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Hello, I’ve the following issue.
P acquired 75% of S on 1.10.2002. At 1.4.2002 RE of S were ($4 000) (a loss) and at the year ended 31.3.2003 RE showed a balance of $8 000. At the date of acquisition (1.10.2002) S produced a draft statement of P&L which showed net loss of $2 000 at that date. This figure served as a basis for calculating pre- and post-acquisition split of S’s profit for the year ended 31.3.2003.
Answer says that retained earnings of S at the acquisition day were a loss of $6 000 ($4000 + $2000) and this figure is subtracted from the share capital to arrive at the net assets of S at the acquisition day.
Why? At the day of acquisition the loss was $2 000 so why don’t we simply take this amount as a pre-acquisition RE and then calculate the post -acq RE as a movement: $2 000 plus $8 000. S must have made a $10 000 profit to arrive at $8 000 balance on RE, musn’t it ?Please advise, thank you!
AnnaHi,
It is a mid-year acquisition, and the loss of $2,000 is only the loss since the start of the period and not since the date the subsidiary was incorporated. The cumulative losses are the ones in retained earnings at the start of the year, plus the losses made in the current period.
Thanks
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