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hello sir I have a couple of silly doubts through out this question :
1. sir why is the 25% premium calculated on sale of clubs not the profit?? I mean the value of the club is 6139$ and they expect to pay a 25% on it so will 7674 – 6139 = 1535 not the profit that should be added to the retain earnings? ? why are we seeing the book value of assets when we have the current mv of the clubs using the FCF method.
2. the ‘profit’ of 3879 added to RE in SOFP why is the tax affect not take into account? shouldnt it be 80% of 3879?
3. when calculating the impact on earnings why are we not adding the profit on sale of clubs to the profit to calculate the revised earnings?
also sir Ive also been confused about whether earnings are profit before interest or tax or PAT?thanks alot
1. This is basic financial accounts – not financial management !! The profit on sales of non-current assets is always the difference between the sale proceeds and the book value.
2. Two reasons – one is that the question says the profit on sale should be taken directly to reserves (no mention of tax). When assets are sold, tax is never calculated on the profit on sale – it is capital allowances (a balancing allowance or a balancing charge) and there is no information here about capital allowances.
3. Unless specified otherwise then earnings are always earnings available for shareholders – profit after tax and after interest. The question says that the profit on clubs is to go directly to reserves and therefore does not appear in the SOPL.
thanku for the answer but Im still confused in the first point..what I meant to ask was that we are selling the Eview clubs which are a part of business…so why is the profit on selling a part of business not calculated as expected price to recieve less the current value of the business?
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