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Hi,
Please could you advise on the answer to this part of the exam question:
‘Guidance Co purchased a 25% interest in an associate co in 1 July 2016 for cash. The investment has cost 15 million and the associate had profits of 32 million in the year 31 Dec 16. Guidance co accounted for the purchase of the associate correctly.’
The question asks us to recalculate ROE by removing the associate from the year end figures of Guidance Co. The answer is as follows:
Net profit before tax: reduced by 4
Equity: reduced by 4
There is no adjustment in assets. I understand that the original 15 does not need to be adjusted in assets as the cash is replaced by the investment. However, I thought that 4 should be removed from assets to remove the profit of the associate? Wouldn’t the investment be showing as 19 at year end?
Please could you explain why I didn’t need to do that?
Many thanks
Sarah
Not sure I understand your question
If they ask for return on equity, you should reduce profit and reduce equity
Why are you thinking about assets?
Please come back to me
Hi,
For this question, I could not understand why there is a reduction of $4m in Equity, what is the equity item? Shouldn’t it be
Share of profits of associate $4m – relevant to NPBT
Investment in associate $4m – relevant to assetThank you.
If you remove profits of 4, you will automatically remove equity of 4, as profits form part of retained earnings which in turn forms part of equity.
Hi, Sir.
I would like to know, how does the Net PBT and equity be minus 4?Is it due to profit of $32m x 25% of interest = $8m in an associate?
The adjustment to both is (4)
That is 6/12 of 25% of 32 – the change is in the middle of the year
If you haven’t please watch my debrief in our online revision kit
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