1. Profile photo of Swati says


    In the F7 December 2010 Question 1 Premier:
    Another very small doubt regarding the pt: ‘the issue of a $100 6% loan note for every 500 shares acquired in Sanford. Also says: but the issue of the loan notes has been recorded.’

    Why are we not doing anything in the liability side of the B/S ? As in do we not increase the ‘6% loan note’? And why are we subtracting it from ‘Investments’ under Assets?


    • Profile photo of MikeLittle says

      It already has been recorded. The only way it could have been recorded, given the information in the question, is Dr Assets – Investment in Subsidiary and Cr 6% Loan Note

      “As in do we not increase the ’6% loan note’?” has already been done as explained in the foregoing paragraph

      “And why are we subtracting it from ‘Investments’ under Assets?” because we have included it within investments but, in working W2 Goodwill, we are including it as part of goodwill calculation


  2. Profile photo of Swati says


    My another small doubt is:

    Do we always take into account the ‘Depreciation Adjustment’ in the working of Cons Ret ear? If its a reduction in Depr, we add it and vice-versa? Right?

    Referring to: pt (i) …This would lead to a reduction of the depreciation charge (in cost of sales) of $50,000 in the post-acquisition period. Sanford has not incorporated this value change into its entity financial statements.


      • Profile photo of Swati says

        Okay, got it.
        So every time there is ‘dep adjustment’ , we either add or subtract it from cons ret ear. of Subsidiary depending upon FV increase or decrease.
        And we take just the portion of depr till acquisition, as in, if acquisition is in mid yr, we time-apportion it?

  3. Profile photo of Swati says


    A very small doubt in the ques: F7 December 2010 Question 1 Premier

    Its point (ii): Sales from Sanford to Premier throughout the year ended 30 September 2010 had consistently been $1 million per month. Sanford made a mark-up on cost of 25% on these sales. Premier had $2 million (at cost to Premier) of inventory that had been supplied in the post-acquisition period by Sanford as at 30 September 2010.

    My confusion is: when we have calculated pup of 400000, why are we not deducting if from NCI (working W4A)? I mean, why are we not subtracting nci’s share of pup?

  4. Profile photo of nari says

    hi mike
    Something that bothers me a bit in this and other questions such as chap 7 ques 7 is if P is buying $1 shares in S at a cost of $1.50 (at doa) , then why is the premium not shown as part of the net assets of S at doa? in this quest the $1 shares were bought at a price of $3.50 @ doa. Even though at year end there is no share premium account , I would think that at doa there would have been one.

    • Profile photo of MikeLittle says

      No – the payment for the shares is not to S itself. We are paying $3.50 (or however much the question tells us) to the former shareholders of S who have now been persuaded to sell their shares in S to P. These are not new shares being issued by S for P to buy


  5. Profile photo of nari says

    hello mike, regarding the decrease in value of 1.2 mill below the fair value of assets. I don’t understand why the decrease in value is not shown in the profit and loss ? (since sanford did not have a revaluation account)

      • Profile photo of nari says

        Mike, thanks for your response but I still don’t understand,…… the 1st paragraph they said the EXCEPTION to the fair value of the assets was that property was 1.2 mil below at date of acquisition and that “Sanford has not incorporated this value change into its entity financial statements” If you could elaborate a bit more maybe I would understand…..I really would appreciate it if you did. Thanks.

      • Profile photo of MikeLittle says


        The fair value of the subsidiary’s net assets are not (ok, exceptionally rarely) adjusted for in the subsidiary’s accounting records. It says in the question Premier and you have yourself copied the line in your post – “Sanford has not incorporated this value change into its entity financial statements”

        This fair value adjustment to the Sanford net assets is taken into account when calculating the goodwill paid by Premier on the acquisition. In addition, for the purposes of the CONSOLIDATION ONLY the TNCA of the group will be reduced by the value of this downward fair valuation.

        Furthermore, there may be an adjustment necessary to the post acquisition charge for depreciation – and that WOULD go through the Sanford post acquisition Retained Earnings in working W3, Consolidated Retained Earnings.

        But, to get back to your original question, the fair value adjustments to the carrying values of subsidiary net assets at date of acquisition are made in working W2 to calculate the goodwill and in working W3 where there is a consequent adjustment necessary for eg depreciation (either an additional depreciation to charge (where fair value was greater than carrying value) or excess depreciation to add back to the subsidiary’s post acquisition retained earnings (where fair value was lower than carrying value))

        Is that better?

  6. Profile photo of latoyah says

    Hi Mike,

    Thanks so much for going through these past exam papers, it really helps!

    I work the questions from the kit, then watch the videos your reasoning goes a far way in clearing up some issues.

    why in this questionn the profits for the year is split $10760 and 190 and total comprehensive income 11560 and 190.

    isnt that showing the same deduction twice?

    thanks much.

  7. avatar says

    On the consolidated statement of financial position, under Investments you have added 1800 + 300 for the increase in value of the investments (i understand it all until then) but then deducted 800?? for what? is it the loan note part of the investment in Sanford? it says in the question that the issue of the loan note has been recorded. Could you pleas tell me where I am going wrong here?
    Many thanks in advance and thanks for all the videos and help on here! :)

    • avatar says

      This is because the question says that the issue of the loan note has been recorded as you have noted, this means that the double entry that was passed in recording this transaction was initially:-
      Dr: Investments 800
      Cr: 6% Loan note 800
      The concept is that if you issue loan note you increase your financial investment hence we debit it and once you issue shares you increase your capital and hence credited….And this is currently the accounting entries being reflected in the unconsolidated F/S. Hence as part of consolidation, since the Loan note has been issued as part of consideration, it has been included in Goodwill; hence if we do not cancel this transaction, it will be recorded twice, i.e as part of investment and as part of cost of investment (i.e goodwill)
      Hence we need to subtract the 800 in order to cancel this effect.
      Hope you have got a concept…
      May be Mike will come to make this clear…this is according to my understanding..

      • avatar says

        Sorry to say but this puzzles me greatly, I have r ead your answer over and over but still havent cleared it as yet. If it is entered twice so it has to be deducted from Investments then why is it not deducted from Loan Notes also.

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