Hi mike Thank you for your lecture however I have a few queries. First in part (a) I do not understand how you got the 6 million in the shares section you add the 40 million + 6 million =46 million and the pre -acquisition of 6 million also,In point ( 111)can you explain the question a little more I understand the concept but not the question . In part (b)you have cost , profit & selling price 4mil+1.5 =560 thousand or 5.6 million & how do you arrive at 5months @ 1.2 million equal 6 million
Hi Mike. I just saw this lecture after doing the same question in my practice kit. I understood how to solve it but now i’m confused because your conso. retained earnings are 34000 but in my practice kit it’s 34,525. And also total assets equal 141,725 in the kit. =/ Please help me sir.
Sorry, I am not following the workings of part b regarding the related party transactions exactly from 4:32: instead of getting 5 month @40 profit, we are getting 5 months at 160 profit. Where does these figures come from? Your earlier workings do not have these figures. Thank you.
But I just don’t get where did you get 5 month@40 profit? In the lecture, the 40 was used as proforma figure like say cost is 100, profit is 40, and selling price is 140; but the would-be profit you later calculated is not 40, it was 1600, and the actual profit is 600, and so Paradigm is underselling by 1000 per month.
“the 40 was used as proforma figure like say cost is 100, profit is 40, and selling price is 140” that’s not pro-forma! That’s what the question says! And where Paradigm has been selling at “discounted” rates, the profit figure recorded has not been $40. It has been only 15
OK – a sale of $4,600 at a mark up of 15% gives a cost per month of $4,000
If that $4,000 had been sold at normal rates, cost per month to Strata would have been not $4,600 but $4,000 x 140% = $5,600
That’s a difference of $1,000 per month that Strata’s cost of sales should have been greater
Hello0.. Sir Mike. hope you are in best of health. . 馃檪
Sir I have a question i am still confused that how you get on the figure of post and pre acq’s . Like also in this ques. of paradigm according to me the pre RE should be:
@ 1st april 2012 = (4000) loss (B/f as you say) and @ from 1st april to 30th sep split as 4000 pre and 4000 post as the balance sheet says that the RE for year ended 31 march are 8000.
“At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the pre- and post-acquisition split of Strata鈥檚 profit for the year ended 31 March 2013.”
I’m sure that I recorded my answer to Paradigm in the F7 Revision lectures on this site. Did you watch that?
Doesn’t the question say that the subsidiary made a loss for the pre-acquisiion period of $2,000 so post acquisition must be $10,000 if the profit for the year is $8,000?
That’s from memory so may not be the right question!
Could you tell me why we need to deduct both loss b/f of 4000 and pre aqn loss of 2000 ( which makes a total loss of 6000) in the goodwill calculation? And why not only deduct the pre acquisition loss of 2000?
Hi Mike, I have written in the last two sittings two exams each. i.e. F4,6,8 in Dec 2014 and passed 4&8, While writing F5,6,7 in Dec 2014 and passed F5&6. I am currently contemplating attempting F7 and F9 in June 2015. I have a very demanding job as I work at EY. Do you think this is a wise decision. Note: I have started studying as of Today for F7. So again, do you think this is wise? and do you think it is possible within the remaining time? Also, any possible suggestions for study patterns between now and June? Thank you!
admin! am taking f7 this december and was exempted first four courses. my question is how important is it to quote IASs when answering theory questions? is it compulsory to quote or not because i was made to believe through my earlier studies that if you quote a wrong IAS the whole answer automatically becomes wrong. whats your advise on this matter? do you encourage or discourage quoting of IASs?
You are a fabulous PRACTICAL teacher! Thanks for going the extra mile to share your experience with myself and many others!!!
Regarding part b, may you explain how you come up with “5” months purchases at “1,2 Mio” = 6 Mio. I thought we are talking about 6 months (DOA-YE) at 600,000 (PUP equivalent) per month = 3.6 Mio. understated costs.
But only 5 months’ worth has been sold to the outside World. The sixth month’s worth of intr-group purchases is still in inventory and is not therefore part of cost of goods sold
I really thank you and all the OpenTuition team for this great effort. Keep up the good job
Question: The cost consideration of this consolidation includes a share exchange and a 10% loan note of 100$ for every 1000 shares. My question is why we do not account the 6 month interest of this loan note (from the acquisition date to the year end date). Its crystal clear why I account the loan note to NCL. But in CL shouldn’t I account the six month finance cost? Maybe I am a bit confused since I do this in cases of deferred considerations (in other questions).
Hi Mike, When parent invests in sub’s loan notes, we debit loan notes, credit investment in consolidated account. What is the double entry for the issue of loan notes? Thanks.
Hi MikeLittle, I would like to ask a question. Could you please help to explain this question? I don鈥檛 understand this question clearly.
(i) At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the pre- and post-acquisition split of Strata鈥檚 profit for the year ended 31 March 2013.
I don’t see the investment of Paradigm in Strata, reflected on Paradigm Statement of Financial Position. Is this in “Financial Asset: Equity Investments”? If yes why isn’t eliminated in the CSOP?
For the calculation of equity shares, your workings stated that Paradigm has issued a new Shares of $6000, $40 000 plus and additional of $6000 and also added to the Premium of $6000.
May I know where is that part of $ 6000 stated in the Question? I’m pretty lost now as I couldn’t find the new issue of $ 6000 requirements in the question, would really appreciate it if you can help me solve this puzzle in my mind.
Thank you in advanced! Love your lectures, it is indeed very helpful 馃檪
We acquired 75%. For every 5 acquired, we issued 2 of our own. Our shares were worth $2 each at date of acquisition. (All of this information is clearly stated in the question)
so: 75% x 20,000 shares x 2 / 5 (two for five issue) x $2 value per share
Ok, that’s the value of the shares that we issue ie 6,000 shares valued at $2 each = $12,000
But the issue has not yet been reflected in Paragidm’s figures so we need to credit share capital with the face value of the shares issued $6,000 (6,000 shares of $1 each) and credit the share premium account with the excess by which the value exceeds the face value (6,000 shares x $2 worth – $1 face value) = $6,000
In Working 3, why do we account for the fair value adjustment of 3m. twice? We subtract it from current year’s retained earnings first and then add it to the pre-acquisition retained earning, effectively cancelling it out.
“and then add it to the pre-acquisition retained earning, effectively cancelling it out” yes, you’r correct. This si the way in which I deal with fair value adjustments. Other tuition establishments consider just the change in the fair valued asset (ie the depreciation since acquisition) and yet another establishment lists all the assets at date of acquisition and again as at date of consolidation.
They all arrive at the same solution – it’s just that I prefer to use the way that have always used
Isn’t it because it was agreed that the retained earnings for the year are not split on a pure time-apportionment? The year’s profits were achieved with a 2m loss pre-acquisition and therefore the post-acquisition profits are 2m more that the year’s profits thus giving (-2 + post acq) = year’s profits?
natty2 says
Hi mike Thank you for your lecture however I have a few queries. First in part (a) I do not understand how you got the 6 million in the shares section you add the 40 million + 6 million =46 million and the pre -acquisition of 6 million also,In point ( 111)can you explain the question a little more I understand the concept but not the question . In part (b)you have cost , profit & selling price 4mil+1.5 =560 thousand or 5.6 million & how do you arrive at 5months @ 1.2 million equal 6 million
MikeLittle says
Put this on the Ask ACCA Tutor page and I’ll get back to you, probably tomorrow when I get home
zohaib03 says
Hi Mike. I just saw this lecture after doing the same question in my practice kit. I understood how to solve it but now i’m confused because your conso. retained earnings are 34000 but in my practice kit it’s 34,525. And also total assets equal 141,725 in the kit. =/
Please help me sir.
MikeLittle says
It’s not unusual for the printed revision kits / exam kits to make small alterations to the exam question
I think you’ll find that that could explain the difference
See if you can identify whether that’s the problem
a7mdsuliman says
The difference 525 due to minor diff. between the lecture and the kite, They added 35% investment in Rainbow.
MikeLittle says
Thank you a7mdsuliman
lukayl says
Sorry, I am not following the workings of part b regarding the related party transactions exactly from 4:32: instead of getting 5 month @40 profit, we are getting 5 months at 160 profit. Where does these figures come from? Your earlier workings do not have these figures.
Thank you.
MikeLittle says
Surely it’s explained from 4.32 to 5.55
Paradigm has been selling to Strata at a gross under-valuation in order to funnel profits into Strata.
Were those sales to be made on an arm’s length basis, Strata’s profits would fall by 5 months’ worth of $1.2 million per month cost of sales
OK?
lukayl says
But I just don’t get where did you get 5 month@40 profit? In the lecture, the 40 was used as proforma figure like say cost is 100, profit is 40, and selling price is 140; but the would-be profit you later calculated is not 40, it was 1600, and the actual profit is 600, and so Paradigm is underselling by 1000 per month.
MikeLittle says
“the 40 was used as proforma figure like say cost is 100, profit is 40, and selling price is 140” that’s not pro-forma! That’s what the question says! And where Paradigm has been selling at “discounted” rates, the profit figure recorded has not been $40. It has been only 15
OK – a sale of $4,600 at a mark up of 15% gives a cost per month of $4,000
If that $4,000 had been sold at normal rates, cost per month to Strata would have been not $4,600 but $4,000 x 140% = $5,600
That’s a difference of $1,000 per month that Strata’s cost of sales should have been greater
Is that better?
lukayl says
Yes. Now I understand. Thanks.
MikeLittle says
You’re welcome
Rana Nabeel says
Hello0.. Sir Mike. hope you are in best of health. . 馃檪
Sir I have a question i am still confused that how you get on the figure of post and pre acq’s . Like also in this ques. of paradigm according to me the pre RE should be:
@ 1st april 2012 = (4000) loss (B/f as you say) and
@ from 1st april to 30th sep split as 4000 pre and 4000 post as the balance sheet says that the RE for year ended 31 march are 8000.
Kindly help me out sir..
MikeLittle says
Note (i) in the question:
“At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the pre- and post-acquisition split of Strata鈥檚 profit for the year ended 31 March 2013.”
I’m sure that I recorded my answer to Paradigm in the F7 Revision lectures on this site. Did you watch that?
MikeLittle says
Doesn’t the question say that the subsidiary made a loss for the pre-acquisiion period of $2,000 so post acquisition must be $10,000 if the profit for the year is $8,000?
That’s from memory so may not be the right question!
cara12 says
Hello,
Could you tell me why we need to deduct both loss b/f of 4000 and pre aqn loss of 2000 ( which makes a total loss of 6000) in the goodwill calculation? And why not only deduct the pre acquisition loss of 2000?
Thank you
Neil says
Hi Mike,
I have written in the last two sittings two exams each. i.e. F4,6,8 in Dec 2014 and passed 4&8, While writing F5,6,7 in Dec 2014 and passed F5&6. I am currently contemplating attempting F7 and F9 in June 2015. I have a very demanding job as I work at EY. Do you think this is a wise decision. Note: I have started studying as of Today for F7. So again, do you think this is wise? and do you think it is possible within the remaining time? Also, any possible suggestions for study patterns between now and June? Thank you!
Neil says
Any help / advice would be much appreciated.
Thank you.
MikeLittle says
I’ve just answered this on the Ask the Tutor page!
Please, post any questions that you may have but don’t post them multiple times!
Yassin Yassin says
Good Day, Mike:
Many thanks for your valuable ACCA support sources online;
Will you be including a revision lecture on Dec-14 F7 Exam as format changed;
regards,
Yassin
MikeLittle says
I most probably will be recording an answer to Paradigm sometime in the future but it’s not on my list of priorities as at today, sorry
takesurechitofu says
admin! am taking f7 this december and was exempted first four courses. my question is how important is it to quote IASs when answering theory questions? is it compulsory to quote or not because i was made to believe through my earlier studies that if you quote a wrong IAS the whole answer automatically becomes wrong. whats your advise on this matter? do you encourage or discourage quoting of IASs?
MikeLittle says
Whoever led you believe that is talking nonsense.
Now, let me ask you, have you listed, read or watched to articles on exam technique on this site.
Or read any previous posts concerning this topic of IAS / IFRS numbers?
Clearly you haven’t, so here I go again answering this same question for the 58th time!
There are NO marks for quoting IAS /IFRS numbers nor titles so, no, there is no need to know them
Ok
馃檪
takesurechitofu says
Thank you very much sir am a happy man now your site is excellent keep up the standards
MikeLittle says
You’re welcome
Ivan says
Might be a stupid question…
I am trying to understand how you got to those 11,200 post acquisition?
thanks
MikeLittle says
On the recording, from around 10.00 through to 19.30 you’ll see how I got to 11,200 post-acquisition
ffgg says
Dear Mike,
You are a fabulous PRACTICAL teacher! Thanks for going the extra mile to share your experience with myself and many others!!!
Regarding part b, may you explain how you come up with “5” months purchases at “1,2 Mio” = 6 Mio.
I thought we are talking about 6 months (DOA-YE) at 600,000 (PUP equivalent) per month = 3.6 Mio. understated costs.
Many thanks!!!!
ffgg
MikeLittle says
But only 5 months’ worth has been sold to the outside World. The sixth month’s worth of intr-group purchases is still in inventory and is not therefore part of cost of goods sold
Yannis says
Dear Mike
I really thank you and all the OpenTuition team for this great effort. Keep up the good job
Question: The cost consideration of this consolidation includes a share exchange and a 10% loan note of 100$ for every 1000 shares. My question is why we do not account the 6 month interest of this loan note (from the acquisition date to the year end date). Its crystal clear why I account the loan note to NCL. But in CL shouldn’t I account the six month finance cost? Maybe I am a bit confused since I do this in cases of deferred considerations (in other questions).
Thank you in advance
bbbdung02 says
hello how can i download the bpp revision kit,many thanks!
admin says
Contact or visit BPP
kahui says
Hi Mike,
When parent invests in sub’s loan notes, we debit loan notes, credit investment in consolidated account. What is the double entry for the issue of loan notes? Thanks.
MikeLittle says
WHAT!!!!!
The investment (in the parent’s records) is debit investment and credit cash
The loan note issue in the subsidiary is recorded as debit cash credit loan notes
On consolidation, the investment in the parent is cancelled against the relevant amount of the loan note liability
Ok
wendyjy says
Hi MikeLittle, I would like to ask a question. Could you please help to explain this question? I don鈥檛 understand this question clearly.
(i) At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the pre- and post-acquisition split of Strata鈥檚 profit for the year ended 31 March 2013.
Thank you.
wendyjy says
Hi MikeLittle, please kindly reply my question. Thank you.
MikeLittle says
Wendy, if you want me to answer a question, I have to see it first! Post your questions that you want me to answer on the “ask the tutor” page!
The question you are referring to is a mid-year acquisition question.
Normally in F7 where we have a mid-year acquisition, the examiner will tell you that all the p&l figures accrue evenly unless ore wise stated.
In this question, the examiner is specifying that profits do NOT accrue evenly.
2m negative of the year’s results were sustained at date of acquisition.
So, if the profit for the year had been say 7m, (2m) was before acquisition and 9m post acquisition
Ok?
Sali says
Hi Mike,
Great lecture!
I don’t see the investment of Paradigm in Strata, reflected on Paradigm Statement of Financial Position. Is this in “Financial Asset: Equity Investments”? If yes why isn’t eliminated in the CSOP?
Thanks in advance!
Nurhidayah says
Mr Mike,
For the calculation of equity shares, your workings stated that Paradigm has issued a new Shares of $6000, $40 000 plus and additional of $6000 and also added to the Premium of $6000.
May I know where is that part of $ 6000 stated in the Question?
I’m pretty lost now as I couldn’t find the new issue of $ 6000 requirements in the question, would really appreciate it if you can help me solve this puzzle in my mind.
Thank you in advanced! Love your lectures, it is indeed very helpful 馃檪
MikeLittle says
We acquired 75%. For every 5 acquired, we issued 2 of our own. Our shares were worth $2 each at date of acquisition. (All of this information is clearly stated in the question)
so: 75% x 20,000 shares x 2 / 5 (two for five issue) x $2 value per share
Ok, that’s the value of the shares that we issue ie 6,000 shares valued at $2 each = $12,000
But the issue has not yet been reflected in Paragidm’s figures so we need to credit share capital with the face value of the shares issued $6,000 (6,000 shares of $1 each) and credit the share premium account with the excess by which the value exceeds the face value (6,000 shares x $2 worth – $1 face value) = $6,000
OK?
Nurhidayah says
Okay I understand it clearly now. Thank you very much! 馃榾
sueellen says
Thank you was wondering the same thing. Pretty obvious now.
sherese22 says
Many, many thanks for posting these lectures. Very understandable and invaluable when revising for the upcoming exams! 馃檪
zhernovoi says
In Working 3, why do we account for the fair value adjustment of 3m. twice? We subtract it from current year’s retained earnings first and then add it to the pre-acquisition retained earning, effectively cancelling it out.
MikeLittle says
“and then add it to the pre-acquisition retained earning, effectively cancelling it out” yes, you’r correct. This si the way in which I deal with fair value adjustments. Other tuition establishments consider just the change in the fair valued asset (ie the depreciation since acquisition) and yet another establishment lists all the assets at date of acquisition and again as at date of consolidation.
They all arrive at the same solution – it’s just that I prefer to use the way that have always used
carolg32 says
Why are you adding back the $2m loss?
MikeLittle says
Isn’t it because it was agreed that the retained earnings for the year are not split on a pure time-apportionment? The year’s profits were achieved with a 2m loss pre-acquisition and therefore the post-acquisition profits are 2m more that the year’s profits thus giving (-2 + post acq) = year’s profits?
rochyroch says
For note (iii) I reduced receivables and payables by 1200 (the difference between 2800 and 900). Careless mistakes….
chiclarence says
dont worry abt your mistakes my dear: they ve been commited and have to be forgotten. learn from them but i know you will pass anyway
chiclarence says
i wish i did it this way but i promise to do it this way in december