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April 23, 2016 at 6:47 pm
Can I ask why do you minus excess depreciation from the selling company? Isn’t the excess net off from the buyer’s retained earnings? That way, aren’t we supposed to add back the excess value on the buyer’s side instead? Thank you!
April 23, 2016 at 8:37 pm
I’ve answered a question very similar just recently!
The current thinking is that the unrealised profit becomes realised over the period of the life of the asset. So, as each year passes, some of that pup becomes realised.
Why, the amount of the depreciation on the excess
So the NET pup is shown as an adjustment to the seller’s retained earnings
April 20, 2016 at 3:14 pm
wonderful lecture, thank you.
If we have to make adjustments for unrealised profits at the end of the accounting year, why not just transfer TNCA and even inventory at cost rather at a profit and then having to make adjustments later?
April 20, 2016 at 7:21 pm
Good question! However, the adjustments for pups are made solely for the purposes of consolidation. The individual financial statements for the individual companies are not adjusted for pups
Does that explain it?
April 21, 2016 at 3:30 pm
Yes it does! Thank you. 🙂
March 12, 2016 at 4:15 pm
Normally deduct 1000 (5000-1000) from group retained earnings and add back 250 (inflated depreciation: 1250-1000) to subsidiary post acquisition profit the logic is that the one who sold the asset should remove the profit and the one who bought the asset holds the asset should add back inflated depreciation we cannot put it 1000-250 because NCI is affected by inflated depreciation
March 12, 2016 at 9:00 pm
The entries, both the pup on the sale AND the adjustment for the inflated adjustment, should be through the retained earnings of the selling company!
March 4, 2016 at 2:42 pm
This video is sticking a lot…….can’t watch video. Please fix!
May 25, 2015 at 11:08 am
Hey, I’m having trouble watching this video. All the other videos are fine but this one continues to reload over and over again. I tried on numerous devices (Phone, laptop, tablet and even a P.C). Please help.
May 25, 2015 at 11:23 am
maybe it is temporary glitch, the video works fine,
May 9, 2015 at 2:28 pm
Thanks Mike, you are quicker than Batman!
One thing I want to confirm here that whenever the “Negative” goodwill arises then it should always completely add in Group Retained Earning ? It doesn’t really matter that either a NCI value is given or it proportionate ?? I mean should we require to apportion the amount of negative goodwill if NCI is not proportionate ??
May 9, 2015 at 3:24 pm
Hi saqib you need to put this on the ask the tuitor page if you want to be surre that mike sees it
January 29, 2016 at 3:47 pm
Hi Saqib, whenever there is a negative good will that means there has been a profit on bargain for purchase of the subsidiary therefore, it is considered as reserves and added to retained earnings, why it is not given a share in the NCI is because it is a benefit to the Parent company based on its bargain and as such the NCI can not benefit from this.
But if goodwill was positive notice it is not good will that is apportioned to NCI but the percentage of value impaired if any and if the bases of the NCI is not proportionate.
April 4, 2015 at 2:00 pm
I’d like some help on the following question:
“The acquisition of Subsidiary (S) by Parent (P) took place on 1/10/x0.
Immediately after the acquisition P transferred an item of plant with a carrying amount of $4,000 to S an agreed value of $5,000. At this date the plant had a remaining life of 2 1/2 years.
P had included the profit the profit on this transfer as a reduction in its depreciation costs. All depreciation is charged to the CoS.”
Calculate the depreciation.
Consolidated accounts are being prepared for the YE 31.3.x1
The answer says depreciation is:
Profit on transfer $5000 – $4000 = $1,000
Proportion depreciated 0.5 / 2.5 = ($200)
Unrealised Profit = $800
Dr CoS $800
Cr Plant $800
My question is, why is the profit multiplied by 0.5?
Is it because although a full years’ depreciation should be charged in the year of acquisition, P acquired S half way through their financial year and therefore have pro-rated the depreciation charge?
If this is the case, what has happened to the remaining depreciation charge for that year? Are we to assume that depreciation prior to acquisition has already been charged to CoS?
April 4, 2015 at 4:06 pm
The depreciation of that asset is split into two parts. The first part (the first six months of the year) the depreciation is accounted for in the records of the parent company and is taken into account in arriving at the carrying value as at date of transfer.
The second part (since date of acquisition until the year end) is accounted for in the subsidiary and, since it’s only half a year, then the element of depreciation that is to be charged in the subsidiary’s statement of profit or loss is depreciation for a full year but then divided by 2 because it’s only for half a year
It’s actually an unfortunate example because the depreciation for half a year on the $5,000 asset is $1,000 and that figure is the same as the pup on the initial transfer 🙁
You say in your post that “although a full year’s depreciation should be charged in the year of acquisition ….”
What makes you think that?
April 4, 2015 at 4:18 pm
Thanks Mike 🙂
In my last comment, I meant that the rule is for a full years depreciation to be charged in the year of acquisition and none in the year of disposal.
Ordinarily if the asset was acquired on 1.10.x0 then depreciation should’t have been pro-rated, but from what I understand, half the years’ depreciation was already charged in the Subsidiary, therefore the remaining half would be charged to the Parent after acquisition, and when looking at the group accounts, a whole year’s depreciation would have been charged.
Or maybe I am just totally confused… in which case I think I will just give up and focus on answering the rest of the questions correctly.
April 4, 2015 at 4:36 pm
Don’t give up!
The parent is selling to the subsidiary so 6 months’ pre-transfer depreciation is in the parent and now we need 6 months’ post-transfer depreciation in the subsidiary.
You are quoting this rule to me as though it is cast in tablets of stone “…. the rule is for a full year’s depreciation ….”
That’s not a rule! It’s a policy that some companies choose to adopt, but it’s not a rule
April 4, 2015 at 4:38 pm
Ahhh I thought it was the rule set in stone by IFRS/IAS
Thanks for the heads up!
March 12, 2016 at 4:14 pm
February 10, 2015 at 8:03 pm
Apologies for raising this query on the lecture site rather than “ask the tutor”. Just thought it might be quicker than referring back to the lecture example. My query is if the example above had made the exact same transaction but from the sub to the parent (i.e. PUP of 10 on sale less the excess of 5 on dep’n now in parent company) then the net effect is now a reduction in the sub rather than parent – Dr Ret Earn, CR TNCA etc.
Does the sub now present as follows on the consolidated statement of retained earnings (for the sub);
Per Question 600
Pre Acq (275)
Less: PUP (5)
Post Acq 320
This would leave post-acq for parent as 60% x 320 = $192,000. I’m assuming this is correct as the 600 would (theoretically) already incorporate the accelerated depn etc. Equally the NCI of 40% in W4 would then be 40% x 320 = $128,000.
Many thanks for your help in advance and many thanks for getting me through my F4 paper last month too!
April 4, 2015 at 4:39 pm
This is pure chance that I saw this post – I rarely look at the comments after the lectures. You, of all people, should know that I respond always when the post is on “Ask the Tutor” but it’s a rare occurrence that I see other posts.
Your principles are correct (I don’t have the question in front of me, but so long as the figures that you are using are correct, then so too are your observations)
Congratulations of your F4 roaring success – I bet you’re missing it now….all that fun and excitement!
February 9, 2015 at 6:06 pm
Hi Mike, im just wondering why the net pups is written off against the retained earning of the selling company only.
Taking this example, the parent made a sale of asset to the sub making a profit of 10. Therefore the subsidiary is charging extra depreciation (of 5)
So logically, the profit of 10 should be charged against the retained earning of the parent while the extra depreciation of 5 should be added on to the retained earning of the subsisidiary. This would affect working 3 . cons retained earning.right?
April 4, 2015 at 4:42 pm
Jonathan, if ever in the future you want a tutor to respond, please post your question on the ask the tutor page. It’s a rare occurrence that we look at other posts!
It used to be the case that we eliminated the profit on disposal from the seller’s retained earnings and added the excess depreciation back to the buyer’s retained earnings.
This changed about 4 years ago so the NET adjustment is now made in the seller’s retained earnings
April 8, 2015 at 6:28 am
Ok. got it. Thanks a lot Mr. Mike 🙂
January 13, 2015 at 9:40 am
Fantastic! The step by step approach is interesting. I recommend these series of lectures for all ICAN students in Nigeria.
The method used to treat inter group non current assets. How can we compute depreciation if useful life of the asset is unknown using the short method you recommended?
I mean how can I compute depreciation using (unrealized profit divided by remaining useful life)
January 13, 2015 at 11:35 am
A question HAS to give you that information. Let me turn your question round ….. how can you calculate depreciation if you use the “long” way round and the examiner doesn’t tell you remaining useful life?
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