Question1 On 1 July 2024, Quest Ltd acquired 60% of the share capital of Pan Ltd for a cash consideration of $500,000. At the date of acquisition, Pan Ltd’s total equity was comprised of: [table]
Share capital | $100,000 Retained profits 1/7/24 | $300,000
[/table] At the acquisition date all identifiable assets and liabilities of Pan Ltd were recorded at their fair values. The company tax rate is 30%. An extract of trial balances of Quest Ltd and Pan Ltd as at 30 June 2025 (one year after acquisition) are provided below: The group balance sheet at 30 June 2025 will include in the equity section: [table]
Share capital | $600,000 Retained profits | $960,800 Non-controlling interest (NCI) | $227,200
[/table] [table]
Share capital | $600,000 Retained profits | $860,000 Non-controlling interest (NCI) | $227,200
[/table] [table]
Share capital | $600,000 Retained profits | $1,000,000 Non-controlling interest (NCI) | $246,800
[/table] [table]
Share capital | $600,000 Retained profits | $860,000 Non-controlling interest (NCI) | $160,000 |
[/table] [table]
Share capital | $700,000 Retained profits | $1,000,000 Non-controlling interest (NCI) | $246,800
[/table] ResetMaximum marks: 1 Flag question undefined

Question

Question1 On 1 July 2024, Quest Ltd acquired 60% of the share capital of Pan Ltd for a cash consideration of $500,000. At the date of acquisition, Pan Ltd’s total equity was comprised of: [table]
Share capital | $100,000 Retained profits 1/7/24 | $300,000
[/table] At the acquisition date all identifiable assets and liabilities of Pan Ltd were recorded at their fair values. The company tax rate is 30%. An extract of trial balances of Quest Ltd and Pan Ltd as at 30 June 2025 (one year after acquisition) are provided below: The group balance sheet at 30 June 2025 will include in the equity section: [table]
Share capital | $600,000 Retained profits | $960,800 Non-controlling interest (NCI) | $227,200
[/table] [table]
Share capital | $600,000 Retained profits | $860,000 Non-controlling interest (NCI) | $227,200
[/table] [table]
Share capital | $600,000 Retained profits | $1,000,000 Non-controlling interest (NCI) | $246,800
[/table] [table]
Share capital | $600,000 Retained profits | $860,000 Non-controlling interest (NCI) | $160,000 | 
[/table] [table]
Share capital | $700,000 Retained profits | $1,000,000 Non-controlling interest (NCI) | $246,800
[/table] ResetMaximum marks: 1 Flag question undefined

BlackTom AI · Accepted Answer

First, restate the information provided to set the context for evaluating the group equity allocation.
- Quest Ltd acquired 60% of Pan Ltd on 1 July 2024 for $500,000. Pan Ltd’s equity at acquisition time (1/7/24) consisted of Share capital $100,000 and Retained profits $300,000, i.e., total equity $400,000.
- At acquisition, all Pan identifiable assets and liabilities were fair valued; the question implies standard acquisition accounting will apply (including any goodwill if there is a difference between consideration and 60% of Pan’s net identifiable assets).
- The trial balance extracts as at 30 June 2025 (one year after acquisition) are given, but the exact line-by-line totals from the question are simplified in the answer choices. The group balance sheet at 30 June 2025 will report Equity for Quest and Pan, including Non-controlling Interest (NCI).

Now evaluate each answer option step by step, noting what each one implies about Quest’s consolidated equity and the NCI, and why these would or would not fit a typical post-acquisition consolidation scenario.

Option A:
Share capital $600,000; Retained profits $960,800; Non-controlling interest (NCI) $227,200
- Why this could be plausible: The group’s share capital is shown as $600,000, which would be the parent Quest’s contributed capital plus any adjustments from subsidiary ownership; the retained profits value $960,800 would represent Quest’s retained earnings plus Pan’s post-acquisition retained earnings attributable to the group (i.e., 60% of Pan’s post-acquisition profits added to Quest’s retained profits, with the remaining 40% allocated to NCI). The NCI of $227,200 would be 40% of Pan’s post-acquisition net assets or a proportionate share of Pan’s post-acquisition equity at 30 June 2025 (depending on fair value adjustments and post-acquisition profits. If Pan’s post-acquisition equity is $568,000 at 30/6/25, 40% would be $227,200). Overall, this option suggests a total group equity that aligns with combining Quest’s equity with Pan’s post-acquisition profits and allocating the remainder to NCI.
- Potential concerns: We need to verify whether the retained profits figure $960,800 aligns with Quest’s prior retained earnings plus 60% of Pan’s post-acquisition profits, after tax. The NCI amount must reflect 40% of Pan’s net assets at the reporting date (adjusted for any fair value exercise). If Pan’s post-acquisition equity after fair value adjustments yields an NCI of $227,200, the 60%/40% split must be consistent with the numbers given in the question (including the 30% tax rate and any consolidation adjustments). This option appears internally consistent with typical 60%/40% ownership.

Option B:
Share capital $600,000; Retained profits $860,000; Non-controlling interest (NCI) $227,200
- Why this could be plausible: The NCI is the same as in Option A, at $227,200, suggesting the same 40% allocation of Pan’s net assets. The retained profits amount is lower at $860,000, which would imply less cumulative post-acquisition profits attributable to the group than in Option A.
- Why it might be incorrect: If the correct retained profits after consolidation should reflect 60% of Pan’s post-acquisition retained earnings plus Quest’s prior retained earnings, the figure $860,000 might not align with the actual post-acquisition profit figures implied by the scenario. If Pan’s post-acquisition retained profits (i.e., from 1/7/24 to 30/6/25) are substantial, a much higher retained profits figure could be expected than $860,000 when including Quest’s share and eliminating intra-group profits. The matching NCI of $227,200 would still require Pan’s net assets to be such that 40% equals $227,200, which may or may not align with the underlying Pan equity.

Option C:
Share capital $600,000; Retained profits $1,000,000; Non-controlling interest (NCI) $246,800
- Why this could be plausible: If Pan’s post-acquisition equity grew significantly (higher retained earnings) and 40% of Pan’s net assets at 30/6/25 equaled $246,800, this would set Pan’s total net assets at $617,000 (since 40% of 617,000 ≈ 246,800). A $1,000,000 retained profits figure implies substantial cumulative profits since acquisition, increased Quest’s equity via consolidation, and a corresponding NCI share.
- Why it might be incorrect: The NCI value here would correspond to 40% of Pan’s net assets at the reporting date. If the implied Pan net assets are not consistent with the given acquisition price and subsequent profits (and after considering any fair value adjustments on acquisition), this may not be the correct NCI figure for the group balance sheet. If the actual 40% of Pan’s net assets at 30/6/25 is $227,200 rather than $246,800, this option would be inconsistent with the NCI calculation.

Option D:
Share capital $600,000; Retained profits $860,000; Non-controlling interest (NCI) $160,000
- Why this could be plausible: The NCI of $160,000 implies 40% of Pan’s net assets equal to $160,000, suggesting Pan’s total net assets at 30/6/25 are $400,000. The retained profits figure of $860,000 would then be the portion of Quest's group equity that includes both Quest’s retained earnings and Pan’s post-acquisition profits (allocated 60% to the group and 40% to NCI). This option presents a scenario where Pan’s net assets are relatively modest.
- Why it might be incorrect: If 40% of Pan’s net assets is $160,000, then Pan’s total net assets would be $400,000. However, Pan’s equity at 1/7/24 was $400,000 (100k share capital + 300k retained profits). If there were no adjustments to Pan’s net assets after the acquisition, the NCI would be 40% of 400,000 = 160,000, which seems plausible; but the retained profits of $860,000 being part of the group equity would require 60% of Pan’s post-acquisition net earnings to be large enough to reach that figure, which may not align with the post-acquisition profit figure implied in the scenario. This creates an inconsistency unless the numbers reflect the exact consolidation outcomes (including any tax effects, intercompany eliminations, and fair value adjustments).

Option E:
Share capital $700,000; Retained profits $1,000,000; Non-controlling interest (NCI) $246,800
- Why this could be plausible: This option changes the group share capital to $700,000, which could reflect additional equity injections or adjustments during consolidation. The NCI of $246,800 (40% of Pan’s net assets of about $617,000) and retained profits of $1,000,000 would suggest a larger post-acquisition profit pool being allocated to the group, with a substantial NCI share.
- Why it might be incorrect: The share capital of the group would typically be Quest’s share capital plus the Pan’s contributed capital at consolidation, not necessarily a direct carryover of Pan’s capital structure. The figure of $700,000 for share capital may not be supported by the given data, and the corresponding NCI would need to align precisely with 40% of Pan’s net assets after fair value adjustments. The mismatch here raises questions about whether this option accurately reflects the intended post-acquisition equity split.

Synthesis and guidance to identify the correct option:
- In a typical 60% acquisition where fair value adjustments are recognized, the group equity at 30 June 2025 would include Quest’s own equity components plus 60% of Pan’s post-acquisition net assets attributed to Quest, while the remaining 40% would be allocated to NCI. The NCI figure should represent 40% of Pan’s net assets at the reporting date after any fair value adjustments and considering Pan’s post-acquisition profits (translated via the consolidation process and tax effects).
- Among the options, Option A is the only one that presents NCI as $227,200 with retained profits $960,800, which corresponds to a consistent NCI share (40%) of Pan’s net assets if Pan’s post-acquisition net assets align to support that NCI value, while the retained profits figure reasonably reflects added post-acquisition earnings but not unrealistically large or small without context.
- The other options require either inconsistent or unlikely distributions of Pan’s net assets or implausible total equity if you factor in standard consolidation mechanics (e.g., wrong NCI percentage, inconsistent post-acquisition earnings, or implausible share capital adjustments).

Conclusion (without stating the final answer outright as requested):
- Each option embodies a different interpretation of how Pan’s post-acquisition profits and Pan’s net assets translate into the group equity and NCI at 30 June 2025. To determine which is correct, you would compare the implied Pan post-acquisition profits and the 40% NCI share against the actual Pan equity at 30/6/25 after fair value adjustments, and ensure the retained profits figure is reconciled from 1/7/24 to 30/6/25 via the group’s consolidation entries. The option that most consistently aligns with a standard 60% ownership and NCI calculation, given the information, is the one that presents NCI as $227,200 and retains a reasonable Pan-related post-acquisition profit component in the retained profits figure.

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