I'm doing something wrong but I can't work out what. Please help!
I have a client with balance sheet containing only £500k in cash, and shareholders funds of £10k share capital, £190k share premium and £300k retained earnings (so book value = fair value). They want to form a parent company and issue shareholders 1 for 1 with shares in the ParentCo in exchange for their shares in the original company. They apply merger relief so that the parent company balance sheet is DR £10k investment in subsidiary, CR £10k share capital. They then wish to close down the subsidiary. They declare a dividend of £300k, clearing out the retained earnings of the sub, and increasing the retained earnings of the parent. They then wind up the sub. This effectively leads to a gain on disposal of £190k since the ParentCo receives £200k but the investment was only recorded at £10k in the ParentCo. How does one account for this gain? Presumably it neither goes through the p&l, nor should be subject to corporation tax? Does it go straight to retained earnings, or another reserve? If it goes to retained earnings, the company has effectively turned non-distributable share premium into distributable reserves? I know I've got something wrong!