ExpertMedium2 marksMultiple Choice
ACCA · Question 32 · Preparing simple consolidated financial statements
Section A
When preparing a consolidated statement of financial position, how are the pre-acquisition retained earnings of a subsidiary treated?
Section A
When preparing a consolidated statement of financial position, how are the pre-acquisition retained earnings of a subsidiary treated?
Answer options:
A.
They are added in full to the parent's retained earnings
B.
They are included in the calculation of goodwill but excluded from consolidated retained earnings
C.
They are ignored completely in the consolidation process
D.
They are allocated entirely to the Non-Controlling Interest (NCI)
How to approach this question
Remember that the group only earns profits *after* the acquisition date. Pre-acquisition profits are what the parent paid for, so they go into the goodwill calculation.
Full Answer
B.They are included in the calculation of goodwill but excluded from consolidated retained earnings✓ Correct
Pre-acquisition retained earnings represent the wealth of the subsidiary before the parent took control. The parent pays for these as part of the purchase consideration. Therefore, they are used in the goodwill calculation (as part of net assets at acquisition) and are NOT included in the consolidated retained earnings.
Common mistakes
Adding pre-acquisition profits to consolidated retained earnings.
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