Question

Truly Berhad has a 100%-owned foreign subsidiary, which has a carrying value at a cost of RM25 million. It sells the subsidiary on 31 December 2019 for $45million. As at 31 December 2019, the credit balance on the exchange reserve, which relates to this subsidiary, was RM6 million. The functional currency of the entity is the Ringgit Malaysia and the exchange rate on 31 December 2019 is RM1 to $1.5. The net asset value of the subsidiary at the dateof disposal was RM28 million.

Required: Explain the accounting treatment forthe disposal transaction

Answer 1

Accounting treatment for the disposal transaction:-

Note 1: for sale of subsidary the net value of the business is to be determined i.e. investment less asset.  

Note 2: Journal Entry for Disposal of Subsidary:

Investment In Subsidary A/C .... Dr RM25 M

Bank A/C ...... Dr RM30 M

To Net Asset A/C RM 28 M

To Profit on Sale Of Subsidary A/C RM 27 M

Note 3: Treatment of exchange reserve:

The difference arising in exchange rate is recorded in equity of the parent companys consolidated income in other comprehensive income. For complete description of foreign exchange reserve and effect of disposal refer IAS 21.