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Hi there
When doing a practice question for a consolidated SFP, I have been given the retained earnings figure at reporting but not the retained earnings figure at acquisition (mid year).
I’m thinking that perhaps the retained earnings figure at acquisition is the reporting figure less any inter company transactions?
What things should i look out for in the question to help me get to this figure?
Any help would be appreciated.
Thanks
Nick
for acquisition we mostly follow equity method..
share capital
share premium
retained earnings
fair value adjustments…add them and take share these net assets…
at reporting date we take share in post aquisition profits of subsidiary also and then adjust with entries we passed in adjustments…
okay thanks for the response.
The example below is the question being asked:
Can you check my solution?
P owns 75% of S
Aquired on 01.07.08
Reporting 31.12.08Net assets of subsidiary
At Reporting: 31.12.08
Ordinary Share £4,000
Retained Earnings £8,800Net Assets of subsidiary at acquistion: (no figure given in question so taken % and time apportioned??)
Ordinary Share
(4,000 *75%/12*6 £1,500.00)
(8,800*75%/12*6 £3,300.00)So the net assets at acquistion are £4,800 and at reporting £12,800???
Quite a large leap?
hey..
ordinary shares remain same unless any info given in question about issue of new shares..deduct 6 months profit from subsidiary’s retained earning at reporting date…
add all figures then take share of total figure
okay thanks for that.
Yes on the shares front that is obvious and should have instantly remembered that!At the risk of sounding totally stupid, when you say deduct 6 months profit, from reatined earnings, as i only have the one figure do i just apportion this?
As in retained earnings at acquisition would be £8,800 x 50%? (£8,800/12*6) which would make £4,400Thanks
If the entity was acquired during an accounting period the six months will have to be deducted as it serves as part of the pre-acquisiton profits. Am I right?
@cuteleo110 said:
hey..
ordinary shares remain same unless any info given in question about issue of new shares..deduct 6 months profit from subsidiary’s retained earning at reporting date…
add all figures then take share of total figure
I prefer to take the retained earnings brought forward and add to that the ( say ) 6 months of pre-acquisition profits this year. You CAN do it by taking closing retained earnings and deducting the ( say ) 6 months of post acquisition this year to get back to the position as at date of acquisition.
In your question, can I assume that the subsidiary has just been incorporated – as at the start of this year? Otherwise, your method of halving 8,800 will give you a wrong answer. There must be somewhere in the question an indication of what this year’s profits are.
If so, take 100% of the S profits / retained earnings brought forward + 6 months of this year’s profits. That will give you retained earnings as at date of acquisition
Hope that helps
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“take 100% of the S profits / retained earnings brought forward + 6 months of this year’s profits. That will give you retained earnings as at date of acquisition” – is just the perfect answer.
in mathematical notion it would be –
retained earning of susidiary, at the date of acquisition
= retained earning of susidiary, at reporting date – subsidiary’s profit for the yr, (to be obtained from I/S) X no of months since acquisition/12.
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