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Hi Sir,
In point (ii) of the question it is stated as follows “Under the purchase agreement of 1 June 2008, Bravado is required to pay the former shareholders 30% of the profits of Mixted on 31 May 2010 for each of the financial years to 31 May 2009 and 31 May 2010. The fair value of this arrangement was estimated at $12 million at 1 June 2008 and at 31 May 2009 this value had not changed. This amount has not been included in the financial statements”
The $12m should be deferred consideration or contingent consideration? I think it shouldn’t be considered as contingent consideration since the purchase consideration is not dependent on a future outcome or a particular event. Please do correct me if I am wrong.
Secondly, I cannot understand the calculation behind the addition of deferred tax of 0.6m (2*30%) within the Net Assets calculation of MIXTED. Where did they get this 2 from??
Is the 2 not a revaluation increase? I don’t have a revision kit with me so can’t answer the first part of your post, but I’ll have one tomorrow
I think that it has been called “contingent consideration” because that’s what it was at date of acquisition. But now having looked at the printed solution, you’ll see in working W7 of the Kaplan answer that the 12 has been included as an actual current liability. It’s simply retained the title that it was given as at the date of acquisition
The deferred tax adjustment of 30% x 2 is because of the “extra” depreciation on the fair value adjustment of the PPE. PPE was fair valued upwards by 14, depreciation on that uplift over 7 years is 14 / 7 =2, and there’s a deferred tax implication of 30% x that 2 extra depreciation
Does that do it for you?
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