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is anyone else having difficulty in working out how they calculate retained earnings in certain questions, i understand using the figure from the SOFP and then apportioning the profit after tax figure for the part acquisition, however i do not get how question 40 has calculated it … can anyone help???
This question gets me very confused too, and I find the answer in the BPP book doesn’t help me much.
The only way I manage to get my brain around this one is to calculate what the retained earnings is at the beginning of the year, then add 3,600 to that figure, to arrive at the pre acquisition retained earnings. Using x to denote the retained earnings at the beginning of the year:
x + 3600 – 3000 = 6300
therefore x = 6300 – 3600 + 3000
x = 5700
5700 + 3600 = 9300 (this is the retained earnings on acquisition)
Now we can subtract 9300 from the retained earnings given in the statement (the same as in the answer) to arrive at post acquisition retained earnings.
Sorry it’s such a long winded way to go about it, but hopefully someone else can suggest a much simpler way of understanding it!
I suppose another way to think of it is this.
To work out the post acquisition retained earnings, you subtract the (present retained earnings minus post acquisition profit) from present retained earnings. If the profit is actually a loss, as in this case, instead of subtracting the post acquisition profit, you add back the post acquisition loss.
It occurred to me just now, that if you’ve worked out goodwill already, then you already have the retained earnings figure at acquisition in the goodwill calculation.
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