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Hi sir.. can u help me out for this question
On 1 April 2000, X, a limited liability Company, paid $120,000 for 48,000 $1 share in Y, another limited liability company, representing 80% of Y’s $60,000 share capital. The retained earnings of Y at that date were $70,000. It is group policy to value NCI at (full) fair value. At 31 march 2005 the retained earnings of the company were:
$
X 180,000
Y 100,000
All goodwill arising has been written off because of impairment.
What figure should appear in the consolidated statement of financial position of the X group at 31 March 2005 for retained earnings?I work it out and got $204,000 but actually the right answer is $188,000
I think there is something to do with the impairment.
Can you explain me how to get the right answer
Thank you…It will be because of the impairment, but either you have not typed out the whole question or the answer is wrong 🙂
The retained earnings (ignoring the impairment for the moment) would be 180,000 + 80% x (100,000 – 70,000) = $204,000.
Any impairment of goodwill reduced the goodwill and also reduces the retained earnings.
So….we need to calculate what the goodwill would have been.
The total worth at the date of acquisition was 120,000 (paid by X) + the fair value of the NCI. Unless the question gave a value of the NCI (and you forgot to type it) you would value it at 20/80 x 120,000 = 30,000. This gives a total of 150,000.
The balance sheet value at the date of acquisition was 60,000 (sh cap) + 70,000 (ret earnings) = 130,000.
This means goodwill was 150000 – 130000 = 20,000.Since the goodwill has been fully impaired (written off), it means retained earnings should be 204,000 – 20,000 = 184,000.
Check that there was nothing else mentioned in the question (such as the fair value of the NCI, or the fair value of the non-current assets at the date of acquisition)
sir i have already checked its not given..The only thing i missed was the answers which are as follows:
A $184,000
B $188,000
C $204,000
D $280,000it means A was the correct answer..The answer i gave was maybe wrong..i have understood your explanation.. u’ve been of great help.. thanks a lot sir..
Sir i’m a bit confused..
For the impairment of goodwill.. why the goodwill is not deducted from the retained earnings as follows:
180,000 + 80% x (100,000 – 70,000 – 20,000) = $188,000.
Can you clear my doubt on this point
Thank you…Sorry – I answered too fast before 🙁
What you have now written is correct (and the other 20% is subtracted from the NCI).Sorry 🙁
Its ok sir.. there is no need to be sorry.. 🙂 and thks now all my doubt about this has been cleared.. thanks a lot for doing such a great job.. may god bless u 🙂
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