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Hi Mr John…Regarding P and S companies, if I buy Parent company paying worth of capital amount in it , shall I have subsidiary company as well in the end..( I meant P owns 100 shares in S)…
Thank you…Mr John, you replaced investment at cost of 10000 with S’ ingredients…
S company’s capital was 10000 before making profit of 8000…
So the formula Assets-Liabilities=Capital(net assets) doesn’t seem to be working here..
Net assets was 18000 but you replaced this figure with 10000 which is so confusing…If one company owns more than 50% of the other company, then the other company is a subsidiary.
Net assets at the date of acquisition were 10,000. The profits since acquisition are included in the consolidated retained earning.
Ok…But since it bought another company, subsidiary company’s net assets have increased to 18000 from 10000 which gives us the impression of revaluation of our Investment asset..
And then you prepared consolidation giving us 6000 more than expected at 54000 instead of 48000…
( Investment was the capital amount of subsidiary before making profit , if subsidiary makes a profit of 8000 I think parent company’s net assets should rise by 8000 )
Thanks…Revaluation????
For any business, the value of its net assets will increase over time as the business makes profit. There is no revaluation of anything (otherwise there would be a revaluation reserve).
The financial statements of the parent company are not affected at all by consolidating – they stay exactly as they are given in the question.
The consolidated statement of financial position is an additional statement that is produced for the whole group – treating it as if it is one big company. In the consolidated statement, the retained earnings attributable to the shareholders of the parent company are all of those of the parent plus the parent’s share of the retained earnings of the subsidiary since acquisition (the post-acquisition profits).
Many thanks for clear explanation..
On page 117, example 2 , you calculated post acquisition earning like (16,000-6000)*60%.
I found it very confusing because 6000 isn’t total retain earning when P bought S but earning belonged to P… I mean 16000 is total but 6000 isn’t.
Thank youI am sorry – it is a typing error. I will have it corrected immediately.
The first line of the question should read “……when the retained earnings of S stood at $6,000.”
Thank you for noticing it.
Hi Mr John…
Like you said, parent company isn’t affected at all by consolidating so if investment cost doesn’t change then Should I only pay net assets worth of money of P company in order to buy P and S? (If I own 100% shares of S).
But in fact over a period of time , S has managed to generate some profits (retained earnings)
promoting an increase in net assets of S which will not equal to our investment cost in the end…
Thank you….Although that is true, it does not affect the statements of P on its own – the investment remains at the original cost.
It is only in the consolidated statement that we show the true position and bring in the post-acquisition retained earning of the subsidiary.
we only want to show receivables and payables from outside the group – we do not want to include receivables and payables between the parent and subsidiary
…Hi Mr John…The question is why not..
As long as S sells all the goods bought from P….
Thank youHi Mr John…
I came across a question about consolidated statement including dividend in Parent company’s P and L, and as a liability in both P and Sub companies SOFP…(The question is
I don’t know how to deal with them…
It would be great if you gave some direction….
Thank you…
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