Hamlet plc acquired 70% of the shares of Macbeth on 1 January 2018 for £2,000,000 when Macbeth’s retained earnings were £600,000. The group policy is to measure non-controlling interests at fair value at the date of acquisition. The fair value of non-controlling interests at 1January 2018 was £400,000. 

Hamlet plc disposed of 15% of Macbeth’s share capital on 1 October 2020 for £800,000.

 

Required:

a) Advise the directors of the accounting for the disposal of the 15% of Macbeth and show the accounting entry required for the disposal (no calculations are required). Hamlet plc prepares financial statement at 31 December 2020.

Extracts from the financial statements of Hamlet plc as at 31 December 2020 are shown below. Profits of both companies can be assumed to accrue evenly throughout the year. 

Statement of Financial Position as at 31 December 2020	Hamlet	Macbeth
Non-current assets	£'000	£'000
Property plant and equipment	1,400	2,100
Investments	2,000	0
Total non-current assets	3,400	2,100
Current assets	1,500	1,000
Total assets	4,900	3,100
Equity and liabilities
Share capital	1,000	1,000
Retained earnings	2,400	1,100
Total equity	3,400	2,100
Current liabilities	1,500	1,000
Total equity and liabilities	4,900	3,100
Statement of Profit or Loss for the year ended 31 December 2020	£'000	£'000
Profit for the year	2000	1,500

b) Prepare the group structure and calculate the value of the retained earnings and non-controlling interest to beincluded in the consolidated statement of financial position for the Hamlet group for the year ended 31 December 2020 taking into consideration the 15%disposal discussed on point a) above. (A consolidated statement of financial position is not required).

c) Prepare the profit for the year attributable to the parent and the non-controlling interest for inclusion in the consolidated statement of profit or loss account for the year ended 31 December 2020.

In order to raise finance the directors of Hamlet plc are considering disposing of a further 30% of the share capital of Macbeth in the next financial year 31 December 2021and would retain significant influence over Macbeth.

Required:

d) Advise the directors of the accounting treatment in the consolidated financial statements of the Hamlet Groupand the calculation of the profit or loss on disposal (no calculations are required.)

e) Explain to the directors how the calculation of the profit or loss on disposal would be different if the non-controlling interest was valued at proportionate share.

Answer rating: 100% (QA)

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