Acquired during the Financial Year

Steps to remember:

1. Look upon the date when the subsidiary is getting acquired. A simple jugaad is that all the profits existing with the subsidiary company on the date of acquisition will be treated as capital profits and hence, will be Pre-Profits. Similarly, all profits earned by the subsidiary after acquisition will be revenue profits meaning Post-Profits.

2. In the above case, acquisition is happening on 1st June, 2022. Hence, we will have to check the profit balances existing with the Subsidiary Company on that date. Usually, companies prepare their financials, and report their profit balances as on the date of acquisition. So, all these profits reported as on the date of acquisition will be treated as Capital Profits. However in exams, balances on the date of acquisition will not be given. Hence, we have to apply 'Time Ratio' which assumes that profits have been earned evenly by the company throughout the year i.e. same for all the months. The following balances will have to be looked upon:

i. Opening Profits

ii. Current Year profits

iii. Opening General Reserves

iv. Transfer to General Reserve (out of profits of the Current Year)

3. Now try to understand. When the subsidiary got acquired, it will be assumed that they have earned even profits during the month of April and May. On the same day i.e. date of acquisition, General Reserves would stand the same as opening i.e. Rs. 22,000/- as transfers to General Reserves are made out of profits in the year end only.

4. In simple language, Opening General Reserve was Rs. 22,000/- which is going to be the same on the date of acquisition. To this amount, Rs. 3,000/- has been transferred in the year end from the current year's profits, thereby making its closing value Rs. 25,000/- (as shown in the Balance Sheet). 

5. Now imagine what would have been the profits before making this transfer of Rs. 3,000/- to the General Reserve in the year end?

6. The profits before transfer would be Rs. 10,000 (Closing Profits - Opening Profits) + Rs. 3,000 = Rs. 13,000/-. This is the actual profit that the subsidiary company has earned during the year before transferring to General Reserve. As this whole profit is earned during the year, we will apply Time Ratio which is "2 : 10". The portion of "2" will be treated as Pre Profits and the portion of "10" will be Post.

7. After all the above masala, now we are left with "Opening Profits (Pre) of Rs. 30,000/-", Updated current year profits (Time Ratio) of Rs. 13,000/- and "Opening General Reserve (Pre) of Rs. 22,000/-". In short, we have deducted the amount transferred to General Reserve from Closing balance of General Reserve and added it back to the Profits.

Alternatively, profits can be analyzed in the below manner also. But it is recommended to follow the above method.

All you need to do is:

1. Declare the opening balances of Profits and General Reserves as Capital Profits i.e. pre profits.

2. Identify increase in the profits and transfer to General Reserve which is Rs. 10,000/- and Rs/ 3,000/- respectively and divide these two in Time Ratio. 

Note:

In the tables given above, amount entered in the green box will be used in computing Cost of Control. Amount in the blue box will be added with Profits in Reserves and Surplus. Amounts in the yellow box will be considered in Minority Interest.

As no transfer is made from Profits to General Reserve, we will allocate the profits as follows:

i. Opening Profits (Rs. 30,000) - Pre (Not earned by the control of the Parent Company. Rather, these are acquired by the Parent Company. Hence, capital in nature.)

ii. Current Year Profits (Rs. 10,000) - Time Ratio (As these are the profits are earned in between the year)

iii. Opening General Reserve (Rs. 25,000) - Pre (Not earned by the control of the Parent Company. Rather, these are acquired by the Parent Company. Hence, capital in nature.)