Wholly-owned Subsidiary has the following balances at control date 20X1:
$$\begin{array} { l l }
\text { Capital } & \$ 500000 \
\text { Asset revaluation reserve } & \$ 200000 \
\text { Retained profits } & \$ 100000
\end{array}$$
During 20X2 Subsidiary generates $100 000 profits and revalues plant downwards by $375 000.The asset revaluation reserve all relates to previous revaluation of plant.
During 20X3 Subsidiary incurs $50 000 of losses.
The substitution elimination in 20X3 for retained profits would be Cr.$25 000.

Question

Wholly-owned Subsidiary has the following balances at control date 20X1:
 $$\begin{array} { l l } 
\text { Capital } & \$ 500000 \
\text { Asset revaluation reserve } & \$ 200000 \
\text { Retained profits } & \$ 100000
\end{array}$$ 
During 20X2 Subsidiary generates $100 000 profits and revalues plant downwards by $375 000.The asset revaluation reserve all relates to previous revaluation of plant.
During 20X3 Subsidiary incurs $50 000 of losses.
The substitution elimination in 20X3 for retained profits would be Cr.$25 000.

Quizplus · Accepted Answer

The substitution elimination for retained profits in 20X3 would consider the profits and losses since the control date. From 20X1 to 20X3, the subsidiary generated $100,000 in profits during 20X2 and incurred $50,000 of losses in 20X3, resulting in a net increase in retained profits of $50,000 since the control date. The downward revaluation of the plant does not affect retained profits directly but would reduce the asset revaluation reserve. Therefore, the substitution elimination for retained profits would not be Cr.$25,000 but rather reflect the net change in retained earnings since the control date, which is an increase of $50,000.

Wholly-Owned Subsidiary Has the Following Balances at Control Date 20X1