Associates

I’m not a big fan of the Kaplan approach to determine the post-acquisition retained profits, but here’s the explanation of the figures they have used and that have caused you some degree of confusion.

The net assets at 30 November, according to the question, are 250 share capital + 1,200 retained earnings giving us an aggregate for net assets / shareholders’ equity of $1,450.

Now we need to deduct the net assets / shareholders’ equity that existed at the date of acquisition.

That comprised: share capital $250, retained earnings brought forward at 1 December 2006 $600 ( that’s 1,200 today less the 600 achieved this year) and the three months of this year’s profits achieved by A in the three months before P acquired the 30% (3/12 x 600). So aggregate shareholders’ equity in A as at date of acquisition is 250 + 600 + 150 and that gives you the $1,000 in Kaplan’s Working 5

All clear?

You’re welcome