- February 15, 2022 at 2:30 pm #648666Claire91Member
- Topics: 3
- Replies: 0
Hi Tutor and friends,
I am very confused over a question& answer in the BBP practice kits.
The question is very long so I will take a part from the question regarding the part i am getting confused with now.
Below are extracts from the statements of profit or loss for the Perkins group and Perkins Co for the years ending 31 December 20X7 and 20X6 respectively.
20X7(Consolidate ) 20X6 (Perkins Co Individual)
Revenue 46,220 35,714
Cost of sales (23,980) (19,714)
Gross profit 22,240 16,000
Operating expense (3,300) (10,000)
Profit from operations 18,940 6,000
Finance costs (960) (1,700)
Profit before tax 17,980 4,300
The following information is relevant:
On 1 September 20X7, Perkins Co sold all of its shares in Swanson Co, its only subsidiary, for $28.64m. At this date, Swanson Co had net assets of $26.1m.
Perkins Co originally acquired 80% of Swanson Co for $19.2m, when Swanson Co had net assets of $19.8m. Perkins
Co uses the fair value method for valuing the non-controlling interests, which were measured at $4.9m at the date of acquisition. Goodwill in Swanson Co has not been impaired since acquisition.
In order to compare Perkins Co’s results for the years ended 20X6 and 20X7, the results of Swanson Co need to be eliminated from the above consolidated statements of profit or loss for 20X7.
Although Swanson Co was correctly accounted for in the group financial statements for the year ended 31 December 20X7, a gain on disposal of Swanson Co of $9.44m is currently included in operating expenses.
This reflects the gain that should have been shown in Perkins Co’s individual financial statements.
What I’m feeling confused is why in the answer in the BBP practice kit, the gain of $9.44M was added to the operating expense in the statement of P&L for Perkin Co (individual)? Isn’t doing so would make the expense increases and profit goes down? Then how could we say it is a gain then?
Hope someone help~
Thank you,February 20, 2022 at 8:46 am #648944P2-D2Keymaster
- Topics: 4
- Replies: 6460
There is a video recording of this question in the revision section of the videos and this should answer your query. If memory serves me right it is the removal of the gain that has incorrectly been recorded in the accounts.
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