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Found this question in the revision kit, i am not quite sure how they got the answer or perhaps the dates are incorrect, its as if the subsidiary was disposed before acquisition, could you assist please
On I January 20X8, Lentil Co acquired all of Chickpea Co’s 100,000 $1 shares for $400,000. The goodwill acquired in the business combination was $60,000, of which 40% had been written off as impaired by 31 December 20X8. On 31 December 20X5 Lentil Co sold all of Chickpea Co’s shares for $680,000 when Chickpea Co had retained earnings of $215,000.
What is the profit on disposal that should be included in the individual entity financial statements of Lentil Co?
Hi,
The profit in the individual financial statements is simply the proceeds less the initial cost of the investment. So here the profit should be $280,000 (=$680,000 – $400,000).
Thanks
Be careful not to get the profit in the individual account (based on legal form) and the profit in the group accounts (based on substance) confused. In the individual accounts we just have proceeds less the value of the investment disposed of, there is no goodwill in the individual accounts.
In the group accounts, the proceeds are compared against the assets (including goodwill) and liabilities disposed of.
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