL also sold goods costing ₹60 lakh to SGL at a profit of 25% on cost. At the year-end, SGL continued to hold 40% of this consignment in its inventory, valued at the inter-company transfer price. There are no differences in the reciprocal balances, no goods have been sold outside the group from the remaining stock lots, and no other intra-group transactions or adjustments exist. The finance controller has prepared a draft consolidation worksheet by eliminating only the reciprocal account balances and leaving the inventory profits untouched. The audit committee requires a complete assessment of the mutual balances, unrealised profits, their direction of transfer and the implications for minority shareholders.

What is the total amount of reciprocal trade receivables/payables and bills receivable/payable that must be eliminated from the consolidated financial statements of SGL and EWL?

1. ₹18 lakh of assets and ₹18 lakh of liabilities
2. ₹24 lakh of assets and ₹24 lakh of liabilities (correct answer)
3. ₹30 lakh of assets and ₹30 lakh of liabilities
4. ₹12 lakh of assets and ₹12 lakh of liabilities

Answer: B — ₹24 lakh of assets and ₹24 lakh of liabilities

Explanation. The reciprocal trade receivable and payable amount is ₹18 lakh. The accepted bill creates an additional mutual balance of ₹6 lakh. Therefore, the consolidated adjustment eliminates ₹18 lakh + ₹6 lakh = ₹24 lakh from assets and an equal ₹24 lakh from liabilities. The ₹18 lakh option ignores the bill of exchange. AS 21 requires mutual balances between group enterprises to be eliminated in full, irrespective of the parent's 80% shareholding.

Where it goes wrong. Eliminating only trade debtors and creditors while overlooking bills receivable and bills payable.

Authority. AS 21, para 16; Study Material, Chapter 10, Section 1.14(C)

Question 2 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

What is the total amount of reciprocal loan and accrued-interest balances to be eliminated from the consolidated balance sheet?

1. ₹24 lakh
2. ₹24.80 lakh
3. ₹25 lakh
4. ₹25.20 lakh (correct answer)

Answer: D — ₹25.20 lakh

Explanation. The principal amount of the inter-company loan is ₹24 lakh. Accrued interest of ₹1.20 lakh is separately recognised as an asset by SGL and a liability by EWL. Both balances represent obligations within the group and must be eliminated. Total reciprocal balances are ₹24 lakh + ₹1.20 lakh = ₹25.20 lakh on each side. Eliminating only the loan principal leaves the accrued interest overstating both group assets and liabilities.

Where it goes wrong. Eliminating the inter-company loan principal but forgetting the accrued interest receivable and payable.

Authority. AS 21, para 16; Study Material, Chapter 10, Section 1.14(C)

Question 3 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Calculate the unrealised profit on SGL's downstream inventory transfer that must be eliminated from closing inventory and consolidated profit.

1. ₹8 lakh (correct answer)
2. ₹10 lakh
3. ₹12 lakh
4. ₹16 lakh

Answer: A — ₹8 lakh

Explanation. SGL's cost is ₹80 lakh and its 25% mark-up gives a transfer price of ₹100 lakh. The total profit is ₹20 lakh. Since 40% of the transferred goods remain in EWL's inventory, the unrealised profit is ₹20 lakh × 40% = ₹8 lakh. This amount is eliminated from closing inventory and consolidated profit. As the transaction is downstream, the entire elimination is attributable to SGL and is not shared with minority shareholders.

Where it goes wrong. Applying the 25% mark-up to the transfer price instead of calculating profit as a percentage of cost.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 4 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amount should be deducted from minority interest on account of unrealised profit in EWL's upstream sale of goods to SGL?

1. ₹0.90 lakh
2. ₹4.80 lakh
3. ₹1.20 lakh (correct answer)
4. ₹6.00 lakh

Answer: C — ₹1.20 lakh

Explanation. EWL sells goods costing ₹60 lakh at a 25% mark-up, giving a transfer price of ₹75 lakh and profit of ₹15 lakh. Forty per cent remains unsold, so unrealised profit is ₹15 lakh × 40% = ₹6 lakh. Minority shareholders own 20% of EWL; their share of this unrealised profit is ₹6 lakh × 20% = ₹1.20 lakh. The entire ₹6 lakh is eliminated from inventory, but the profit adjustment is allocated between parent and minority interests.

Where it goes wrong. Eliminating upstream unrealised profit entirely against the holding company's profit without adjusting minority interest.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 5 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Zenith Components Ltd. (ZCL) holds 75% of the equity shares of Orion Gears Ltd. (OGL). Both entities have a reporting date of 31 March 2027. On 1 July 2026, ZCL transferred a specialised CNC machine to OGL for ₹60 lakh. Immediately before the transfer, the machine had a carrying amount of ₹48 lakh in ZCL's books. The transaction was completed at an arm's-length price for the separate financial statements of the two entities, and ZCL recognised a profit on sale in its statement of profit and loss. At the transfer date, the machine had a remaining useful life of four years and no residual value. Both companies follow the straight-line method of depreciation. OGL recorded the machine at ₹60 lakh and charged depreciation from 1 July 2026 on that basis. No impairment occurred during the year, and the machine was still in use by OGL at 31 March 2027. The following additional details are available (₹ in lakh): Particulars | Amount Transfer consideration | 60.00 Transfer-date carrying amount in ZCL | 48.00 Remaining useful life | 4 years Residual value | Nil Period of use by OGL during 2026-27 | 9 months ZCL's ownership in OGL | 75% The accounts teams have already incorporated the depreciation charged by OGL in their respective standalone financial statements. No adjustment has been recorded in the consolidation worksheet. The group auditor observes that the machine continues to remain within the economic entity and that ZCL's profit on transfer has not been realised through a transaction with an external party. The auditor also notes that OGL's depreciation is calculated on the transfer price rather than the original carrying amount to the group. You are required to determine the elimination of unrealised profit, the excess depreciation adjustment, the adjusted consolidated carrying amount and the impact on consolidated profit, including whether minority shareholders share the unrealised profit.

What amount of profit on the transfer of the CNC machine must be eliminated from ZCL's consolidated profit?

1. ₹6 lakh
2. ₹9 lakh
3. ₹12 lakh (correct answer)
4. ₹15 lakh

Answer: C — ₹12 lakh

Explanation. ZCL sold the machine for ₹60 lakh when its carrying amount was ₹48 lakh. The separate financial statements therefore recognise a profit of ₹60 lakh − ₹48 lakh = ₹12 lakh. Since OGL remains within the group and the machine has not been sold to an external party, the gain is unrealised from the group's perspective. The entire ₹12 lakh must be eliminated, rather than only the 75% attributable to the parent.

Where it goes wrong. Eliminating only 75% of the unrealised profit because ZCL owns 75% of OGL.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 6 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Calculate the excess depreciation charged by OGL over the depreciation that would have been charged by the group on the original carrying amount of the machine during 2026-27.

1. ₹2.25 lakh (correct answer)
2. ₹1.50 lakh
3. ₹3.00 lakh
4. ₹4.50 lakh

Answer: A — ₹2.25 lakh

Explanation. OGL's depreciation on the transfer price is ₹60 lakh ÷ 4 × 9/12 = ₹11.25 lakh. Depreciation on the original group carrying amount is ₹48 lakh ÷ 4 × 9/12 = ₹9 lakh. The excess depreciation is therefore ₹11.25 lakh − ₹9 lakh = ₹2.25 lakh. It must be reversed in consolidation because the internal transfer did not increase the machine's cost to the group.

Where it goes wrong. Calculating depreciation on the transfer price without comparing it with depreciation on the original group carrying amount.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 7 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

By what amount is the carrying value of the CNC machine overstated in OGL's standalone balance sheet compared with its correct carrying amount for the consolidated balance sheet as at 31 March 2027?

1. ₹7.50 lakh
2. ₹8.00 lakh
3. ₹12.00 lakh
4. ₹9.75 lakh (correct answer)

Answer: D — ₹9.75 lakh

Explanation. The original unrealised profit on transfer is ₹12 lakh. Additional depreciation of ₹2.25 lakh has already reduced OGL's carrying amount but is not an economic depreciation charge for the group. Accordingly, the remaining unrealised profit embedded in the machine's closing carrying amount is ₹12 lakh − ₹2.25 lakh = ₹9.75 lakh. This amount must be deducted from the combined PPE balance. Merely eliminating the original gain would ignore the subsequent depreciation correction.

Where it goes wrong. Deducting the full original gain from closing PPE without reversing the excess depreciation already charged.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 8 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is the net effect of the machine transfer adjustments on consolidated profit for 2026-27, before considering tax effects?

1. Decrease of ₹12 lakh
2. Decrease of ₹9.75 lakh (correct answer)
3. Decrease of ₹10.50 lakh
4. Increase of ₹2.25 lakh

Answer: B — Decrease of ₹9.75 lakh

Explanation. The internal sale gain of ₹12 lakh must be eliminated from ZCL's profit. However, OGL has charged excess depreciation of ₹2.25 lakh, which must be reversed, increasing consolidated profit by that amount. The net effect is a reduction of ₹12 lakh − ₹2.25 lakh = ₹9.75 lakh. Since this is a downstream transaction, the adjustment is made against the holding company's profit and is not allocated proportionately to minority shareholders.

Where it goes wrong. Deducting the transfer gain but overlooking the positive profit adjustment from reversing excess depreciation.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 9 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Vardhan Chemicals Ltd. (VCL) acquired 80% of the equity shares of Nova Polymers Ltd. (NPL) on 1 July 2026. Both companies have a financial year ending on 31 March 2027. At 1 April 2026, NPL had a general reserve of ₹18 lakh and a credit balance in its profit and loss account of ₹12 lakh. NPL earned a profit of ₹24 lakh during 2026-27, accruing evenly throughout the year. No other reserve movements occurred. On 20 March 2027, NPL declared and paid a dividend of ₹15 lakh. The resolution specifically stated that ₹6 lakh was being distributed from accumulated profits existing before VCL acquired control, while ₹9 lakh was being distributed from profits earned after acquisition. VCL received its entire entitlement under the dividend declaration and correctly credited the pre-acquisition component to its investment account and the post-acquisition component to its profit and loss account. The remaining dividend was paid to outside shareholders. Separately, on 10 April 2027, after the reporting date but before approval of the financial statements, NPL's board recommended a further final dividend of ₹8 lakh out of post-acquisition profits. This recommendation was subject to shareholder approval at the forthcoming annual general meeting. No liability or dividend payable was recorded in NPL's financial statements as at 31 March 2027. The audit team must review the treatment of the pre-acquisition dividend, the post-acquisition dividend credited by VCL, the distribution attributable to non-controlling shareholders and the subsequent proposed dividend. Assume that there are no other inter-company balances, dividends, adjustments or transactions, and that the stated dividend amounts are fully supported by the respective resolutions.

What amount of the dividend received by VCL represents a recovery of its investment cost because it was distributed from NPL's pre-acquisition accumulated profits?

1. ₹6 lakh
2. ₹3 lakh
3. ₹7.20 lakh
4. ₹4.80 lakh (correct answer)

Answer: D — ₹4.80 lakh

Explanation. The dividend specifically distributed from pre-acquisition accumulated profits is ₹6 lakh. VCL owns 80% of NPL and is entitled to ₹6 lakh × 80% = ₹4.80 lakh. This receipt is a capital receipt representing recovery of investment cost and must be credited to the investment account, not treated as revenue income. The ₹6 lakh option incorrectly includes the minority shareholders' entitlement.

Where it goes wrong. Treating the entire pre-acquisition dividend declared by the subsidiary as income of the holding company.

Authority. AS 13, para 8; AS 21, para 16; Study Material, Chapter 10, Section 1.11(B)

Question 10 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amount of dividend income credited by VCL to its standalone profit and loss account must be eliminated while preparing the consolidated statement of profit and loss?

1. ₹9 lakh
2. ₹15 lakh
3. ₹7.20 lakh (correct answer)
4. ₹4.80 lakh

Answer: C — ₹7.20 lakh

Explanation. The dividend from post-acquisition profits is ₹9 lakh. VCL's 80% entitlement is ₹9 lakh × 80% = ₹7.20 lakh, which VCL correctly credited to its own profit and loss account. In consolidated financial statements, the subsidiary's dividend paid to the parent is an intragroup transaction and must be eliminated in full. The ₹4.80 lakh pre-acquisition component is dealt with as a reduction in investment cost, not as dividend income.

Where it goes wrong. Retaining the holding company's dividend income in consolidated profit after the subsidiary's underlying post-acquisition profits have already been included.

Authority. AS 21, para 16; AS 13, para 8; Study Material, Chapter 10, Section 1.11(B)

Question 11 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What amount of the ₹15 lakh dividend paid by NPL represents a distribution to outside shareholders that is not eliminated as an intragroup transaction?

1. ₹12 lakh
2. ₹3 lakh (correct answer)
3. ₹4.80 lakh
4. ₹7.20 lakh

Answer: B — ₹3 lakh

Explanation. VCL owns 80% of NPL, so outside shareholders own 20%. Their entitlement to the ₹15 lakh dividend is ₹15 lakh × 20% = ₹3 lakh. VCL's own entitlement of ₹12 lakh is an intragroup distribution and is eliminated or adjusted according to its pre- and post-acquisition source. The ₹3 lakh paid to outside shareholders is not an intragroup transaction and remains a distribution attributable to non-controlling shareholders.

Where it goes wrong. Eliminating the entire subsidiary dividend, including the amount distributed to shareholders outside the group.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Sections 1.12 and 1.14(C)

Question 12 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is the appropriate treatment of NPL's further proposed dividend of ₹8 lakh recommended by its board on 10 April 2027 in the consolidated financial statements as at 31 March 2027?

1. Do not recognise a dividend payable or receivable at 31 March; disclose the subsequent dividend proposal as required. (correct answer)
2. Recognise a dividend payable of ₹8 lakh and a receivable of ₹6.40 lakh in the consolidated balance sheet.
3. Recognise a dividend payable of ₹6.40 lakh and eliminate it against the parent's investment account.
4. Recognise a dividend expense of ₹8 lakh and allocate 20% to non-controlling shareholders.

Answer: A — Do not recognise a dividend payable or receivable at 31 March; disclose the subsequent dividend proposal as required.

Explanation. The additional dividend was recommended only on 10 April 2027, after the reporting date. It was subject to shareholder approval and no dividend liability or payable was recognised in NPL's 31 March financial statements. Under AS 4, a dividend proposed or declared after the reporting period but before approval of financial statements is not recognised as a liability at the reporting date; the required disclosure is made. Consequently, no corresponding intragroup dividend receivable or payable arises for elimination at 31 March.

Where it goes wrong. Recognising a subsequent proposed dividend as a liability and receivable in the reporting-period balance sheet.

Authority. AS 4, para 8; AS 21, para 16; Section 123, Companies Act, 2013

Question 13 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Parent Ltd. has recorded trade receivables of ₹50 lakh from its subsidiary. The subsidiary has recorded the corresponding trade payable of ₹40 lakh after remitting ₹10 lakh on 30 March 2027. The parent received the remittance in its bank account on 2 April 2027 and has not yet recorded it. What adjustment is required while preparing consolidated financial statements as at 31 March 2027?

Parent Ltd. has recorded trade receivables of ₹50 lakh from its subsidiary. The subsidiary has recorded the corresponding trade payable of ₹40 lakh after remitting ₹10 lakh on 30 March 2027. The parent received the remittance in its bank account on 2 April 2027 and has not yet recorded it. What adjustment is required while preparing consolidated financial statements as at 31 March 2027?

1. Recognise ₹40 lakh as cash in transit and eliminate ₹10 lakh of reciprocal balances.
2. Recognise ₹50 lakh as cash in transit and eliminate ₹40 lakh of reciprocal balances.
3. Recognise ₹10 lakh as cash in transit and eliminate ₹40 lakh of reciprocal balances. (correct answer)
4. Recognise ₹10 lakh as an expense and eliminate ₹50 lakh of reciprocal balances.

Answer: C — Recognise ₹10 lakh as cash in transit and eliminate ₹40 lakh of reciprocal balances.

Explanation. The subsidiary has already reduced its payable by ₹10 lakh through remittance, but the parent has not recorded the receipt. The consolidated statements must therefore recognise ₹10 lakh as cash in transit by reducing the parent's receivable by that amount. The remaining reciprocal receivable and payable are ₹40 lakh each and are eliminated. The ₹50 lakh option incorrectly treats the whole balance as a remittance rather than distinguishing the actual outstanding amount.

Where it goes wrong. Ignoring cash in transit and attempting to eliminate unequal reciprocal balances without first reconciling them.

Authority. AS 21, para 16; Study Material, Chapter 10, Section 1.14(C)

Question 14 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Holding Ltd. owns 80% of Subsidiary Ltd. Holding Ltd. sold goods to Subsidiary Ltd. for ₹150 lakh at a profit margin of 30% on selling price. At the year-end, 40% of the goods remained unsold in the subsidiary's inventory. Determine the unrealised profit to be eliminated.

Holding Ltd. owns 80% of Subsidiary Ltd. Holding Ltd. sold goods to Subsidiary Ltd. for ₹150 lakh at a profit margin of 30% on selling price. At the year-end, 40% of the goods remained unsold in the subsidiary's inventory. Determine the unrealised profit to be eliminated.

1. ₹18 lakh (correct answer)
2. ₹15 lakh
3. ₹24 lakh
4. ₹30 lakh

Answer: A — ₹18 lakh

Explanation. The transfer price is ₹150 lakh and the profit margin is 30% on selling price. Total profit on the transaction is ₹150 lakh × 30% = ₹45 lakh. Since 40% of the goods remain unsold, unrealised profit is ₹45 lakh × 40% = ₹18 lakh. This entire amount is eliminated from inventory and consolidated profit because the transaction is downstream. The parent's 80% shareholding does not reduce the required elimination to 80%.

Where it goes wrong. Using 30% as a mark-up on cost instead of the stated profit margin on selling price, or applying the parent's ownership percentage.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 15 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Parent Ltd. holds 75% of Subsidiary Ltd. Subsidiary Ltd. sold goods costing ₹120 lakh to Parent Ltd. at a profit of 20% on cost. Half of the goods remained in Parent Ltd.'s closing inventory at transfer price. What amount should be deducted from minority interest because of the upstream unrealised profit?

Parent Ltd. holds 75% of Subsidiary Ltd. Subsidiary Ltd. sold goods costing ₹120 lakh to Parent Ltd. at a profit of 20% on cost. Half of the goods remained in Parent Ltd.'s closing inventory at transfer price. What amount should be deducted from minority interest because of the upstream unrealised profit?

1. ₹2 lakh
2. ₹9 lakh
3. ₹12 lakh
4. ₹3 lakh (correct answer)

Answer: D — ₹3 lakh

Explanation. Subsidiary's total profit is ₹120 lakh × 20% = ₹24 lakh. Half the goods remain unsold, so unrealised profit is ₹12 lakh. The minority interest is 25%, and the amount attributable to minority shareholders is ₹12 lakh × 25% = ₹3 lakh. The entire ₹12 lakh is deducted from closing inventory, while the profit elimination is allocated between parent and minority interests. Deducting ₹12 lakh from minority interest would incorrectly ignore ownership proportions.

Where it goes wrong. Deducting the entire upstream unrealised profit from minority interest instead of only the minority's proportionate share.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 16 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. A holding company sells goods costing ₹90 lakh to its wholly owned subsidiary for ₹120 lakh. Before 31 March 2027, the subsidiary sells the entire consignment to independent customers for ₹145 lakh. What is the unrealised profit on this transfer that remains to be eliminated from closing inventory?

A holding company sells goods costing ₹90 lakh to its wholly owned subsidiary for ₹120 lakh. Before 31 March 2027, the subsidiary sells the entire consignment to independent customers for ₹145 lakh. What is the unrealised profit on this transfer that remains to be eliminated from closing inventory?

1. ₹30 lakh
2. Nil (correct answer)
3. ₹25 lakh
4. ₹12 lakh

Answer: B — Nil

Explanation. The holding company earned a separate profit of ₹30 lakh on the internal transfer. However, the subsidiary sold all goods to external customers before the reporting date. The goods have therefore left the group, and the profit has been realised through an external sale. The internal sales and purchase are eliminated from consolidated revenue and expenses, but no unrealised profit remains in closing inventory. Retaining a ₹30 lakh adjustment would incorrectly defer profit already realised by the group.

Where it goes wrong. Eliminating the entire internal profit even though the goods were sold to external customers before year-end.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 17 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A subsidiary in which the holding company owns 70% sells a machine to the holding company for ₹30 lakh. Its carrying amount immediately before the transfer was ₹24 lakh. The remaining useful life is three years, with no residual value. The transfer took place on 1 October 2026, and the holding company charges straight-line depreciation. What amount of the unrealised profit remaining at 31 March 2027 is attributable to minority shareholders?

A subsidiary in which the holding company owns 70% sells a machine to the holding company for ₹30 lakh. Its carrying amount immediately before the transfer was ₹24 lakh. The remaining useful life is three years, with no residual value. The transfer took place on 1 October 2026, and the holding company charges straight-line depreciation. What amount of the unrealised profit remaining at 31 March 2027 is attributable to minority shareholders?

1. ₹1.20 lakh
2. ₹6 lakh
3. ₹1.50 lakh (correct answer)
4. ₹1.80 lakh

Answer: C — ₹1.50 lakh

Explanation. The subsidiary's transfer profit is ₹30 lakh − ₹24 lakh = ₹6 lakh. Depreciation charged by the holding company is ₹30 lakh ÷ 3 × 6/12 = ₹5 lakh, while depreciation on the original group carrying amount would be ₹24 lakh ÷ 3 × 6/12 = ₹4 lakh. Excess depreciation of ₹1 lakh reduces the remaining unrealised profit to ₹5 lakh. Minority shareholders own 30%, so their share is ₹5 lakh × 30% = ₹1.50 lakh.

Where it goes wrong. Calculating minority interest on the original unrealised profit without adjusting for excess depreciation in an upstream fixed-asset transfer.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 18 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A holding company sold equipment to its subsidiary for ₹50 lakh on 1 October 2026. Its carrying amount immediately before transfer was ₹42 lakh, and its remaining useful life was four years. At 31 March 2027, the subsidiary has charged six months' depreciation on the transfer price. What is the correct reduction in the carrying amount of equipment required in the consolidated balance sheet?

A holding company sold equipment to its subsidiary for ₹50 lakh on 1 October 2026. Its carrying amount immediately before transfer was ₹42 lakh, and its remaining useful life was four years. At 31 March 2027, the subsidiary has charged six months' depreciation on the transfer price. What is the correct reduction in the carrying amount of equipment required in the consolidated balance sheet?

1. ₹7 lakh (correct answer)
2. ₹8 lakh
3. ₹6 lakh
4. ₹9 lakh

Answer: A — ₹7 lakh

Explanation. The transfer profit is ₹50 lakh − ₹42 lakh = ₹8 lakh. Depreciation on the transfer price for six months is ₹50 lakh ÷ 4 × 6/12 = ₹6.25 lakh. Correct group depreciation is ₹42 lakh ÷ 4 × 6/12 = ₹5.25 lakh. Excess depreciation is ₹1 lakh, leaving an unrealised profit embedded in closing PPE of ₹8 lakh − ₹1 lakh = ₹7 lakh. This entire amount is eliminated because the transaction is downstream.

Where it goes wrong. Reducing PPE by the original transfer gain without first reversing excess depreciation.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 19 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Parent Ltd. has the following balances against its subsidiary at 31 March 2027: trade receivables ₹16 lakh, bills receivable ₹5 lakh, loan receivable ₹30 lakh and accrued interest receivable ₹1.50 lakh. The subsidiary has recorded precisely matching trade payables, bills payable, loan payable and interest payable. What is the total amount of reciprocal assets and liabilities to be eliminated?

Parent Ltd. has the following balances against its subsidiary at 31 March 2027: trade receivables ₹16 lakh, bills receivable ₹5 lakh, loan receivable ₹30 lakh and accrued interest receivable ₹1.50 lakh. The subsidiary has recorded precisely matching trade payables, bills payable, loan payable and interest payable. What is the total amount of reciprocal assets and liabilities to be eliminated?

1. ₹51 lakh
2. ₹52.50 lakh (correct answer)
3. ₹50 lakh
4. ₹46 lakh

Answer: B — ₹52.50 lakh

Explanation. All four balances are reciprocal balances between two members of the same group. Their total is ₹16 lakh + ₹5 lakh + ₹30 lakh + ₹1.50 lakh = ₹52.50 lakh. Therefore, ₹52.50 lakh of assets and an equal ₹52.50 lakh of liabilities must be eliminated. The ₹51 lakh alternative omits accrued interest, which is also an intragroup balance. The loan principal cannot be netted against accrued interest or omitted simply because it is a non-current item.

Where it goes wrong. Eliminating only trade balances and loan principal while overlooking bills and accrued interest.

Authority. AS 21, para 16; Study Material, Chapter 10, Section 1.14(C)

Question 20 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A subsidiary sold goods costing ₹100 lakh to its holding company for ₹90 lakh. The entire consignment remained unsold at 31 March 2027. Its net realisable value on that date was estimated at ₹108 lakh. What consolidation adjustment is appropriate for the unrealised loss?

A subsidiary sold goods costing ₹100 lakh to its holding company for ₹90 lakh. The entire consignment remained unsold at 31 March 2027. Its net realisable value on that date was estimated at ₹108 lakh. What consolidation adjustment is appropriate for the unrealised loss?

1. Retain the entire ₹10 lakh loss because the subsidiary has recorded it in its books.
2. Recognise an additional loss of ₹8 lakh because NRV exceeds transfer price.
3. Ignore the transaction and retain inventory at ₹90 lakh.
4. Reverse the ₹10 lakh unrealised loss and restore inventory to the group's cost of ₹100 lakh. (correct answer)

Answer: D — Reverse the ₹10 lakh unrealised loss and restore inventory to the group's cost of ₹100 lakh.

Explanation. The subsidiary recorded an internal loss of ₹100 lakh − ₹90 lakh = ₹10 lakh. Since the goods remain within the group, the group has not incurred this internal loss. Their NRV of ₹108 lakh exceeds the original group cost of ₹100 lakh, confirming recoverability of the original cost. Therefore, the loss is reversed in full and inventory is restored to ₹100 lakh. The reversal would not be appropriate to the extent that the goods' actual cost cannot be recovered.

Where it goes wrong. Automatically retaining an internal loss without examining whether the original cost remains recoverable through the NRV.

Authority. AS 21, paras 16-17; Study Material, Chapter 10, Section 1.14(C)

Question 21 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. An investor acquired 80% of a company's equity shares for ₹40 lakh. After acquisition, it received a dividend of ₹10 lakh that was declared entirely from profits accumulated before the acquisition date. What is the amount of dividend to be credited to the investment account of the holding company?

An investor acquired 80% of a company's equity shares for ₹40 lakh. After acquisition, it received a dividend of ₹10 lakh that was declared entirely from profits accumulated before the acquisition date. What is the amount of dividend to be credited to the investment account of the holding company?

1. ₹10 lakh
2. ₹2 lakh
3. ₹8 lakh (correct answer)
4. Nil

Answer: C — ₹8 lakh

Explanation. The dividend is entirely attributable to pre-acquisition profits and therefore represents a return of part of the acquisition cost rather than income earned after control was obtained. The holding company's share is ₹10 lakh × 80% = ₹8 lakh. This amount is credited to the investment account. The minority shareholders' ₹2 lakh entitlement is not received by the holding company and cannot be credited to its investment account.

Where it goes wrong. Crediting the entire dividend declared by the subsidiary to the holding company's investment account instead of only the parent's entitlement.

Authority. AS 13, para 8; AS 21, para 16; Study Material, Chapter 10, Section 1.11(B)

Question 22 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Parent Ltd. owns 80% of Subsidiary Ltd. After acquisition, Subsidiary Ltd. declared and paid ₹15 lakh as a dividend entirely out of post-acquisition profits. Parent Ltd. correctly credited its share to its standalone profit and loss account. What amount of dividend income should remain in the consolidated statement of profit and loss after eliminating intragroup transactions?

Parent Ltd. owns 80% of Subsidiary Ltd. After acquisition, Subsidiary Ltd. declared and paid ₹15 lakh as a dividend entirely out of post-acquisition profits. Parent Ltd. correctly credited its share to its standalone profit and loss account. What amount of dividend income should remain in the consolidated statement of profit and loss after eliminating intragroup transactions?

1. Nil (correct answer)
2. ₹3 lakh
3. ₹12 lakh
4. ₹15 lakh

Answer: A — Nil

Explanation. Parent Ltd.'s entitlement is ₹15 lakh × 80% = ₹12 lakh, which it has credited to its standalone profit and loss account. This dividend income is entirely an intragroup transaction and must be eliminated in full. The remaining ₹3 lakh was distributed to outside shareholders and is not income of the consolidated group. The consolidated statement of profit and loss therefore contains no income from this internal dividend distribution.

Where it goes wrong. Retaining dividend income from the subsidiary in consolidated profit, even though the subsidiary's underlying earnings are already included.

Authority. AS 21, para 16; AS 13, para 8; Study Material, Chapter 10, Section 1.11(B)

Question 23 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A Ltd. acquired 75% of B Ltd. on 1 September 2026. B Ltd. earned a profit of ₹24 lakh evenly throughout the year ended 31 March 2027. B Ltd. declared a dividend of ₹12 lakh out of the current year's profits, and it is specifically stated that current-year profits were used to fund the distribution. What amount of A Ltd.'s dividend entitlement should be credited to its profit and loss account before consolidation adjustments?

A Ltd. acquired 75% of B Ltd. on 1 September 2026. B Ltd. earned a profit of ₹24 lakh evenly throughout the year ended 31 March 2027. B Ltd. declared a dividend of ₹12 lakh out of the current year's profits, and it is specifically stated that current-year profits were used to fund the distribution. What amount of A Ltd.'s dividend entitlement should be credited to its profit and loss account before consolidation adjustments?

1. ₹3.75 lakh
2. ₹6.00 lakh
3. ₹9.00 lakh
4. ₹5.25 lakh (correct answer)

Answer: D — ₹5.25 lakh

Explanation. A Ltd.'s entitlement to the ₹12 lakh dividend is ₹12 lakh × 75% = ₹9 lakh. The acquisition date is 1 September, so seven months of the year are post-acquisition. Since current-year profits are specifically stated to have funded the dividend, the post-acquisition portion is ₹9 lakh × 7/12 = ₹5.25 lakh. This is initially credited to A Ltd.'s P&L account as post-acquisition dividend income, before eliminating it from consolidated profit as an intragroup distribution.

Where it goes wrong. Treating the entire dividend as post-acquisition income or splitting the dividend using the wrong number of pre- and post-acquisition months.

Authority. AS 13, para 8; AS 21, para 16; Study Material, Chapter 10, Section 1.11(B), Illustration 7

Question 24 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. A subsidiary's board recommends a final dividend after the reporting date but before approval of the financial statements. The dividend is subject to approval by shareholders, and no liability or dividend payable was recorded at the reporting date. How should the dividend be treated in the consolidated financial statements for the year ended 31 March 2027?

A subsidiary's board recommends a final dividend after the reporting date but before approval of the financial statements. The dividend is subject to approval by shareholders, and no liability or dividend payable was recorded at the reporting date. How should the dividend be treated in the consolidated financial statements for the year ended 31 March 2027?

1. Recognise the full dividend as a current liability of the subsidiary.
2. Do not recognise a reporting-date liability; disclose the dividend proposal as required. (correct answer)
3. Recognise the parent's proportionate share as a current receivable.
4. Eliminate the proposed dividend from both reserves and current liabilities.

Answer: B — Do not recognise a reporting-date liability; disclose the dividend proposal as required.

Explanation. A dividend recommended after the reporting date, but before approval of the financial statements, does not create a liability at 31 March when it has not been approved and no payable has been recognised. AS 4 requires disclosure of the proposed dividend rather than recognition as a reporting-date liability. Since no receivable or payable exists at that date, there is no intragroup dividend balance to eliminate under AS 21.

Where it goes wrong. Recognising a dividend recommended after the reporting date as though it had already become an obligation at the balance sheet date.

Authority. AS 4, para 8; AS 21, para 16; Section 123, Companies Act, 2013

Question 25 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Parent Ltd. sold goods to its subsidiary for ₹100 lakh during the year. The subsidiary sold 70% of the goods to external customers before 31 March 2027, while the remaining 30% was held in closing inventory. What amount should be eliminated from both consolidated revenue and the appropriate expense heading on account of the internal sale?

Parent Ltd. sold goods to its subsidiary for ₹100 lakh during the year. The subsidiary sold 70% of the goods to external customers before 31 March 2027, while the remaining 30% was held in closing inventory. What amount should be eliminated from both consolidated revenue and the appropriate expense heading on account of the internal sale?

1. ₹30 lakh
2. ₹70 lakh
3. ₹100 lakh (correct answer)
4. ₹130 lakh

Answer: C — ₹100 lakh

Explanation. The entire internal sale of ₹100 lakh must be eliminated from consolidated revenue and from the corresponding cost of sales or appropriate expense heading, irrespective of whether the subsidiary resold all the goods externally. The 70% resale to external customers affects whether an additional unrealised-profit adjustment is needed for closing inventory, but it does not change the amount of the intragroup sale elimination. The adjustment to revenue and expenses is therefore ₹100 lakh.

Where it goes wrong. Eliminating only the portion of internal goods remaining in closing inventory instead of the entire inter-company sale and corresponding purchase.

Authority. AS 21, para 16; Study Material, Chapter 10, Sections 1.14(C) and 1.15