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Dear Mike
Hope you are fine.My question seems to be a little silly (and excuse me for that), but that is really confusing me! The question is about ” Disposal of Investment ” and specifically when we want to calculate ” W3A Gain in parent ”. The question is why the formula is like that! Why we do NOT add after acquisition profit of the subsidiary to our investment ?
I think my question is a little vague yet , so let me just clear it for you by referring you to an easy ( but very useful) example!
F7 Course Note,Chapter 6, illustration 2 & 3:
First we : Dr Investment in Gediminas 3000 & Cr cash 3000 . OK. Everything is fine!
BUT! What should we do in the next year ! The Retained earning of Gediminas (the 100% subsidiary) is increased from 2600 to 9600. i.e. it is increased by 7000.
So when we want to make SoFP of Vytautas (not consolidated SoFP) what should we do?!
Dr Investment in Gediminas 7000 & Cr Retained Earnings of parent 7000 ? I know the answer is NO! (The notes says: The investment remains static at historical cost) , but WHY? Why it remains static? We have profit from our investmen !!Thank you in advance
Kind RegardsYes, we do have a profit – but it’s not received. The realisation of that profit would only be recognised where Gediminas pays the profit out by way of dividend and even then the double entry would be debit cash and credit investment income
The post acquisition profit is used and reflected in the consolidated statement only and the investment in the shares on acquisition remains static (as the note says!)
OK?
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