In this workout Tortilla Espanola Group is planning to IPO a subsidiary. The IPO is for a 100% stake, quite unusual. Prior to the IPO, the subsidiary will take on new debt and pay a dividend to the parent. We asked to firstly adjust the group and subsidiary balance sheets for the new debt and dividend, and secondly, adjust the group balance sheet for the IPO. And lastly, we're told tax is paid in the year it occurs. So the first thing we need to do is then set up this. Step one. We've got the group figures here, which include the subsidiary, and we need to get to the group after all this debt and dividends. So I'll take group plus the adjustments. I'm going to copy that down where if it's in line with a blue figure and for the subtotals, I'll copy across the subtotal that we've already got built.

Now we're all set up for step one. We now need to work out what these adjustments are. Remember we're taking on debt and paying a dividend. Well, at the bottom we're told the subsidiary's new borrowing is 300, and the subsidiary's dividend paid to the parent is 280. Let's put the debt in there first. So that means cash will be received for 300 and new debt of 300. The dividend paid is an internal transfer from a subsidiary to a parent. Therefore, it won't affect the group numbers. So group is all done. Next, we have to see how the subsidiary is affected by this. I'll start just by linking to the subsidiary figures. I'll make some changes after that. So I'll copy that down.

And subtitles, I'll just copy across.

Now, what changes need to be made? Well, the first one regards the debt that debt was taken on, meaning we've got an extra 300 of cash, but in addition, that means that the subsidiary also needs to take on that 300 of debt as well.

So debt is now accounted for, but there was a payment of the dividends. The dividend was being paid up to the parent, and that will be shown in the subsidiaries accounts. So that means we're gonna have dividends Being paid of 280. So cash goes down by 280. What's the other balance sheet transaction for the dividend? It's going to be our equity going down by the same amount.

So a quick comparison of the two. When we were looking at the group, we just needed to put the debt through because the dividend was just a movement from the subsidiary to the parents. It wouldn't have affected the group's numbers. But when we look at just the subsidiary on its own, we have to put the debt through and we have to show the dividend leaving the subsidiary. So that's step one done. We now move on to step two, which is the IPO. Let's set this up by doing the group, excluding the subsidiary column first. So I'll take the group after step one and I'll add on the adjustments. And again, I'll copy that down and copy subtotals across. So what adjustments need to be made? Well, because it's a 100% IPO, this means we need to de consolidate the subsidiary. So at the moment, my group, excluding subsidiary, is the group we now need to subtract out the subsidiary. So now cash has gone down by the subsidiaries. Cash. I can do exactly the same for all of my assets, debts, operating liabilities, but we don't de consolidate equity. What other complications do we have? Well, if we look down to the bottom, we've got a bit more information. We can see that the subsidiaries valuation is 1000, but we have an IPO discount of 10%. So we'll be selling it from 900. There's a 100% state being sold, and this tax of 20% to be paid. So we need to work out a few numbers before putting them into our adjustments. Firstly, the cash received is gonna be that 1000 times by one minus that 10% discount.

We'll then multiply that by the stake being sold 100% and we're receiving 900.

But that is very much above the book value of equity. That gives us a capital gain. The capital gain is the difference between the 900 and the book value of equity, which is currently in at 105. So we need to pay tax on that. So that's 795. We're charged tax of 20%, 159.

We can now update our figures further up the page in our adjustments to the group. At the moment, we're just de consolidating the subsidiary, but we're also going to add on the very large cash proceeds of 900. However, we also need to pay tax, so we'll subtract off the 159 as well.

So my balance sheet's not quite balancing at the moment. We need to find what those balancing items are and it regards the equity. The capital gain will go through the accounts that needs to be reflected in our equity. So 7, 9, 5. But tax will also go through the accounts and needs to be reflected in equity as well. And that gets us through step two. Group, excluding subsidiary is now balanced. We did a debt push down, a dividend pay up, and then an IPO.