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Equity
Equity shares of $1 each 40,000 20,000
Retained earnings/(losses) – at 1 April 2012 19,200 (4,000)
– for year ended 31 March 2013 7,400 8,000This is from June 2013’s examination.
At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a
net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the
pre- and post-acquisition split of Strata’s profit for the year ended 31 March 2013Equity shares 20,000
Pre-acquisition retained losses:
– at 1 April 2012 (4,000)
– 1 April to 30 September 2012 (2,000)
Fair value adjustment – plant (3,000) (11,000)The retained /losses of (4,000) is being included as part of net asset at acquisition.
Should retained losses be treated as a separate item from retained earnings?Retained earnings is the title given to the accumulation of results for a company since the company was created / incorporated
“Normally” we like to see companies with Retained Earnings that represent a positive accumulation of previous years’ profits, but sometimes life can be cruel to us all, including companies
Recently Strata has fallen on hard times, those accumulated profits have been eroded and Strata is now in a negative retained earnings situation
Is that ok for you now? Or are you concerned about combining Paradigm retained earnings with Strata’s retained losses? No worries – think of the two figures with a common title “accumulated results”
Now you can combine with no concerns
OK?
I think i will use the formula i saw.
Retained/ earnings/losses b/f (opening of the subsidiary) X
Time apportioned earnings X
Any other reserves XThis will be the net assets at acquisition
If it is time apportioned… lets say 2000 profit for the year with 6/12
The parent gave the subsidiary a loan 1000 loan at 5%
Retained earning B/F = 60000Interest element = (5%*1000)*6/12 = 25
True Profits = 2000+ 25 = 2025
Time apportion = 6/12 * 2025 = 1012.50 (Post acquistion profits)
Beginning = 2,000 – 1,012.50 = 987.50 + 60000 B/F = 60,987.50 and that will go next to time apportioned profits b/f?
“Retained/ earnings/losses b/f (opening of the subsidiary) X
Time apportioned earnings X
Any other reserves XThis will be the net assets at acquisition”
Er … NO! This is not the subsidiary net assets at date of acquisition! You appear to have omitted the subsidiary’s share capital
“True Profits = 2000+ 25 = 2025” – ok to here
“Time apportion = 6/12 * 2025 = 1012.50” this too is fine, but then you go wrong
“(Post acquistion profits)” this is wrong!
1,012.50 is the 6 month PRE-acquisition profit and 987.50 is the POST-acquisition element
“60,987.50 and that will go next to time apportioned profits b/f?” (ok, the figure’s wrong) but the figure would go against “Retained earnings” in the working W2 Goodwill calculation
Personally I would show 2 separate lines for Retained earnings …
I would have
Retained Earnings brought forward 60,000
Retained earnings 6 months ((2,000 + 50)/2) 1,012.50You can see how I do it if you watch any one of the many recordings where I have worked through a question from past exams
Hi Mike:
Yes i forgot to add in the SC. I didnt mean to say post acqusition profit… i meant the post acquisition elemet.
What I calculated would have been the amount between acquisition and at the reporting date.
Am i correct?
No, again, sorry
What you originally called “post acquisition profit” and now wish to amend to “post acquisition element” is incorrect
If you look at my response you’ll see that 1,012.50 is in fact the pre-acquisition element of the 2,000 and only 987.50 is the post acquisition element
OK?
ok thanks.
one last question…
If on acquisition, the parent obtains a loan from the subsidiary to finance the purchase, should an adjustment be made on the SOFP for that loan?
I saw a past paper where loan notes were issued for the consideration but an adjustment was not madeIt would be against the law for a company to lend money to enable or encourage someone else to buy that company’s shares
The Guinness scandal from many years ago revolved around a similar situation (Guinness acquiring Distillers (?) and finished up with some high profile people going to prison)
“I saw a past paper where loan notes were issued for the consideration but an adjustment was not made”
The loan notes were not issued to the company being taken over! Those loan notes were issued to the people that were the former shareholders of the victim company
There is no concept of that loan being intra-group
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