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I cannot find anything on how to work out the retained earnings of the subsidiary at the date of acquisition.
there is a question on kaplan which asks for the numbers used to find the retained profit for the subsidiary at the date of acquisition.
– P acquired S (subsidiary) at 1 January 2016
– reported date 31 March 2016
– retained earnings of subsidiary at 31 March 2016 – $1,290,000
– Share capital of subsidiary at 31 March 2016 – $4,800,000
– profit after tax at 31 March 2016 – $240,000the book says the answer to the retained profit of the subsidiary at the point of acquisition is:
1,290,000 – 240,000 + (9/12 x 240,000)
However, the calculation for fair value of net assets of subsidiary at date of acquisition is:
$4,800,000 + $1,290,000 – (3/12 x $240,000) + $1,000,000
Q> why the heck is the same profit after tax of $240,000 multiplied by 9/12 for retained earnings at point of acquisition but 3/12 for fair value of net assets??
Im sure it has something to do with the fact that the acquisiton date and reporting date are different, but i can’t understand the logic behind it. it seems conflicting.
Q>2 why the heck is it for the retained profit, that you minus the profit made, AND then add the apportioned profit amount?
The retained earnings as at 1 January will be the retained earnings as at 31 March 2015 plus the profit made between 31 March 2015 and 1 January 2016.
The retained earnings at 31 March 2015 are equal to the retained earnings at 31 March 2016 (1,290,000) less the profit for the year to 31 March 2016 (240,000). The profit made between 31 March 2015 and 1 January 2016 is 9/12 of the profit for the year to 31 March 2016 of 240,000.
You could, of course, have got the same answer by taking the retained earnings as at 31 March 2016 and subtracting the profit made between 1 January 2018 and 31 March 2016.
1,290,000 – (3/12 x 240,000) = 1,230,000ah thank you! – i managed to somehow figure it out after like 4 hours but your explanation is clearer and makes more sense
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