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    • Mr Mike,

      In December 2011, consolidation question, why did you reduce receivables and payable by 1.3m and provision of unrealised profit of 600 reduce in both retained earnings and inventory

      • Because of this extract from point number iii) in the question:

        “Paladin’s agreed current account balance owed by Saracen at 30 September 2011 was $1·3 million.”

        As for the pup adjustment, it’s an unrealised profit so needs to be deducted from retained earnings … because it’s not yet earned … it’s unrealised

        And we have to stick with double entry principles so by deducting $600 from closing inventory that automatically increases cost of goods sold by $600 and thus reduces profits / retained earnings and the other side is a reduction of that same closing inventory figure as it appears on the statement of financial position

  2. Sir,

    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.

    Swati

    • 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!

      OK?

  3. 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.

    Swati.

    • 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

      OK?

      • Sir,
        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?

  4. OK – SO SORRY…
    Please ignore my comment, if I just watched a little further my problem was solved… (Paused the video too soon) Panic over 🙂

  5. 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 ?

  7. 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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