Disposal of Investments in Associates

Recap: Organic Food Everyday bought 30% of Vege Farm shares with $10,000 (assume $1.00 per share, 10,000 units of Vege Farm shares), and Vege Farm became associates of Organic Food Everyday.

We are incredibly lucky that right after we received dividends from Vege Farm, a new investor made a huge investment in Vege Farm and we cash out a small portion of our shares. We cash out 1,500 units of Vege Farm shares with $2.00 per share. It means:

First, we made $1,500 profit from disposing the shares: $1,500 = 1,500 shares x $2.00 (selling price) – 1,500 shares x $1.00 (initial cost). This profit is taxable, so we must record it in the Income Statement.

Income StatementYear 1Year 2Explanation
Cost of Sales(110,000.00)(150,000.00)
Gross Profit90,000.00130,000.00
Selling and marketing expenses(3,000.00)(7,000.00)
Administrative expenses(50,000.00)(50,000.00)
Operating Expenses(53,000.00)(57,000.00)
Amortisation of intangible assets0.00(11,000.00)
Operating Profit37,000.0056,000.00
Other Income / (Expenses)900.00900.00
Interest Income / (Expenses)0.00(1,750.00)
Gains / (Losses) on disposal of quoted shares0.001,000.00
PP&E written off0.00(3,000.00)
Inventories written off0.00(500.00)
Receivables written off0.00(800.00)
Share of profit of associate0.002,700.00
Gains / (Losses) on disposal of Vege Farm0.001,500.001,500 shares x $2.00 (selling price) – 1,500 shares x $1.00 (initial cost)
Profit Before Tax37,900.0056,050.00
Income tax expense (24%)(9,096.00)(13,452.00)
Net Income28,804.0042,598.00

Keep in mind that the Income Statement and Cash Flow Statement show us only what is happening in this period. Therefore, due to timing differences, we must take the gain as a non-cash adjustment in the Cash Flow Statement.

Besides, we received $3,000 cash from the disposal: $3,000 = 1,500 shares x $2.00 (selling price). However, we do not gain $3,000 in cash in this period, but it is a cash gain relative to what we paid for the asset, be it in the same period or different period. Therefore, we record $3,000 cash in the Cash Flows From Investing Activities section. The concept is exactly same with how we treat disposing short-term and long-term investments.

Cash Flow StatementYear 1Year 2Explanation
Cash flows from operating activities
Net Income28,804.0042,598.00
Amortisation of intangible assets11,000.00
(Gains) / Losses on disposal of quoted shares0.00(1,000.00)
PP&E written off0.003,000.00
Inventories written off0.00500.00
Receivables written off0.00800.00
Share of profit of associate0.00(2,700.00)
Gains / (Losses) on disposal of Vege Farm0.00(1,500.00)
Changes in working capital
(Increase)/Decrease in Inventory0.00(22,000.00)
(Increase)/Decrease in Accounts Receivable0.00(45,000.00)
(Increase)/Decrease in Prepaid Expenses0.00(16,000.00)
Increase/(Decrease) in Accounts Payable0.004,000.00
Increase/(Decrease) in Deferred Revenue0.0011,500.00
Net cash from operating activities28,804.00(8,802.00)
Cash flows from investing activities
Capital Expenditures0.00(18,000.00)
Acquisition of quoted shares0.00(10,000.00)
Disposal of quoted shares0.0011,000.00
Acquisition of Café 950.00(180,000.00)
Acquisition 30.0% of Vege Farm ownership0.00(10,000.00)
Dividend received from associate0.00450.00
Disposal of shares of Vege Farm0.003,000.001,500 shares x $2.00 (selling price)
Net cash from investing activities0.00(203,550.00)
Cash flows from financing activities
Proceeds from bank borrowings0.0050,000.00
Repayment of bank borrowings0.00(5,000.00)
Shares Issuance0.0010,000.00
Dividends Issued0.00(8,000.00)
Shares Repurchase0.00(10,000.00)
Net Cash from financing activities0.0037,000.00
Net Change in Cash28,804.00(175,352.00)

At last, we must adjust book value of Investment in Associates in the Balance Sheet: $10,750.00 = $10,000 (Initial book value) + $2,700 (Share of profit of associate) – $450 (Dividend received from associate) – $1,500 (Gains / (Losses) on disposal of Vege Farm)

Balance SheetYear 1Year 2Explanation
Current Assets
Accounts Receivable0.0044,200.00
Prepaid Expenses0.0016,000.00
Short-Term Investments0.000.00
Total Current Assets30,000.0016,348.00
Long Term Assets
Property, plant and equipment0.0039,000.00
Intangible Assets0.0044,000.00
Investment in Associates0.0010,750.00$10,000 (Initial book value) + $2,700 (Share of profit of associate) – $450 (Dividend received from associate) – $1,500 (Gains / (Losses) on disposal of Vege Farm)
Total Long Term Assets0.00118,750.00
Total Assets30,000.00135,098.00
Liabilities & Equity
Current Liabilities
Accounts Payable0.0014,000.00
Deferred Revenue0.0011,500.00
Total Current Liabilities0.0025,500.00
Long Term Liabilities
Total Long Term Liabilities0.0045,000.00
Toal Liabilities0.0070,500.00
Total Liabilities & Equity30,000.00135,098.00

Impact of Disposal of Investments in Associates to the Financial Statements in a Glance

Impact of Disposal of Investments in Associates to the Financial Statements in a Glance

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