Question

Thomson Reuters (TR) reports on a consolidated basis. It generates approximately $16KB worth of annual revenues. It recently entered into a venture with another firm (Blackstone) to create a new company in which TR would hold approximately 45% of the stock of NewCo; and Blackstone would hold 55% of the stock (of the NewCo). TR then sold one line of business that typically generated about $8B of revenues to TR for approximately $20B.  

Since TR no longer owns the former business and is not a controlling owner of the NewCo how will this likely impact TR going forward?

How does this impact the financial statements (journal entries) ?

Answer 1

Answer:-

TR no longer owns the former business and is not a controlling owner of New Co.

Just considering the revenue & selling price of a particular business, future profitability and viability of other businesses cannot be ascertained.

Generally, there are two methods that it is a profitable sale or not one of them is Market Capitalization Method and another one is Discounted Cash Flow Method.

Using the above methods profitability can be ascertained

Note: With the given data, profitability cannot be ascertained .

Following are the journal entries to be passed while selling a business:-

1) Realisation A/c Dr.   

To Assets A/c

2) Liability A/c Dr.

To Realisation A/c

3) Transferee Co. A/c Dr.

To Realisation A/c

4) Equity Share Capital A/c Dr.

Reserves A/c Dr.

To Shareholders A/c

5) Realisation A/c (Profit) Dr. (In case of profit)

    To Shareholders A/c

6) Shareholders A/c Dr.

To Realisation Ac (loss)    (In case of loss)

7) Shareholders A/c Dr.

To Bank A/c

For having a stake in New Co.(Venture), proportionate method of consolidation method shall be used.

Means TR will have only 45% share of Assets & Liabilities of New Co.