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I would like to ask with regards to question acca f7 june 2011
what is the meaning of loss of fair value of equity financial asset investment?
because I have a look with the answer where I saw the for the sentinel(s co) the loss of fair value of equity financial asset investment 400 need to be time apportioned and allocate to parent and nci. I not understand why we need to do so? but for the gain on revaluation of land does not have to time apportioned
and actually how was the accounting treatment for it in cis and csofp?On 1 October 2010 Prodigal purchased 75% of the equity shares in Sentinel. The acquisition was through a share
exchange of two shares in Prodigal for every three shares in Sentinel. The stock market price of Prodigal’s shares at
1 October 2010 was $4 per share.
The summarised statements of comprehensive income for the two companies for the year ended 31 March 2011 are:
Prodigal Sentinel
$’000 $’000
Revenue 450,000 240,000
Cost of sales (260,000) (110,000)
––––––––– –––––––––
Gross profit 190,000 130,000
Distribution costs (23,600) (12,000)
Administrative expenses (27,000) (23,000)
Finance costs (1,500) (1,200) ––––––––– –––––––––
Profit before tax 137,900 93,800
Income tax expense (48,000) (27,800) ––––––––– –––––––––
Profit for the year 89,900 66,000 ––––––––– –––––––––
Other comprehensive income
Gain on revaluation of land (note (i)) 2,500 1,000
Loss on fair value of equity financial asset investment (700) (400) ––––––––– –––––––––
1,800 600 ––––––––– –––––––––
Total comprehensive income 91,700 66,600 ––––––––– –––––––––
The following information for the equity of the companies at 1 April 2010 (i.e. before the share exchange took place)
is available:
$’000 $’000
Equity shares of $1 each 250,000 160,000
Share premium 100,000 nil
Revaluation reserve (land) 8,400 nil
Other equity reserve (re equity financial asset investment) 3,200 2,200
Retained earnings 90,000 125,000
The following information is relevant:
(i) Prodigal’s policy is to revalue the group’s land to market value at the end of each accounting period. Prior to its
acquisition Sentinel’s land had been valued at historical cost. During the post acquisition period Sentinel’s land
had increased in value over its value at the date of acquisition by $1 million. Sentinel has recognised the
revaluation within its own financial statements.
(ii) Immediately after the acquisition of Sentinel on 1 October 2010, Prodigal transferred an item of plant with a
carrying amount of $4 million to Sentinel at an agreed value of $5 million. At this date the plant had a remaining
life of two and half years. Prodigal had included the profit on this transfer as a reduction in its depreciation costs.
All depreciation is charged to cost of sales.
(iii) After the acquisition Sentinel sold goods to Prodigal for $40 million. These goods had cost Sentinel $30 million.
$12 million of the goods sold remained in Prodigal’s closing inventory.
(iv) Prodigal’s policy is to value the non-controlling interest of Sentinel at the date of acquisition at its fair value which
the directors determined to be $100 million.
(v) The goodwill of Sentinel has not suffered any impairment.
(vi) All items in the above statements of comprehensive income are deemed to accrue evenly over the year unless
otherwise indicated.Here’s what you posted:
“I saw the for the sentinel(s co) the loss of fair value of equity financial asset investment 400 need to be time apportioned”
and here’s an extract from the question:
“(vi) All items in the above statements of comprehensive income are deemed to accrue evenly over the year unless otherwise indicated.”
So that explains the time apportionment
“and allocate to parent and nci” – I don’t understand this part of your post!
Here’s the next bit of explanation for the land – it’s an extract from the question:
“During the post acquisition period Sentinel’s land had increased in value over its value at the date of acquisition by $1 million”
So that explains why it ISN’T time apportioned
OK?
Is that means the revaluation is the post acq period already so do not have to time apportionment?
may I know what is the meaning of loss of fair value of equity financial asset investment? I not really understand about it. It is a post or pre acq?
and I want to ask how do we know the the note (i) for the post acquistion land had increased in value. How do we know we no need to add someone 1000 to the gain on revaluation of land? we straight deemed the 1000 in the income statement is that revaluation transaction already?
“and allocate to parent and nci” – I don’t understand this part of your post!
This part of my post means that the loss of fair value of equity financial asset investment for subsidiary is it for the group % portion go to cost of investment and nci % go to non controlling interest?There are also the other question taken from acca f7 june 2012
May I know what is the accounting treatment for the below 2 addtional information one is regards to 1million unrecorded deferred tax, cit and urp on inventory?
for the note iii) I don’t understand y the sales to square is 16000 and then purchase from pyramind 14500? It not supposed to be the same figure? and for the receivable and payable part I also not really understandOn 1 April 2011, Pyramid acquired 80% of Square’s equity shares by means of an immediate share exchange and
a cash payment of 88 cents per acquired share, deferred until 1 April 2012. Pyramid has recorded the share
exchange, but not the cash consideration. Pyramid’s cost of capital is 10% per annum.
The summarised statements of financial position of the two companies as at 31 March 2012 are:
Pyramid Square
Assets $’000 $’000
Non-current assets
Property, plant and equipment 38,100 28,500
Investments – Square 24,000
– Cube at cost (note (iv)) 6,000
– Loan notes (note (ii)) 2,500
– Other equity (note (v)) 2,000 nil ––––––– –––––––
72,600 28,500
Current assets
Inventory (note (iii)) 13,900 10,400
Trade receivables (note (iii)) 11,400 5,500
Bank (note (iii)) 900 600 ––––––– –––––––
Total assets 98,800 45,000 ––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each 25,000 10,000
Share premium 17,600 nil
Retained earnings – at 1 April 2011 16,200 18,000
– for year ended 31 March 2012 14,000 8,000 ––––––– –––––––
72,800 36,000
Non-current liabilities
11% loan notes (note (ii)) 12,000 4,000
Deferred tax 4,500 nil
Current liabilities (note (iii)) 9,500 5,000 ––––––– –––––––
Total equity and liabilities 98,800 45,000 ––––––– –––––––The following information is relevant:
(i)– Square had an unrecorded deferred tax liability of $1 million, which was unchanged as at 31 March 2012.
(iii) Pyramid sells goods to Square at cost plus 50%. Below is a summary of the recorded activities for the year ended
31 March 2012 and balances as at 31 March 2012:
Pyramid Square
$’000 $’000
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid’s receivables 4,400
Included in Square’s payables 1,700
On 26 March 2012, Pyramid sold and despatched goods to Square, which Square did not record until they were
received on 2 April 2012. Square’s inventory was counted on 31 March 2012 and does not include any goods
purchased from Pyramid.
On 27 March 2012, Square remitted to Pyramid a cash payment which was not received by Pyramid until
4 April 2012. This payment accounted for the remaining difference on the current accounts.‘Is that means the revaluation is the post acq period already so do not have to time apportionment?’
I presume that you’re asking about the land revaluation here
That’s what the question says, yes
Here’s the next part of your post:
“… how do we know the the note (i) for the post acquistion land had increased in value. How do we know we no need to add someone 1000 to the gain on revaluation of land? we straight deemed the 1000 in the income statement is that revaluation transaction already?”
And here’s what the question says:
“Sentinel has recognised the revaluation within its own financial statements.”
Here’s the next part of your post:
“… what is the meaning of loss of fair value of equity financial asset investment? I not really understand about it.”
Imagine that you own shares in a company and the value at 1 January last year was $4 per share and at 31 December last year the value had fallen to $3 per share
Shares held by you would be classified within your own financial statements as ‘Equity financial asset investments”
These are not the shares that Prodigal holds in Sentinel – these are shares that Prodigal holds in other entities
Clearly, in my example, the equity financial asset investment has suffered a loss in fair value
Your post asks … “It is a post or pre acq?”
The final note in the question states … “All items in the above statements of comprehensive income are deemed to accrue evenly over the year unless otherwise indicated.”
OK?
Okay thanks mike I got it I still gt one more question to ask
There are also the other question taken from acca f7 june 2012
May I know what is the accounting treatment for the below 2 addtional information one is regards to 1million unrecorded deferred tax, cit and urp on inventory?
for the note iii) I don’t understand y the sales to square is 16000 and then purchase from pyramind 14500? It not supposed to be the same figure? and for the receivable and payable part I also not really understandOn 1 April 2011, Pyramid acquired 80% of Square’s equity shares by means of an immediate share exchange and
a cash payment of 88 cents per acquired share, deferred until 1 April 2012. Pyramid has recorded the share
exchange, but not the cash consideration. Pyramid’s cost of capital is 10% per annum.
The summarised statements of financial position of the two companies as at 31 March 2012 are:
Pyramid Square
Assets $’000 $’000
Non-current assets
Property, plant and equipment 38,100 28,500
Investments – Square 24,000
– Cube at cost (note (iv)) 6,000
– Loan notes (note (ii)) 2,500
– Other equity (note (v)) 2,000 nil ––––––– –––––––
72,600 28,500
Current assets
Inventory (note (iii)) 13,900 10,400
Trade receivables (note (iii)) 11,400 5,500
Bank (note (iii)) 900 600 ––––––– –––––––
Total assets 98,800 45,000 ––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each 25,000 10,000
Share premium 17,600 nil
Retained earnings – at 1 April 2011 16,200 18,000
– for year ended 31 March 2012 14,000 8,000 ––––––– –––––––
72,800 36,000
Non-current liabilities
11% loan notes (note (ii)) 12,000 4,000
Deferred tax 4,500 nil
Current liabilities (note (iii)) 9,500 5,000 ––––––– –––––––
Total equity and liabilities 98,800 45,000 ––––––– –––––––The following information is relevant:
(i)– Square had an unrecorded deferred tax liability of $1 million, which was unchanged as at 31 March 2012.
(iii) Pyramid sells goods to Square at cost plus 50%. Below is a summary of the recorded activities for the year ended
31 March 2012 and balances as at 31 March 2012:
Pyramid Square
$’000 $’000
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid’s receivables 4,400
Included in Square’s payables 1,700
On 26 March 2012, Pyramid sold and despatched goods to Square, which Square did not record until they were
received on 2 April 2012. Square’s inventory was counted on 31 March 2012 and does not include any goods
purchased from Pyramid.
On 27 March 2012, Square remitted to Pyramid a cash payment which was not received by Pyramid until
4 April 2012. This payment accounted for the remaining difference on the current accounts.“(i)– Square had an unrecorded deferred tax liability of $1 million, which was unchanged as at 31 March 2012.”
You have NOT given me the full information here!
” iii) I don’t understand y the sales to square is 16000 and then purchase from pyramind 14500? It not supposed to be the same figure?”
It would be the same information if there were no goods in-transit!
this is the full information for the question
that means there were git 1500? from pyramid to square?
I just know need to credit deferred tax liability 1 million for subsidiary ltd but I dont know where to debit it?
On 1 April 2011, Pyramid acquired 80% of Square’s equity shares by means of an immediate share exchange and
a cash payment of 88 cents per acquired share, deferred until 1 April 2012. Pyramid has recorded the share
exchange, but not the cash consideration. Pyramid’s cost of capital is 10% per annum.
The summarised statements of financial position of the two companies as at 31 March 2012 are:
Pyramid Square
Assets $’000 $’000
Non-current assets
Property, plant and equipment 38,100 28,500
Investments – Square 24,000
– Cube at cost (note (iv)) 6,000
– Loan notes (note (ii)) 2,500
– Other equity (note (v)) 2,000 nil ––––––– –––––––
72,600 28,500
Current assets
Inventory (note (iii)) 13,900 10,400
Trade receivables (note (iii)) 11,400 5,500
Bank (note (iii)) 900 600 ––––––– –––––––
Total assets 98,800 45,000 ––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each 25,000 10,000
Share premium 17,600 nil
Retained earnings – at 1 April 2011 16,200 18,000
– for year ended 31 March 2012 14,000 8,000 ––––––– –––––––
72,800 36,000
Non-current liabilities
11% loan notes (note (ii)) 12,000 4,000
Deferred tax 4,500 nil
Current liabilities (note (iii)) 9,500 5,000 ––––––– –––––––
Total equity and liabilities 98,800 45,000 ––––––– –––––––
The following information is relevant:
(i) At the date of acquisition, Pyramid conducted a fair value exercise on Square’s net assets which were equal to
their carrying amounts with the following exceptions:
– An item of plant had a fair value of $3 million above its carrying amount. At the date of acquisition it had
a remaining life of five years. Ignore deferred tax relating to this fair value.
– Square had an unrecorded deferred tax liability of $1 million, which was unchanged as at 31 March 2012.
Pyramid’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose a
share price for Square of $3·50 each is representative of the fair value of the shares held by the non-controlling
interest.
(ii) Immediately after the acquisition, Square issued $4 million of 11% loan notes, $2·5 million of which were
bought by Pyramid. All interest due on the loan notes as at 31 March 2012 has been paid and received.
2
(iii) Pyramid sells goods to Square at cost plus 50%. Below is a summary of the recorded activities for the year ended
31 March 2012 and balances as at 31 March 2012:
Pyramid Square
$’000 $’000
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid’s receivables 4,400
Included in Square’s payables 1,700
On 26 March 2012, Pyramid sold and despatched goods to Square, which Square did not record until they were
received on 2 April 2012. Square’s inventory was counted on 31 March 2012 and does not include any goods
purchased from Pyramid.
On 27 March 2012, Square remitted to Pyramid a cash payment which was not received by Pyramid until
4 April 2012. This payment accounted for the remaining difference on the current accounts.
(iv) Pyramid bought 1·5 million shares in Cube on 1 October 2011; this represents a holding of 30% of Cube’s
equity. At 31 March 2012, Cube’s retained profits had increased by $2 million over their value at 1 October
2011. Pyramid uses equity accounting in its consolidated financial statements for its investment in Cube.
(v) The other equity investments of Pyramid are carried at their fair values on 1 April 2011. At 31 March 2012,
these had increased to $2·8 million.
(vi) There were no impairment losses within the group during the year ended 31 March 2012.
Required:
Prepare the consolidated statement of financial position for Pyramid as at 31 March 2012.“(i) At the date of acquisition ….”
And that’s the bit that was so important that you should not have omitted it!
This is very similar to a fair value adjustment
For example, when there is an asset that has a fair value $3 million in excess of its carrying value, the adjustment necessary in working W2 Goodwill is to increase the fair value of subsidiary net assets as at date of acquisition by that $3 million
Here we have an unrecorded deferred tax liability of $1 million
That’s an adjustment to the fair value of subsidiary net assets at date of acquisition!
In working W2 Goodwill you need to show this deferred tax liability when you are listing the fair value of the subsidiary’s net assets at date of acquisition
“that means there were git 1500? from pyramid to square?” That’s what it looks like
And also $2,700 cash in transit from Square to Pyramid as at the year end
but I was not understand y the statement mentioned that on 26 march 2012, pyramid sold and despatched goods to square, which square did not record until they were receive on 2 april 2012 ? y it mention that the goods transaction havent record? is that means those 14500 is the goods that square purchased before 26 march 2012 from the pyramid?
and how was the urp on sales of inventory?for the fair value of net asset of subsidiary ltd at doa actually y the deferred tax liability will include? it not supposed only include those equity, reserve and retained earnings? actually we should + or – the deferred tax liability at fair value of net asset at doa? that means we need to – or + the group% of deferred tax liability at cost of investment (what I get from the purchase consideration) match with what I paid for investment? am I need to + or – back to non controlling interest as well?
and may I know what is the accounting treatment for a negative goodwill at consolidated income statement?
How else can the examiner tell you that there are goods in transit?!!!
“is that means those 14500 is the goods that square purchased before 26 march 2012 from the pyramid?”
Yes
“actually we should + or – the deferred tax liability at fair value of net asset at doa?”
It was an unrecorded, unrecognised liability
So you should deduct it from the other net assets of the subsidiary as at date of acquisition
“am I need to + or – back to non controlling interest as well?”
Where on Earth have you got that idea from?
Simply include it as a liability fair value adjustment
“and may I know what is the accounting treatment for a negative goodwill at consolidated income statement?”
Look at page 34 of the free course notes on this site
I mean we subdivided for the fair value of nci at date of acquisition. I mean minus the nci portion for deferred liability at the non-controlling interest column to find the final csofp figure?
“I mean we subdivided for the fair value of nci at date of acquisition. I mean minus the nci portion for deferred liability at the non-controlling interest column to find the final csofp figure?”
We didn’t do anything of the kind … if you had followed my way of preparing the workings for a consolidation
If you insist upon “sub-dividing fair values at date of acquisition” then, yes, the nci will have their share of this unrecognised liability set against them
okay thanks mike
SOFPHighveldt, a public listed company, acquired 75% of Samson’s ordinary shares on 1 April 2004. Highveldt paid an immediate $3·50 per share in cash and agreed to pay a further amount of $108 million on 1 April 2005. Highveldt’s
cost of capital is 8% per annum. Highveldt has only recorded the cash consideration of $3·50 per share.
The summarised balance sheets of the two companies at 31 March 2005 are shown below:
Highveldt Samson
$million $million $million $million
Tangible non-current assets (note (i)) 420 320
Development costs (note (iv)) nil 40
Investments (note (ii)) 300 20
–––– ––––
720 380
Current assets 133 91
–––– ––––
Total assets 853 471
–––– ––––
Equity and liabilities:
Ordinary shares of $1 each 270 80
Reserves:
Share premium 80 40
Revaluation reserve 45 nil
Retained earnings – 1 April 2004 160 134
– year to 31 March 2005 190 350 76 210
–––– –––– –––– ––––
745 330
Non-current liabilities
10% inter company loan (note (ii)) nil 60
Current liabilities 108 81
–––– ––––
Total equity and liabilities 853 471
–––– ––––
The following information is relevant:
(ii)
included in highveldt investment is a loan 60 million made to samson at doa. Interest payable annually in arrears. Samson paid the interest due for the year on 31 march 2005 , but highveldt did not receive this until after the year end. highveldt has not accounted for the accrued interest from samson?
I want to ask what does the meaning highveldt has not accounted for the accrued interest from samson? is that means highveldt havent recognize the interest receivable? so we need to recognize nw by debit interest receivable ct parent profit and loss and then only take out intergroup interest?
what is the accounting treatment for the interest ?“I want to ask what does the meaning highveldt has not accounted for the accrued interest from samson? is that means highveldt havent recognize the interest receivable?”
That’s exactly what it means
“so we need to recognize nw by debit interest receivable ct parent profit and loss and then only take out intergroup interest?”
Has Samson recognised the interest payable with the entry?:
Dr Loan interest expense $6 million
Cr Cash Current account $6 millionYes it has so now we have some cash in transit and to record that we must:
Dr Cash (in transit) $6 million
Cr Interest receivable $6 millionI believe that that answers your questions
OK?
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