Dispoals- Groups – BPP f2 question pack.

Hi Chris.

Another disposal question!

On I July 20X1, SP acquired 75% of the 1 million ordinary shares in MN for $6 million. Goodwill of $1 million arose on the acquisition. SP measures non-controlling interests at acquisition at their proportionate share of the subsidiary’s net assets.

On 31 December 20X8, SP disposed of part of its shareholding in MN for $4 million, retaining a 40% interest. The net assets of MN on 1 July 20X8 were $8.5 million and MN made a profit of $800,000 in the year ended 30 June 20X9 (no dividends were paid or declared by MN in that year). As at 31 December 20X8 the fair value
of a share in MN was $10.10.

Non-controlling interests in MN at 31 December 20X8 amounted to $2.225 million.
What is the profit or loss on disposal that will be included in the consolidated statement of profit or loss of SP for the year ended 30 June 20X9?

A $3,675,000 loss
B $365,000 profit
C $615,000 profit
D $1,365,000 profit

Solution

Ok- so we initially had 75%- subsidiary and we disposed of half.. retaining an interest of 40% so it is a subsidiary to associate change in control.

the gain/ loss on dispoal:

Sale proceeds: 4000
FV value of remaining consideration= 40%*1.10*1M= 4040
Total investment= 8040

Less:
Net assets @ disposal= SC(8.5M)+ Profit(800k)= ?????
Goddwill@ disposal= 1m
NCI @ Disposal 2.225m

in the solution the answers take 6/12th of profit= 6/12*800…whereas I have just taken the full 800…… the questions says

“The net assets of MN on 1 July 20X8 were $8.5 million and MN made a profit of $800,000 in the year ended 30 June 20X9 (no dividends were paid or declared by MN in that year”

which makes me think that the profit is in the month 1st July x8. and Month end is 30th June 20×9.. So from 1st July x8 to 30th June x9 is 12 months.. so why do we take 6/12th of the profit figure?

Thanks

Abi