DFS Help Exam paper june 2006 Trustdan plc Retained Earnings

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zoeeileen
zoeeileen Registered Posts: 19 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
Hi Hope some one can help me.

I have just worked on the exam paper from BPP book 2007, and i hope someone can explain something for me.

On the retained earnings why is the Fair Value included within the minority interest but not within when you are working out the reserves for the parent.

This is task 1.1 when you are asked to produce the balance sheet .

Minority Intesret.

S Capital 10.000
S Premium 2,000
R Earnings 22,500
F Value 3000
Total 37500*25%
Total 9375

Wheras parents is worked out 37,950

Sub balance sheet 22,500
Sub Acquistion 17,056
Difference 5,444 *75% = 4083

4083 + 37950 = 41,033

THANKYOU FOR YOUR HELP. Zoe:crying:

Thank

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  • mehmet
    mehmet Registered Posts: 113 Dedicated contributor 🦉
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    Revaluation is non-cash, it doesn't affect the reserves. You take it into account for Trustdan (Parent) when calculating the Goodwill, as that takes into account the fair value of assets held by Isold (Subsidiary) at the acquisition date.

    When you are calculating the consolidated reserves, you take Trustdan's (Parent) reserves + Trustdan's share of post-acquisition earnings in Isold (Subsidiary), which will be £37,950,000(Trustdan reserves) + £4,053,000* (Trustdan share of Isold's post-acq. earnings) = £41,053,000

    *(75% x[£22,500,000 - £17,056,000])

    The Minority Interest is the value of assets at fair value in Isold (Subsidiary) held by minority interests at the balance sheet date, which must take the revaluation into account: 75% x [£34,500,000(Total equity) + £3,000,000(Reval. Surplus)] = £9,375,000
  • visha
    visha Registered Posts: 218 Dedicated contributor 🦉
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    You have two companies.

    1 P – parent
    2- S – subsidiary (p-owns 75% and 25% owed by minority stake holders)

    The fair value of S’s Asset must reflect on the S’s balance sheet. If you increase the Net assets then you must also increase the Equity to balance the balance sheet.

    The increase value belongs to the Equity, therefore you will have to increase the equity by introducing a re-valuation account. Why do you need to do this? It is because the minority interest have a 25% share in the total value of the company. If you were that minority who owns the shares would you want 25% of smaller assets value or 25% of the (Bigger) true asset value?

    Both companies have NET Assets that equals to Equity (share capital + share premium + P&L reserves and Revaluation reserves)

    When you consolidate the accounts for two companies to present them as one set of accounts then:

    1- You need to add Net Asset P to Net Asset S = Net Asset C- consolidated

    2- You must add the Equity of P to Equity of S to arrive at Equity of C

    BUT. Equity of P = (Equity of P plus 75% Equity of S) and Equity of S is only the minority interest –ie 25% of Equity of S.

    Note also that when you add the Net assets pf P & S (you ignore the 75% investment element in S) but only show the GOODWILL as Non-Current Asset ( up and above 75% value- of S -will be added to the Equity of P to show the Total Equity of P in the consolidated statements). The goodwill will not be added to the Equity and therefore it must remain as Asset purchased.

    Don’t forget that during the year the S will have earned profits. Profits increases the assets (in form of cash, bank, debtors, stock) and increases the equity by the same amount in the P&L reserve a/c.
    Remember that 75% of that profit belongs to P.

    Therefore Parents Equity (will reflect 100% in P plus 75% in S) plus 75% of S’s profit to arrive at the Total of P’s Equity in the combined balance sheet.

    Hence, 4083 + 37950 = 41,033 is correct

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