In this workout, FishChips group is disposing of one of its subsidiaries in an all cash deal. The subsidiary has a tax basis that differs from its book basis. We're asked to calculate the adjustments and adjust the group balance sheet to account for the divestiture. Lastly, we're told tax is paid in the year it occurs. The most important thing to point out here is that second sentence. The subsidiary has a tax basis that differs from its book basis. Assuming the company's being sold for more than it's worth, that means we're going to have a gain on sale. Great, and we'll have to pay tax on that. But the gain on sale that goes through our income statement is going to be different to the gain on sale that the tax authorities will calculate because we've got a different book basis compared to the tax basis. So gain on sale through the books, different to the gain on sale, going through the tax authorities books, and that means the tax that we have to pay on that sale is gonna calculate on the gain that their tax authorities calculate. So down at the bottom, we firstly got the taxable gain. Well, the subsidiary has been sold for 250 and the subsidiary tax basis is 40. I.e. that's what the tax authorities think it should be worth in its books. That gives a gain of 210. Let's compare that to the book game that we as a company would recognize through our own books. Well, again, we take the 250, but instead we look at the subsidiary's equity value and the subsidiary had an equity value of 110, very different to the 40 that the tax authorities would have at. So our gain, we'll put through the books is one 40. So how am I gonna calculate the tax on the gain? Well, we'll always calculate that as the tax rate multiplied by the taxable gain, the one that the tax authorities are recognizing. So we will have to put the 140 through our account and that will go through the income statements, but we'll also have to put through the 42 tax on gain that their tax authorities have calculated, because that's what's actually gonna be paid.

Lastly, the cash proceeds post-tax. Well, that's the 250 that we earn from selling the subsidiary. We're going to subtract off the 42 tax that's paid. Now we've got everything we need. We can start de consolidating here. We've got the group balance sheets, and this includes the subsidiary figures. So when we come to deconsolidate, we'll have to subtract off all of these subsidiary figures here.

Let's go into the final column and calculate the group excluding subsidiary first. To do that, we'll take group and then we'll sum up the various adjustments. I'm gonna copy that down so that when I'm parallel with the blue hard-coded figures, we've done exactly the same thing. Again, I'm gonna copy that down into my liabilities and equity as well. Next up, I want to sum up my subtotals, sum them vertically. And lastly, I'm going to check that The balance sheet balances and does. So what's my first adjustment? Well, the first adjustment is to deconsolidate the subsidiary. Quite literally, take all of its figures outta the groups. So I'm gonna go equals minus 30 for cash. So if we have a look at what's happened here, my group had cash of 100, we're now subtracting off the 30 so that the group ends up with 70 of cash. I want to do that for all of the items. So other current assets, net PP&E, debt, operating liabilities, but not equity. Equity was not consolidated when we acquired a subsidiary, and it's not deconsolidated either. Now the remaining adjustments they can be done in any column really. I'm gonna start with my cash proceeds. That was post-tax of 208. There it is.

Next up, I want to go through the book gain. The book gain was 140, and that will go through the income statements, but the one remaining adjustment is still the tax that has to be paid on that gain. Now, that was the 42. That 42 was calculated on the 210 just above. Interestingly, the 210 won't go through the books at all. It's just there to help us calculate the tax on the, and that 42 goes through as a negative because our income has gone down, they're all the adjustments. We now have the group excluding the subsidiary. We've got total assets of 638 total liabilities and equity of 638, and we have a balance balance sheet.