1. Profile photo of Swati says


    While deducting the ‘pre-acq ret earning’ form S (working for Cons. Ret Ear). Why are we also deducting the amount of Customer base (intangible asst) which S never recognized in its B/S? I understood why we deduct R.E b/f & increase in FV adj of plant. But I dont understand why the ‘customer base’ of 3000 also getting deducted.

    Referring to Point ii- Also at the date of acquisition, Paladin valued Saracen’s customer relationships as a customer base intangible asset at fair value of $3 million. Saracen has not accounted for this asset. Trading relationships with Saracen’s customers last on average for six years.
    F7 December 2011 Question 1 Paladin.


    • Profile photo of MikeLittle says

      First things first – did we add the value of the customer base in working W3 as a fair value adjustment as at “today” because it wasn’t reflected in the financial records of the subsidiary?

      And we’re trying to find post-acq retained?

      So we need to deduct the pre-acquisition fair valued customer base as at “yesterday”

      That will give us “today – yesterday = post acquisition movement” Agreed?

      Well, that’s why we do it!


  2. Profile photo of Swati says

    Dear Sir,

    I small thing I have to ask – its about ‘impairment of the Investment in Associate’. We deduct this from the Ret Ear calculations. But this ‘impairment’ goes through the Income Statement? As in, do we have to deduct this impairment from Gross profit and then it comes into B/S? Or it directly affects the B/S?

    Referring to : (iv) Impairment tests were carried out on 30 September 2011 which concluded that consolidated goodwill was not impaired, but, due to disappointing earnings, the value of the investment in Augusta was impaired by $2·5 million.


    • Profile photo of MikeLittle says

      questions will normally say something like “depreciation, impairments and amortisation is to be included within cost of sales”

      Think of double entry! If we have to reduce the value of an asset (Investment in Subsidiary), then we must credit that account. Where’s the debit?

      It has to go through Cost of Sales (or Administrative Expenses or Distribution Costs – whatever the question directs you to do)

      So the double entry finishes up as :

      Dr Expense Account (CoS, Admin or Distrib)
      Cr Investment in Associate


      • Profile photo of Swati says

        Referring to your double entry:
        Dr Expense Account (CoS, Admin or Distrib)
        Cr Investment in Associate

        This ‘Debit’ that you do in the Expense Account (Cos/Admin or Distrib) will lead to the reduction in Retained Earnings. And thats why we are deducting it while calculating the ‘cons ret earning’, even if we are not told to make the Income Statement? Is this the logic?

  3. Profile photo of Chantel says

    I am busy spending the day doing past papers, and Q1 Dec 2011. The only thing I dont understand is in Retained Earnings, the Associate, Why 6 months?? We acquired on the 1.2.11 AFS prepared on 30.09.11 8 months?? Any idea what I am missing ?

  4. Profile photo of nkmile64 says

    Thank you Sir for yet another excellent presentation!
    I just hope I could solve a question like this in 60% of the alloted time but it seems I need double that time!
    Is there something I could do or practice to shorten up my time?

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