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I have problem solving the question 41 in BPP practice book.
Angel bought 70% shares of Shane on 1 June 2016 when Shane’s retained earning stood at 10,000. In 1 June 2018, Angel sold half of the shares in Shane for 120,000 when its fair value stood at 130,000. The ending equity of both company from FS as follow:
Share capital 500,000 100,000
retained reserves 400,000 90,000
Total comprehensive 70,000 18,000
income for 2018
Year ended at 31 Dec 2018.
group profit on disposal of Shane:
FV of consideration received 120,000
FV of 35% investment retained 130,000
less share of carrying value when control lost 181,000 ( 190,000- 18,000*6/12)
I don’t understand why carrying value when control is lost did not exclude 10,000 retained earning bf so that it would be 190,000- 18,000*6/12- 10,000?
You’re getting the carrying value and post acquisition reserves confused it appears. The carrying value is the value of the net assets in the SFP at the date of the disposal, hence there is no need to deduct the retained earnings at the acquisition date. They have calculated the carrying value by taking the net assets at the reporting date and deducting the profits for the six months back to the date of disposal.
We would only deduct the retained earning at the acquisition date if we were trying to find the post acquisition retained earnings.