Acquired on the First Day of the Financial Year

Steps to remember:

1. Look upon the date when the subsidiary is getting acquired. A simple funda is that all the profits existing with the subsidiary company on the date of acquisition will be called 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 heppening on the first day of the year. Hence, we will have to check on the following:

i. Opening Profits

ii. Current Year profits

iii. Opening General Reserves

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

3. Try to understand. When the subsidiary got acquired, it would have reported a profit balance of Rs. 30,000/- and General Reserve balance of Rs. 22,000/-. Both these amounts wil be Capital (Pre) be default.

4. In simple language, Opening General Reserve was Rs. 22,000/- to which Rs. 3,000/- has been transferred 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 have been Rs. 10,000 + 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 profit is earned after acquisition, the entire amount of Rs. 13,000/- will be considered as Revenue Profits i.e. post profits.

7. Now the values left with us are Opening Profits (Pre), updated current year profits (Post) and Opening General Reserve (Pre).

Alternatively, profits can be anaysed in the below manner also. But note that this possible only when acquisition happens on the first or last day but not during the year. 

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 the profit and its part transferred to the General Reserve for the current year by deducting the respective opening balance from its closing balance. You will get Rs. 10,000/- and Rs. 3,000/- for Profits and General Reserves respectively. 

3. Declare these two items as Revenue profits i.e. post profits as this profit is earned after acquisition.

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

i. Opening Profits - 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 - Post (As these are the profits after acquisition. That means, these profits have been earned due the control exercised by the parent company.)

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