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Wellington owns 30% of Boot, which it purchased on 1 May 20X7 for $2.5 million. At that date Boot had retained earnings of $5.3 million. At the year end date of 31 October 20X7 Boot had retained earnings of $6.4 million after paying out a dividend of $1 million. On 30 September 20X7 Wellington sold $700,000 of goods to Boot, on which it made 30% profit. Boot had resold none of these goods by 31 October. At what amount will Wellington record its investment in Boot in its consolidated statement of financial position at 31 October 20X7?
Answer
Cost of investment 2,500
Share of post-acquisition profit 330
(6,400 – 5,300) × 30%)
PURP (63)
(700 × 30% ×30%)
= 2767My question is why did they ignore the dividend payment of $1million?
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They did not ignore it. Retained earinings is the amount of net income after paying out any dividend so in this case the RE AFTER paying the dividend is 6.4M and this amount has been taken into account to calculate the Investment to be shown in the consolidated statements.
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