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  1. 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

  2. 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.

  3. 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.

    • 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?

      • 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

        Is that better?

  4. 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..

    • 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?

    • 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!

      • 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

  5. 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!

  7. 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?

  9. 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

  10. 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

  12. 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.

    • 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

  13. 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.

      • 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?

  14. 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!

  15. 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

    • 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?

  17. 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?

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