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This lecture is applicable for Paper F7 but is also a revision lecture for Paper P2
Group Accounts – Comprehensive example 1
When Ausra bought 75% of the Danute 50c equity shares of 31 March, 2011, the value of the Ausra $1 equity shares was $4.30 and the Danute shares had a market value of $1.30.
The terms of the acquisition were a combination of elements:
– for every 3 shares acquired Ausra issued 1 new share
– a payment of $1.21 for each 2 shares acquired payable on 1 April 2013
– a payment of $0.60 per share acquired immediately
The Ausra cost of capital is 10% per annum
Only the cash payment on 31 March 2011 has so far been recorded
On 31 October 2011, the respective Statements of Financial Position were:
1. At the date of acquisition, some of Danute’s inventory had a fair value $12,000 in excess of its carrying value. All of this inventory had been sold before the year end.
2. On 31 July 2011, Danute had sold an item of property, plant and equipment to Ausra realising a profit on sale of $36,000. Ausra was depreciating this item over its remaining useful life of 4 years. It is group policy to charge a full year’s depreciation in the year of purchase, and none in the year of sale.
3. On 1 October, 2011 Ausra had despatched goods to Danute at a transfer value of $26,000. Ausra sells goods at a margin of 30%. Danute had sold a quarter of these goods by the Statement of Financial Position date.
4. The current accounts did not reconcile at the year end because Danute had sent a payment of $6,500 to Ausra, but Ausra only received it on 2 November 2011. Before any necessary adjustment, the intra group balance in Danute’s records showed an amount owing to Ausra of $11,500.
5. Goodwill is impaired by 25%.
6. Profits for the two companies for the year to 31 October, 2011 (before any adjustments necessary to be made) were respectively $70,000 and $60,000
7. Both entities have declared but not yet accounted for a dividend per share of 10c (Ausra) and 3c (Danute).
8. The directors valued the nci investment on a fair value basis using the market value of the Danute shares as a fair measure.
Prepare a Consolidated Statement of Financial Position for the Ausra Group as at 31 October 2011.
Hi Mike,
Quick query re: the proposed dividend and cross-cancelling the receivables of A&D.
As the purchase of Danute’s shares entailed the issue of 20,000 shares by Ausra (80,000*75%*1/3), should Danute not be entitled to a 2,000 dividend (20,000 *10c)?
Or have I misunderstood the question and this is not actually a share for share exchange?
Scratching my head a little on this one.
Ask yourself “to whom were these shares in Ausra given?”
The answer is “To the former shareholders of Danute who have sold their shares to Ausra”
In fact, in English law (subject to an exception which I’m not going to tell you about!) a company cannot be a member of itself nor of its holding company. Danute CANNOT own shares in
In answer to your question, “No, Danute does NOT own the additional 2,000 shares. They are held by the former shareholders who accepted Ausra’s offer to buy them out.”
Is that ok?
Yes, very clear; and it’s 2 for 2 on stupid questions asked by myself. Let’s put it down to a long day…
Thanks very much for the reply.
I just love these baseball analogies!
sir,
why add this lecture in F7, i think it is P level ‘Q’. Not difficult but it takes to much time. is it possible to come in F7 exam ?
It’s called “comprehensive example” for a reason! We look at the same question when we get to P2. Yes, it’s tough but it should in fact reassure you – there are loads of easy marks in there and no-one, yes, no-one is going to get it right first time. I’m even inwardly overjoyed when I get it to balance!
ok, thanks
You’re welcome, as always
Hi,
I’m having trouble with W3. If PUP on the transfer of NCA is treated using the method explained in the “Dividends, Example 4” video, i.e., by deducting the PUP of $ 36,000 from Danute and adding the excess depn of $ 9,000 to Ausra.
The post acqn. ret’d earnings for Danute is then “-400” (a loss of 400). This results in a Cons. Ret’d Earnings of $ 201,900, and NCI of $ 23,900 at the CSFP date.
Please let me know if I’m right in using this method; and if I am does that mean both methods are correct?
Also in dealing with the FV adj. for inventory, I did not add the $ 12,000 to the $ 10,000 pre acqn profit. Instead I showed it in W2 as a FV adj., and in W3 as a deduction from Danute’s earnings. Hence my pre acqn earnings in W3 was $ 74,000. The overall effect is the same, however, I would like to know if this is also correct.
Thanks in advance.
The treatment of 36,000 in Danute and 9,000 in Ausra is NOW NO LONGER APPLICABLE. Check out the course notes – they are updated for this recent change. The net change is accounted for in the retained earnings of the seller
I keep thinking about being consistent with the 12,000 fair value adjustment and accounting for it in Working 2 and 3 as you suggest. Maybe I’ll try it that way next time. It should work (hopefully!)
Thanks for pointing that out to me. God bless you.
You’re welcome
Hi Mike,
Why was the 12,000 fair value inventory adjustment brought in as pre -acq profit and removed from the post acq profit? I am pretty confused.
If the inventory at date of acquisition had been correctly valued, the pre-acq profit would have been higher but, at the same time, the cost of sales for the post-acq period would be greater and the post-acq profit would be reduced
Hi. I would like to know if you would reduce 12 000 from Inventory in CS of FP?
Sorry…think I got it. INCA(Goodwill) has been reduced so we only need to reduce retained earnings in order to balance.
or…as Mike pointed out above(thanks) cos would be higher for the post acq period so post acq profit would be reduced. Thus only w3 includes a 12000 reduction.?
A Co acquires B Co
In B TNCA=2000
In A = 1000 @ Revalued Amount
And Asset is sold for profit
In BPP Text profit will be calculated differently for B Co and for Group Accounts , Why?
Q/2
AT DOA B Co asset are less than fair value
At yr end Does B Co’s Bal Sheet should show revalued amount or at NBV
A will put fair values on the assets of B when A acquires its interest / investment in B. What value those assets are in B’s books is irrelevant for the consolidation – the value for the group accounts is the fair value as established by A on acquisition as reduced by subsequent impairments and depreciation.
Fair values may or may not be reflected by B based on A’s valuation. In an exam question, it VERY RARELY happens that B will change the carrying value of the assets in B’s own records
Hope that helps
Phew, i was happy with lectures until i watched this. This is so much confusing p.s i went through an exam kit question and i saw at the answer’s pages they’d add up Revaluation surplus in NA acquired @DOA, P.s they include some complex issues like R&D expenses and loans given to Subsidiary. @mikelittle
Yes, a revaluation as at date of acquisition should indeed be added (or sometimes subtracted) from the figure of net assets as at date of acquisition.
R & D and Loans are simply revaluations (normally) and cancellable assets vs liabilities respectively
Mr. Little I am sorry I don’t understand the T account cal. For Ausra’s Danute account, why all of a sudden we balance at 11500? then why b/d 11500 then cancel out then all of a sudden we get 18000?
18,000 is the balance in Ausra’s records – then, when we account for the cash in transit of 6,500 that leaves 11,500 and it’s that amount which needs to be cacelled
OK?
Thank you for the long comprehensive lecture!
Very confusing example I must say! 🙁 I am going to watch the lecture again!
I am hopping the question in the exam will not combine EVERY adjustment we could possibly think of when it comes to consolidation, it seems too much, but anyways, have to be learned!
Maha
You’re right Maha – it all needs to be learnt! The comprehensive example is intended to include ALL the complications which you may face
Thank you Mr Little 🙂
May I say that I find you a great lecturer with a good sense of humour!
Maha
Can someone please give a clear explanation as to how the unrolled discount on deferred consideration was done in Ausra and Danute.
What is “today’s” value of the amount to be paid in the future? You need to look at F2 and F3 to revise the concept of discounting!
Dear Mr Little
When I using dec 2010 paper (INT)a s my practice, I found the Q1 of that paper is similar with this comprehensive example, in that Q, the pre month is 8 and the post month is 4, it tells the profit of the whole year, and we can calculate the PUP of the subsidiary , quite similar with comprehensive question. however, the answer showed that it is directly use the pre and post month split the profit, not consider the PUP, thus I was confused…would you please help to explain?
Hi Sunny
I have to say that I don’t remember December 2010 exam question being similar to my comprehensive example!
The comprehensive example specifically says that the TNCA transfer was in the post acquisition period. Now, normally you’ll find that the examiner will say “revenues and expenses may be assumed to accrue evenly unless otherwise indicated”
Well, in this case, it is otherwise indicated.
I can’t see anything wrong with the logic behind the profit split in my answer – sorry 🙁
Thanks Mike for your wonderful explanation
But I am confused about the value of equity shares of the parent entity (Ausra) showed in the separated statement of financial position as at 31 October 2011 ( the value is $ 100.000 and we know that Ausra issued 20.000 shares @ DOA)
In the separated statement of financial position as at 31 October 2011 of Ausra shouldn’t be shown the value of § 120.000
Thanks in advance for your attention
Hmmm, I think, from memory, that the question says that Ausra has not yet recorded the share issue element f the acquisition
If I’m wrong, do post again
So if Ausra would record the additional shares dividend would be payable for 120 000 instead od 100 000? IS that correct? Also would this dividend for 120 000 be time apportioned?
The dividend will be paid on 120,000 shares and there is no such thing as time-apportioning a dividend
A great example, but it states “Only the cash payment on 31 March 2011 has so far been recorded.”
But the answer considers 120,000 shares for the purpose of calculating dividend payable!
Yes, because even though the share issue has not been recorded, the shares are nevertheless in issue and are entitled to their dividend
Thanks for the lectures!!
And I have one question about the unrolled discount on deferred consideration which is 1750, what is it and why we should take it into consideration when calculate the consolidated retained earnings?
Thanks in advance!
and if I wanna do the next two years about this deferred cash, what is the double entry will be?I am confused about how this works
Many thanks!
look at it this way: the deferred consideration was to be paid after 2 yrs. deferring it means the company didnt pay it : thus after two years the will provide for it by debiting their retained earnings as a finance charge for that year and crediting the deferred consideration account: after 2 years the full amount would ve been credited and they will then debit the account and credit cash tio pay for it:
hope this helps
Thanks Clarence – I couldn’t have explained it better myself 🙂
Hujie – the finance charge of the unrolled discount is an expense which clearly relates to the year and should be included as an expense. It’s the unrolling for 7 post-acquisition months of the discounting of the deferred cash payment due two years after date of acquisition
hello mike !
i am very happy with most explanation except for 1. i tried attempting a question like the profit split in w2. the problem is i do not know when we need to split the profit! what pointer should i look for to determine if i need to split profit or not
I don’t know how often Mike checks these pages, so I’ll try and answer your question 🙂
Give specific regard to the numbered points at the bottom of the question, as they outline all of the relevant information (regarding adjustments and so on).
In this example, we know that the subsidiary was purchased part-way through the year. We also know that they made a profit of $36,000 from selling plant in the post-acquisition period. To time-apportion the other profits, then, we must first deduct the profits from the sale of plant (as they do not pertain to the first period).
Just ensure that you’re reading the question properly and taking note of any dates given – they are usually the key.
you split the profit when the aquisition was not aquired at the begining of the year: thus the profit for the year has to be split between pre and post aquisition and the pre will be added to the reserves for the previous years. hope it helps
I have a query re: the shareholdings on the final consolidated statement.
Your figure of $120,000 includes $20,000 attributable to Danute (D owning 25% of the 80,000 we calculated it as having).
As these are 50cent shares, though, surely the holding is only worth $10,000?
I’m probably missing something, but it’s causing me a bit of trouble.
Cheers.
Dear Mike,
I am struggling. I don’t understand the explanation about/calculation of profit split for Danute. Profit for Danute before adjustment is 60,000. This profit amount was made in the whole year till Oct 2011. The year is split to 5mths (pre acq) and 7 mths (after acquisition).
By my understanding, 36,000 (profit made from sale of property) was made in july 2011 ( post acq), so it it goes under the 7mths post acq period. At the date of acquisition, some of Danute’s inventory had a fair value $12,000 in excess of its carrying value. in other words 12,000 of the 60,000 profit is placed under the 5mths pre acq period.
Therefore, since the 36,000 and 12,000 (parts of the 60,000 profit) have been accounted for… we are left with just 12 ,000 profit to allocate between the two periods ( 5mths pre acq and 7mths post acquisition). when the remaining 12,000 is shared between the two period using the ration 5:7, I got a different answer from that of the tutor.
From your working, the calculations – additions and subtractions are posing a little confusion. Why was the 36,000 subtracted from the 60,000 and then added again? why was the 36,000 not placed under the 7mths post acq period straight away.
Again why was the balance 24,000 split into 14,000 and 10,000? was it assumed that the business made 2000 per month?
I am trying to grasp what is going on. I can’t proceed to the other workings w2-w7 which are a lot easier without understanding how the 60,000 profit for the Danute was shared between the post and pre acq period.
Thank you
Hi, I have made the same mistake as you did when I first calculate the split profit. However, after listening to the explanation of the tutor, I thought our misunderstanding would lie in the fare value in inventories in excess of its carrying value of 12,000 – we remembered that the 12,000 belonging to the pre-aquisition, therefore we treated as profit of pre-aquisition, however, we forgot that the 12,000 also impact that of post-aquisition through Cost of Good Sold, just as the tutor said in the lecture. If considering the 12,000 in the post-acquision, then you can use your same logic before to get the same answer as the tutor did. Please try.
Total profit = 60,000, pre-acq = 12,000, post-acqu = 36,000 – 12,000=24,000, then remaining the even profit = 60,000-12,000-24,000 = 24,000, the 5 months profit would be 12,000+24,000*5/12=22,000, the 7 months profit would be 24,000+24,000*7/12 = 38,000.
Hope it helps…
You’re the best accountant tin the world. Thank you
W-2 for note 7. dividend in parent is 10c and total share are 120,000 (100,000+20,000). hence dividend should be $12,000. is it correct ?
secondly, for transferring of TNCA pup is in seller’s books but additional depreciation is in buyer’s books then why we not adj. add. depreciation in buyers book when calculating consolidated retained earning.
Dear Mr. Little, I am having the same concern as Sgabbas, wrt W-2 #7. At date of issuing the financial statements, 31 October, there are 120,000 shares issued, amd I believe all should have equal rights to dividend, as proposed, i.e. 10c. Furthermore, on the final layout of the CSFP the Share Capital is clearly disclosed at $ 120,000.
Sgabbas, Michi
You’re both absolutely correct – it’s an oversight ( ERROR! ) on my part for which I apologise without reservation. I have, of course, forgotten the 20,000 shares which were issued but not recorded on the event of the Danute takeover.
Well done both of you ( and others ) for spotting my mistake
Dear Mike,
Why we showed unrolled discount as a liability (as deferred cash in CSFP) while we have already subtracted it from Ausra’s Consolidated Retained earnigs.
Thanks in advance for clarity
Dear Mr Little,
1) chapter 9
CSoFP
Receivables 90.000 – 6.500 – 11.500 + 1.800 – 1.800 + 80.000 = 144.150
The Parent receives 1.800 dividends receivable. Why do we cancel the 1.800 afterwards? What is the double entry for the cancellation of the 1.800?
2) In my country we write numbers as follows”
2.000.000,00
which means the use of the “.” and the “,” is the opposite of the UK (2,000,000.00).
I tried changing my writing style to the UK one, but I do get confused that way and I have ended up using both ways of writing.
Which style do you recommend to use?
Will it be ok for me to use the writing style of my country? Will I still get full marks?
Thank you!
No worries – use a “.” or a “,”
You won’t lose any marks!
Dear Mr Little,
Many thanks for your lecture!!!
May you explain once more the procedure of DEFERRED CASH and UNROLLING THE DEFERRED DISCOUNT.
Why is UNROLLING THE DEFERRED DISCOUNT necessary?
When we originally DEFERRED THE CASH PAYMENT, we did that for 2 years, why do we then only need to unroll it for 7 mths, back to the DOA?
Cheers!
You’re not rolling it back to date of acquisition – you’re rolling it forward to date of consolidation
That was hard to follow, alot of work to be done between now and the exam!! There are so many elements, keep getting lost in my workings:(
Sorry if the explanations / workings were hard to follow – I’ll try harder next time
Sorry the lecture was easy to follow and has helped me alot, my understanding of the content is what is lacking, waiting for the penny to drop!
So many thanks for ur kindly help Teacher Mike.Now I got answer and check my answered.And download ur indicated F7 notes.Soo sorry for ur dislike thing.Sorryyyyyy .