John Carter is the CEO of ABC Ltd. (ABC). The company is the parent company of a
Question:
John Carter is the CEO of ABC Ltd. (ABC). The company is the parent company of a number of subsidiaries and applies IFRS. One of these subsidiaries is York Inc. (YI), a wholly-owned subsidiary. YI has shown increased profits since it was acquired by ABC five years ago.
John is eligible for an annual bonus if ABC can report a minimum annual profit. With six weeks to go before the year-end, it seems that ABC’s annual profit this year will be close to the minimum profit required for John to earn a bonus. John decides to sell 10% of ABC’s investment in YI for $450,000. On the date of sale, YI had ordinary shares of $250,000 and retained earnings of $3.95 million.
ABC paid $4 million for YI five years ago. The acquisition differential consisted of goodwill of $500,000, which has not been impaired. ABC recorded a gain on sale of investment of $50,000 ($450,000 – 10% x $4 million) on the sale of the investment in YI. John feels that this transaction is justifiable, as ABC will continue to control YI after the sale.
Question:
Discuss the sale of 10% of YI; including the effect the transaction will have on ABC’s consolidated financial statements.
