Deemed Disposal Of A Subsidiary

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Deemed Disposal Of A Subsidiary - Muhammad Amir - 04-29-2008

Dear Mr KamranACA,

I am facing difficulty in caculating "Carrying Amount Of Investment in Associate" on deemed dsposal topic

Relevant Extracts of Financial Statements are here.

The Balance Sheet Of A and B Ltd for the year ended 31 December 2004 are as follows.

B LTD-

Ordinary Share Capital($1 Each)==>$300,000
Share Premium==============>$170,000
Acumulated Profits===========>$320,000

Brought Forward Profits For B Ltd at 1 January 2004 were $200,000
Profits For The Year Ended 31 Decmber 2004 are $120,000(Profits Are Deemed To Accrue Evenly Through Out The Year)

Notes-

A Ltd Acquired 60% Ordinary Shares Of 'B Ltd' on July 1, 2002 at cost $406,000, when reserves of 'B Ltd' were $120,000.

Included in the tangible assets of 'B' is a piece of land whose fair value exceeded the book value by $30,000 at the time of Acquisition.

On October 1, 2004 "B Ltd" made a right issue of 100,000 Ordinary Shares at a premium of $1.5 per shar. A Ltd decided not to subscribe for right issue.

In November "B Ltd" sold goods to A Ltd at an invoice price of $15,000. The Original cost of these goods were $12,000, 60% of these goods are in A's stock at the balance sheet date.

Solution-

At the balance sheet date Ordinary share capital is $300,000 this also includes right issue so before the rights issue the balance in Ordinary share account will be $200,000 and Share premium Account will be $120,000.

respective entry at the time of right issue will be.

DRCash======>$150,000
CRShare Capital===>$100,000
CRShare Premiun===>$50,000

previously entity A held 60% holding of 200,000shares(i.e. 120,000 shares), now it holds 120,000shares/300,000 shares i.e. 40% so holding of A reduced from 60% to 40% and its control has lost now B is an associate of A.

In November Entity "B" is Associate so the intra group entry will be.

DRReserves======>$ 720
CRInvestment In 'B'===>$720

Calculation Of Good Will-

Cost Of Investment==============>$406,000
LessShare in Fair Value Of Net Assets-
Share Capital=>$200,000
Share Premium=>$120,000
Retained Earnings=>$120,000
Fair Value Adjustment=>$30,000
______________________________
Total============>$470,000*60%==>($282,000)
_____________________________________________
Goodwill======================>$124,000

Now if i have calculated the above things correct then Gain On Deem Disposal is calculated as follows-

Share In Fair Value Of Net Assets Just Before The Right Issue==>[200(Share Capital)+120(Premium)+200(Reserves b/fwd)+90(Current Year Profits till October)]==>$610*60%==>$366.

Share In Fair Value Of Net Assets Just After The Right Issue==>[300(Share Capital)+170(Premium)+200(Reserves b/fwd)+90(Current Year Profits till October)]==>$760*40%==>$304.

Loss On Disposal======>(366-304)=====>($62)

Less Goodwill Disposed=>($124/60*40)==>($82.67)
____________________________________________

Net Loss On Disposal==============>($144,67)

Now B Ltd becomes an associate, so we have to calculate Its Carrying Amount.

There are two methods of it.

In Method#1 we take the fair value of net assets at B/S date apply our Associate's holding percentage and then add UmImpaired Good will.

In Method#2 we take cost of Investment in Subsidiaty and convert it in to Associate's holding(i.e. 406/60*40=>270.67) then we add our associate's share in post acquisition reserves and then we less Impaired Goodwill on our investment.

Can you please provide me the calculations of Carrying Amount Of Investment In Associate as per both methods, unfortunately i am not having a solution of this question, although i have calculated it using both methods but my answers are defferent from both methods.

I am waiting for your quick reply and please also check above calculations that whether they are correct.

Regards,

Muhammad Amir

- Muhammad Amir - 05-01-2008

It seems as this question is too difficult to answer.

- Zikria Yamin - 05-02-2008

Dear Amir Bhai,
I posted a Concept and asked to make correction to it. Under the Heading " Make Correction to this concept" but no body inteded to reply. Please Brother Check it and reply me.

Thanks

- kamranACA - 05-02-2008

Dear Amir,

It's Jumma Prayer's time and I just saw your message. You will get my comments soon.

Regards,

Kamran.

- kamranACA - 05-02-2008

Dear Amir,

The question posted by you is basically not a question becoz you have not mentioned the requirement after posting the relevant data.

As far as your calculations of good will are concerned I have certain resrevations on it.

1. The question suggests that the right issue currently made will give premium of 1.5 $ per share while the share's face value is 1 $ each. In your solution you have deemed that 1.5$ is the total proceed. In my view the current buildup of share preminum should be 150,000 $ on issuance of 100,000 shares while the opening balance of this account would be merely 20,000 $.

2. The question speaks about the pre-acquisition reserves at 120,000$ (on 30 June 2002). Basically the term "reserves" includes both share premium as well as accumulated profits. I don't know how you deemed that Accumulated profit of 120,000$ was available pre-acquisition. As pointed out in 1 above, share premium before the current right issue should be 20,000$ and as the reserves include both share premium as well as accumulated profits, out of pre acquisition reserves of 120,000, the amount of 20,000$ should be the share premium and 100,000$ should be the amount of accumulated profit.

In my view taking 120,000$ as share premium and again 120,000 as accumulated profit/reserve is not a correct treatment. Instead only 120,000$ should be taken as pre acquistion reserves i.e. 20000$ share premium and 100000$ as accumulated profits.

For calculating good will, you will deduct 60% of

Share capital at 200,000$
Share permium at 20,000$
Accumulated profits 100,000$; and
Fair value adjustment 30,000$

By taking these figure, you please re-work your question. We will discuss further, if this will not help you.

Further, also give the complete text of the question so that nothing should be misconstrued.

Regards,

KAMRAN

- Muhammad Amir - 05-03-2008

Thanks for your reply, Let me calculate first then i will know afterwards.

- Muhammad Amir - 05-03-2008

Dear Mr KamranACA,

This was the only requirement

I am facing difficulty in caculating "Carrying Amount Of Investment in Associate" on deemed dsposal topic.

I am sorry to disturb you again.

I have taken your considerations to compute cost of Investment in Associate but i am still unable to calculate correct value.

Anyway, here is the full fledge question-

The Balance Sheets and Profit and Loss accounts of A Ltd and B ltd for the year ended 31 december 2004 are set below.

BALANCE SHEET-

========================A Ltd===========B Ltd
==========================$==============$===
=Investment at Cost====406,000===============
=Non current assets====350,000========470,000
=Stocks================60,000=========55,000
=Debtors===============40,000=========145,000
=Cash and Bank=========150,000========170,000
_____________________________________________
======================1,006,000=======840,000
_____________________________________________

O.Share Capital($1)===300,000=========300,000
Share Premium=========================170,000
Accumulated Profits===606,000=========320,000
Trade Creditors=======100,000=========50,000
_____________________________________________
======================1006,000========840,000
_____________________________________________

PROFIT AND LOSS ACCOUNT-

========================A Ltd===========B Ltd
==========================$==============$===
Sales==================800,000========600,000
Cost Of Sales==========450,000========410,000
_____________________________________________
Gross Profit===========350,000========190,000
Selling Expenses=======98,000=========50,000
_____________________________________________
Profit Before Tax======252,000========140,000
Taxation===============26,000=========20,000
_____________________________________________
Profit After Tax=======226,000========120,000
Dividends==============(60,000)==============
_____________________________________________
Profit for year========166,000======120,000
Profits b/fwd==========440,000======200,000
_____________________________________________
Profits c/fwd==========606,000======320,000
_____________________________________________

Notes-

-A Ltd Acquired 60% Ordinary Shares Of 'B Ltd' on July 1, 2002 at cost $406,000, when reserves of 'B Ltd' were $120,000.

-Included in the tangible assets of 'B' is a piece of land whose fair value exceeded the book value by $30,000 at the time of Acquisition.

-On October 1, 2004 "B Ltd" made a right issue of 100,000 Ordinary Shares at a premium of $1.5 per shar. A Ltd decided not to subscribe

for right issue.

-In November "B Ltd" sold goods to A Ltd at an invoice price of $15,000. The Original cost of these goods were $12,000, 60% of these goods are in A's stock at the balance sheet date.

I am facing difficulty in calculating the remaining "Carrying Amount Of Investment in Associate".

I am once again sorry to disturb you but this is the only source from where i can get answer because i have left my tuition provider because he is wasting our important time.

I hope to receive answer soon.

Regards,

Muhammad Amir

- kamranACA - 05-05-2008

Dear,

Hopefully you will get the reply soon.

Regards,

KAMRAN.

- kamranACA - 05-07-2008

Dear Amir,

Please get the answer to your query given hereunder

The Balance Sheets of A Ltd for the year ended 31 December 2004 is set below.

BALANCE SHEET-

A Ltd

Investment (W-1) 519,280
Non current assets 350,000
Stocks 60,000
Debtors 40,000
Cash and Bank 150,000
__________________________________________________
1,119,280

O.Share Capital($1) 300,000
Share Premium -
Accumulated Profits (W-2) 719,280
Trade Creditors 100,000
__________________________________________________
1,119,280
__________________________________________________

Working 1

METHOD I

Share in Net Asset of associate as B/S date(W-1.1) 324,000
Add
Un-impaired value of Goodwill (406,000 - 210,000) 196,000
Less
Eliminitation of unrealised profit (W-1.3) (720)
________________________________________________________
519,280
________________________________________________________

Working 1.1

Share in Net Asset of associate as B/S date

Share in pre-acquisition capital and reserves (W-1.1.1) 210,000
Share in post acquisition profit (W-1.2) 114,000
________________________________________________________
324,000
________________________________________________________

Working 1.1.1

Share in pre-acquisition capital and reserves

At acquisition date
- Share capital of B 200,000
- Reserves 120,000
- Fair value adjustment 30,000
________________________________________________________
350,000
________________________________________________________

Share of A i.e 60% of 350,000 210,000
________________________________________________________

METHOD II

Cost of investment 406,000
Add
Share of post acquisition profit in associate (W-1.2) 114,000
Less
Eliminitation of unrealised profit (W-1.3) (720)
________________________________________________________
519,280
________________________________________________________

Working 1.2

Share of post acquisition profit in associate

Prior year's profit (200,000 - 120,000)=80,000 *60%= 48,000
Profit for the year
- 9 months (120,000 x 9/12 x 60%) 54,000
- 3 months (120,000 x 3/12 x 40%) 12,000
________________________________________________________
114,000
________________________________________________________

Working 1.3

Eliminitation of unrealised profit

Sale of goods sold to A 15,000
Cost of goods sold to A 12,000
_______________________________________________________
Profit 3,000

Portion of profit in closing stock (3,000 x 60%) 1,800
_______________________________________________________
Profit portion to be eliminated (1,800 x 40%) 720
_______________________________________________________

Working 2

Accumulated Profits

Accumulated profit of A 606,000
Share of profit in Associate (W-1.1) 114,000
Unrealised profit (W-1.2) (720)
________________________________________________________
719,280
________________________________________________________

The result would always be same in both the methods.

So Mr. Amir,

I hope this will help you in resloving the problems in understanding of deemed disposal of subsidiary and conversion into associate.

Now you have become my "deemed student". Is not it? Just kidding.

Regards,

KAMRAN.

- Muhammad Amir - 05-07-2008

<blockquote id="quote">quote<hr height="1" noshade id="quote">Now you have become my "deemed student". Is not it? Just kidding.
<hr height="1" noshade id="quote"></blockquote id="quote">

Many Many Thanks.

Its my pleasure to be your student, and Its your greatness to include me in your students list.

God Bless you!

Kind Regards,

Muhammad Amir

- Astute Accountant - 05-09-2008

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Muhammad Amir
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Now you have become my "deemed student". Is not it? Just kidding.
<hr height="1" noshade id="quote"></blockquote id="quote">

Many Many Thanks.

Its my pleasure to be your student, and Its your greatness to include me in your students list.

God Bless you!

Kind Regards,

Muhammad Amir
<hr height="1" noshade id="quote"></blockquote id="quote">

Astaghfirullah!!!

Haad ho ga'ee... Kahan tu roshan khayali k jurm mai jahanum waasul kia ja raha hota hai aur kahan pride lia ja raha hai student bun'nay par.

Sounds odd...

- Schuaeb - 05-10-2008

Maulana Fazl-ur-Rehman is also blessed with this art.

- Muhammad Amir - 05-10-2008

Mr Astute Accountant,

I was not expecting this post and ASTAGHFIRULLAH from you.

Anyway, this is some other discussion and your pointed discussion was on the different topic and i have not said any one as "Jahhanumi" however i have explained him as my muslims brother the consequences of his actions and words and explaining anyone the consequences of his words and actions is no where fall in the category of a crime.

Mr KamranACA is not only a sound Professional but he is the Cheeta in his field and he is also a very good muslim brother(anyone should have no doubt in my words - although he do not need my words) but some of his thoughts can't be apprciated and i am still having difference of opinion with him.

I have no comments for shoaib's post.

Regards,

Muhammad Amir

- Schuaeb - 05-13-2008

so kamran sb do you have got a tail. i mean a cheetah supposedly need to have one.

thanks amir for pardoning my post, very unlike you, yaar just jokin so no hard feelings