Acquiree Co. is a 90%-owned subsidiary of Acquirer Co. The carrying amounts of t

Question

Acquiree Co. is a 90%-owned subsidiary of Acquirer Co. The carrying amounts of the noncontrolling interest and the subsidiary are 1000,000 and 10,000,000, respectivley. the subsidiary's fair value is 15,000,000. Acquirer transferred part of its interst to Third Co. on December 31 for 12,000,000 in cash but retained a noncontrolling interest equal to 20% of Acquiree's voting interests. The fair value of the retained interest, which gives Acquirer significant influence, is 3000,000. The fair values and carrying amounts are as of December 31. Acquirer must account for this transaction:

By recognizing a gain of 5,000,000

By recognizing a gain of 6,000,000

By recognizing a gain of 1,000,000

By recognizing a loss of 3,000,000

Explanation / Answer

Acquirer must account for this transaction:

"By recognizing a gain of 5,000,000"

=> The carrying value of the subsidiary was $10,000,000. The fair value of the same was $15,000,000. So, the unrealised gain was $5,000,000.

The transfer of 80% of the interest in the subsidiary was @ $12,000,000 which is as per the fair value of the subsidiary. The value of the noncontrolling interest equal to 20% of Acquiree's voting interests so retained is equal to $3,000,000. So, the gain that to be recognised is = realised $4,000,000 + unrealised $1,000,000.

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