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I refer to answer of Q1 workings (vi) and (vii) December 2007 exam answers. I strongly believe there is a mistake made here. Correct calculations should be:
Consolidated retained earnings: $’000
Plateau’s retained earnings: 24,000
Savannah’s post-acquisition ((2,900 – 300 URP + 100 excess depreciation) x 75%): 2,025
Axle’s post-acquisition profits (5,000 x 30%): 1,500
URP in plant, Examiner is wrong here should be -500 included here and +100 above in S’s post acq : (500)
Gain on available-for-sale investment (9,000 – 6,500): 2,500
Impairment of goodwill: (900)
–––––––
Total : 28,625Minority interest
Adjusted equity at 30 September 2007: (12,900 – 300 URP + 100 excess depreciation) = 12,700 x 25% :),175
–––––Any help will be greatly appreciated.
Hi
I mention in my audio answers and in the lectures this “strange” treatment by the examiner, BPP and Kaplan. And they appear to me to be inconsistent in their treatment! This “weird” thinking leaves me speechless. From a purely conceptual point of view, the seller has recorded the ( unrealised ) profit and the buyer has charged ( excess ) depreciation on the grossed up cost.
The only common sense approach is to eliminate the pup from the seller’s retained earnings and add back the excess depreciation to the retained earnings of the buyer.
I’ve said, earlier, that those more knowledgeable than me appear to treat the problem in an inconsistent manner. There is, presumably, some justification for that inconsistency – but I don’t know what it is! Sorry not to be able to be more specific / helpful / enlightening 🙁
Mike
I think I have found the answer to presumed justification. And it is:
Depreciation based on the new carrying value is in effect a realisation of the unrealised profit through use and therefore reduces the consolidation adjustment.
The working isUnrealised profit on transfer X
Less: proportion depreciated by year end (X)
XAdj in the books of the company making the sale:
DR Retained Earnings
CR PPEAh, maybe! there is a certain logic to it. What is the reference ie where did you find this justification?
BPP ran a refresher course last weekend for P2 students here in Ireland. I signed up for that course just to find out the answer to my this particular problem. Before I had got a chance to ask the tutor, he explained the topic. In his lecture, he did say that it used to be the way, but with the revision of the Standard, excess depreciation method was discontinued. Please see attached page of course note.
OK, all you interested students. It appears that there has been a change – hopefully recent! – in that it is now acceptable for the NET pup to be adjusted in the seller’s records.
I don’t know whether this is required or merely acceptable – I’m trying to find out and will let you know as soon as I find anything for sure
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