Deemed Disposal Of A Subsidiary

[kamranACA]

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.