Acquired on the Last 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. As the acquisition is happening on the last day of the year, every amount of profit is going to be Capital in nature and hence pre.

3. However, do read the below points for a better understanding:

a. In the above case, acquisition is heppening on the last 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)

b. Try to understand. When the subsidiary got acquired on the last day of the year, it would have reported a profit balance of Rs. 40,000/- and General Reserve balance of Rs. 25,000/- as mentioned in the Balance Sheet. Both these amounts will be Capital (Pre) by default. Note that any balance existing on the date of acquisition is treated as capital in nature. 

c. 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).

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

e. 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 profit is earned before acquisition, the entire amount of Rs. 13,000/- will be considered as Capital Profits i.e. pre profits. In short, these are the profits acquired (not earned) by the Parent Company.

f. Now the values left with us are Opening Profits (Pre), updated current year profits (Pre) 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 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 also as Capital profits i.e. pre profits as this profit is earned before acquisition.

As no transfer is made from 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 - Pre (As these are the profits before acquisition. That means, these profits have been earned without any 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.)