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Dear sir, please help me understand the following question (Mixed bank 5 – q.33.14 ):
Frog acquired 100% of the ordinary share capital of Toad on 1 October 2017.
On 31 December 2017 retained earnings of Toad and Frog were as follows:
retained earnings on 1 Jan 2017 : Frog – 500.000 , Toad – 100.000
Retained profit for the year ended 31 Dec 2017: Frog – 150.000, Toad- 60.000the profits of toad have accrued evenly throughout 2017
What figure for retained earnings should be included in the consolidated financial statements of th Frog Group at 31 Dec 2017?
Answer:
Per question: Frog 650.000, Toad 160.000-145.000=15.000
Group retained earnings 665.000Frog’s retained earnings were 500,000 at the start of the year, the profit for the year was 150,000, therefore the retained earnings at the end of the year were 650,000.
Similarly, Toad had retained earnings at the end of the year of 100,000 + 60,000 = 160,000.
However Toad was acquired on 1 October which was 9 months through the year. Therefore the pre-acquisition earnings were 100,000 + (9/12 x 60,000) = 145,000.
Therefore the post-acquisition earnings are 160,000 – 145,000 = 15,000.
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