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

question 7

Multiple Choice

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

• A) Deduct the remaining balance of goodwill (after accumulated amortisation) from the investment balance and the difference between that and the consideration received is the profit or loss as recognised by the group. The profit or loss is recognised as part of an elimination entry that removes the investment, balance of goodwill and the investment.
• B) Adjust the amount of the cost of the investment in the subsidiary by adding the parent's share of post-acquisition movements in retained earnings and reserves, and subtracting accumulated goodwill impairment. This figure is then subtracted from the consideration received.
• C) Calculate, from the perspective of the group, the profit or loss on sale of the shares in a controlled company as the difference between the investment and the consideration received. This will only require an elimination entry when the parent entity has revalued the investment in its own books. In this case the revaluation should be reversed in the elimination entry and the profit or loss recognised by crediting the investment and debiting the assets contributed as payment in consideration for the shares.
• D) Adjust the investment held in the subsidiary by deducting any asset revaluation reserves and then calculating the difference between the adjusted investment and the consideration received. The elimination entry will remove the equity items of the subsidiary against the investment and recognise the profit or loss by debiting the consideration received against the fair value of the net assets of the subsidiary at the time of sale.
• E) None of the given answers.

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Definitions:

Salary

Regular payments made by an employer to an employee, typically on a monthly or biweekly basis, in exchange for professional services rendered.

Capital Balances

The amount of equity ownership a partner has in a partnership, often represented as the difference between their contributions to the partnership and any withdrawals.

Net Loss

Occurs when a company's expenses exceed its revenues during a specific period, indicating a negative financial performance.

Capital Account

An account on the balance sheet that shows the equity and debt investments into a country minus its investments abroad.