The Profit or Loss on the Sale of Shares in a Subsidiary

question 33

Multiple Choice

The profit or loss on the sale of shares in a subsidiary will be reported in both the books of the parent legal entity and the consolidated accounts.The method of calculating the profit or loss in the parent's individual legal entity books is to:

• A) Revalue the investment in the subsidiary by adjusting that amount for operating profits recognised in the group accounts over the life of the holding of the shares. The adjusted amount is then compared to the consideration received for the shares and the profit or loss calculated as the difference.
• B) The investment in the subsidiary may be recognised in the accounts at either cost or fair value. If it is at cost the amount should be revalued by reference to the last quoted price on the stock exchange. A revaluation difference will be taken to an asset revaluation reserve if it is an increase in value, or written off in the income statement if it is a decrease in value. Any remaining difference between the consideration received and the revalued investment is recognised as a profit or loss in the period of the sale.
• C) The profit or loss recognised in the income statement is calculated as the difference between the consideration received and the book value of the investment at the time of sale. The book value may have been fair value or it may be at cost.
• D) The investment recorded in the books of the parent entity is first adjusted for any amount of purchased goodwill amortised over the period that the shares have been held, by netting the accumulated amortisation against the investment. The adjusted amount is compared to the consideration received for the shares and where the amount received is greater than the adjusted investment a profit is recognised in the income statement. A loss is recognised in the alternative case, where the consideration is less than the adjusted investment.
• E) None of the given answers.

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