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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 Mark, I am having only one concern within W2 G/W. How did we reach to 60,000 shares which is used in the deferred consideration and cash payment basis, and in PUP working #7 for dividends, how I calculate the 80,000 shares for Danute in order to multiply by 3c.
Those 2 points are very critical to me
Many thanks in advance.
yes got it. Thanks
Hi Mike,
I went through all the comments in hopes of finding my answer regarding £36k (profit on PPE) being deducted from the profit for the current year end 31.10.11.
Not sure why? we are doing this?
Please help.
Hang on! I might be wrong but is it becasue the sale was before year end?
and in most of the examples we have come across to date, the sale was at the year end and not recognised/recorded in the books?
No, and it’s not deducted from the profit either.
Because it’s a mid-year acquisition we need to split the profit for the year
Unless otherwise stated, profits normally accrue evenly through the year.
But here it IS otherwise stated – this $36,000 is a one-off profit that occurred in the post acquisition period
So we need to deduct it from the year’s profit, split what’s left on an even accrual basis, then add back the $36,000 to the post acquisition part
OK?
yes thank you.
Sir why we multiplied 40,000 with 2 instead of 0.50c share cost ? I didnt get this point when you multiplied 75% * 40000 * 2 ? This 2 making me confused
How many 50 cent shares are in $1?
Sir, sincerely, I do really appreciate your sense of humour and authority in lecturing . This gives me life when watching and remove boring elements. I want to suggest that it will better when you answer some questions related to the particular video page watched instead of permiting only comments though you do answer some questions here but not all . I think this will help thousands out there who may have similar questions aching thier brains out . I almost got lost if not same question of how you multiplied 2/3 with 1 new share issued to acquire every 3 share of Danute 50cent came on here
What I now understand is that the $40,000 recorded was actually the number of shares bought with 50cent which is actually 80,000 shares in total , therefore ,it could have been more simpler by saying 75% of 80,000($40000/50c) * 1/3= 20,000. This will automatically, give an idea of the NCI value of 80000 * 25% * $2.20= $44,000.
Sorry, I do not mean any harm , I actually Swift computer Science to Accountancy , just to have strong knowledge of business, finance and accounting . I have non accounting background.
Once again, thank you so much and I have also recommended friends to open tuition and informed ACCA that I use opentuition because is far better to me than those approved bulk of books that I have bought and read but so boring and incomprehensible.
Opentuition the best!
Sir, sincerely, I do really appreciate your sense of humour and authority in lecturing . This gives me life when watching and remove boring elements. I want to suggest that it will better when you answer some questions related to the particular video page watched instead of permiting only comments though you do answer some questions here but not all . I think this will help thousands out there who may have similar questions aching thier brains out . I almost got lost if not same question of how you multiplied 2/3 with 1 new share issued to acquire every 3 share of Danute 50cent came on here
What I now understand is that the $40,000 recorded was actually the number of shares bought with 50cent which is actually 80,000 shares in total , therefore ,it could have been more simpler by saying 75% of 80,000($40000/50c) * 1/3= 20,000. This will automatically, give an idea of the NCI value of 80000 * 25% * $2.20= $44,000.
Sorry, I do not mean any harm , I actually Swift from Computer Science to Accountancy , just to have strong knowledge of business, finance and accounting . I have non accounting background.
Once again, thank you so much and I have also recommended friends to open tuition and informed ACCA that I use opentuition because is far better to me than those approved bulk of books that I have bought and read but so boring and incomprehensible.
Opentuition the best!
Chris, thank you for your kind words
However, your suggestion that I answer all the recent comments is, unfortunately, totally impractical! I have a life that extends beyond OpenTuition and I cannot sit by my PC waiting for the next comment
Put your question on the Ask ACCA Tutor Forum and I shall get back to you because I check that page (almost) every day
But I see Recent Comments only when I happen to have the OpenTuition site open on the PC and, if your question has slipped below the most recent 5 posts, then I won’t see it
Sorry!
Hi,
Could you please explain, “Reduce the penumbral areas of Divergent possibilities” in simple terms?
Watch the early F7 lectures – that’s what the lectures are there for!
and could you explain pls in Working3, why we unroll the finance cost for 7 months if we are doing consolidation statement as at the year end
Because only seven months have elapsed since the date of acquisition until we get to the year end
Mike, why we doing the unrealised proft calc in working 1? what if there was pup or smth and what else may we do before working 2 like this?
Ausra and Danute is a really tricky question. I say in the lecture that the question has pretty much everything that you can expect in the exam. It’s a tough question! Get on top of Ausra and Danute and you’re sailing through F7!
A question. It may sound silly, but how do you manage to do complicated calculations without using a calculator? Curious to know!
When I qualified (almost a hundred years ago, or so it feels like!) there were no calculators. I don’t mean that they weren’t allowed. I mean that they didn’t exist
Computers were in embryonic stage and mobile phones had not even been thought about
Any and all calculations were either done mentally or on very crude, basic, adding machines. The firm that I qualified with had 11 ladies known as comptometer operators and the ladies worked their lightning fingers over the rows and columns of keys on the comptometer machine adding up page after page of figures
If I was working at a client and there was no comptometer operator available, I would do all additions and calculations by mental arithmetic.
And I have simply never stopped!
I’ve also changed the way in which I add up a column of figures. At school we were taught to add the units, then the tens, the hundreds, the thousands and so on working from right to left
I’ve subsequently taught myself to add up columns moving from left to right and, occasionally, if there are only four or five lines of figures in a column, then I’ll sometimes add up, for example, 592 and 1,356, arrive at 1,948 add 714 arrive at 2,662 add 126 arrive at 2,788 add 524 arrive at the total 3,312
The secret? Just practice and a personal resolve not to become dependent upon calculators. Yet I still make errors!
Good to know that.! without calculators half the time of solving a question can be saved! (only when we are good at it)
Thank you
Dear sir,
kindly tell me from where did you take the share price of NCI 2.20 which you multiplied by 20000 shares of NCI which makes the total of 44,000 in working 2 or the question.
thanks in advance.
Hi
I searched high and low and eventually found in on line 2 of the question!
Ok?
Thank you so much sir,
Um my question says 1.30 shld I take it as an error and go with 2.2?
The example was changed after this recording was made. You need to download the course notes (free) for the revised version
Dear Mike, the $36,000 abnormal profits which occured during the Post acquistion period, assuming that this abnormal profit had occurred during the first 5 months which is the Pre acquisition period, How would you treat it?
Will you just take it as part of the Subsidiary retained earnings at the date of acquisition, or you would make some adjustments to the subsidiary profits first.
Regards
H
If there were a one-off profit situation in the exam question then, yes, you would deduct it from the year’s profits, share the remainder into pre- and post-acquisition elements and then add the one-off back to the appropriate period.
But, trust me here(!), it’s pretty unlikely to appear next month!
Thanks Mike
You’re welcome
Sir,
I am really struggling on how you obtain the profits leading up to acquisition. This is the amount of £22,000. Could you be so kind as to give me some guidance please.
Many thanks. Chris.
Chris – it’s shown in the workings in the solution!
Take out the one-off profit on the transfer, time allocate the remainder, add back the one-off to the second period
OK?
Morning Mike,
all ok now thank you! It was a long day and my “small” brain wasn’t working like it usually does. As you can see I failed the last sitting with 48% 🙁 Fingers crossed this time!
Hi Chris
Better luck in December but, of course, I’m always here to give you guidance should you need it
Thank you Mike.
I am just currently going through all of the questions/examples in the notes and working through them and picking out the ones I am having difficulty in remembering. I have only stumbled at this point so far so fingers crossed it’s a breeze for the rest!
Thank you again!
You’re welcome, and never give up!
hi sir, why the fair value adjustment(12000) is include in D’s pre-acq profit(86000) ?
Because the inventory had been undervalued as at date of acquisition by $12,000. If it had been correctly valued, profits as at date of acquisition would have been $12,000 greater
OK?
okay, I got it. Thank you sir.
let say if the depreciation is undervalued at date of acquisition, it also should be included in pre acq profit?
That’s not really “depreciation is undervalued” is it? The point there surely is that the related asset is overvalued. In which case, a fair value adjustment will be accounted for
Sir i have gone through the example, i am facing the difficulty to calculation of the number of shares on Acquisition , i understood the calculation in this Example because you where explaining it , but when i tried to do mini exercise , i wasnt able to do so. please help me on that 🙁
Go through this example again and try to match the figures in the calculation with their source in the question
There’s also a worked example at the end of chapter 8 (?) in the free course notes where I go through the same process in written form within the notes.
Try that one too.
Then see if you are able to do the mini-exercises.
If you’re still struggling post again with a specific mini-exercise number and the bit of the calculation that you don’t understand
The post acquisition earnings are 14 000 after subtracting the asset of 36000 .i still don’t see how the 8600 post earnings calculated by subtracting the 86000 from the 94600 can be the retained earnings when clearly there is a difference in the two amounts calculated there is something very strange in the question.
I have NO IDEA where you’re getting these figures from! Where are you seeing 86,000 and 94,600 and 8,600?
Please post this on the Ask the Tutor forum because I don’t often look at the general forum
Dear Sir
I have small questions?
1: In the w2 first line why do we multiply it by 2. Can you please explain me First line of w2?
2: With the capital is 10% per annum you did (1/1.1) why because 10% is =to 1/10?
3: Probably I am asking a bad question. Can you please re explain whole question or in easy way because I am struggling with it?
Thanks
is declare and proposed before the yearend constitute the same treatment
The process of declaring a dividend involves announcing the idea in the public forum
I suppose that directors could, in the privacy of the boardroom “propose” a dividend but, until it’s announced publicly, you could argue that it has not yet been declared.
However, you’re getting heavily into semantics here and it’s unlikely that the examiner is going to leave you in any doubt. If, in the exam, a dividend is “proposed” or “declared” before the year end, the examiner wants you to account for it
Sir, sorry to post my question here but on the 48th minute, where does the 30,000 premium come from ? thank you in advance.
I have seen it. Do not bother. Thanks though
Well done – always better to work it out for yourself!
Just one more question – what is the likelyhood of getting both subsidiary and associate in a single consolidation question? Are there any similar examples available in notes? Thank you.
Hi, it’s a good possibility and not without precedent! Are there any examples in the notes? Yes, there are some example exercises at the back of the notes (practice questions) and I seem to remember that there is at least one question in there that has a subsidiary and an associate
Will do sir. Have a good evening!
Good evening!
There is one thing I do not understand at 7:30 (discussion about normal profits)
1). We take profit for the year which is 60000
2). We deduct 36000 of unrealized profit in PPE sale
3). We spread the difference of 24 over 12 months perido evenly
Now, at least as I see it, 36000 were earned in one day and constitute >50% of profit for the year. To me it is a clear indication that profits do not accrue evenly (unless there are days where these profits are netted against losses, then it is different (e.g. swings in results))
The reason that 36,000 was not spread like the remaining 24,000 was because, as you correctly state, that 36,000 was achieved in a single day.
But does the question not say somewhere “except where otherwise indicated, revenue and profits are deemed to accrue evenly throughout the year”
And, if it DOES say that, what do you think is meant by the expression “where otherwise indicated”?
Ok?
Ok, I’ve just checked the question again and I see that it in fact does not specify that revenue and profits accrue evenly (except where otherwise stated)
However, in the absence of such a statement, you would be entitled to assume that. In an exam situation I’m pretty sure that the examiner would particularly specify it.
From memory, this chapter in the course notes follows chapter 8 and I think that I’m correct in saying that, towards the end of chapter 8 I say in recordings that revenues and profits are deemed to accrue evenly except where otherwise indicated
Thank you for your help. This is the first time I am watching these videos and I did pick a lot of good things up. There is one thing, however, which I found a little bit confusing. After W1 calculation/concept of normal profit is given without introduction. I managed to get used to PUP calculus being done in between of W2 and W3 (for obvious reasons), but this “normal profit” was a little bit of a surprize. What you could have said is – “we have end of the year RE figure and we need to work backwards to find RE on the date of acquisition… we need to look through all notes and see what adjustments have direct impact on RE figures etc.” I know I just wrote something silly, but I just got this impression that this example is a massive step-up in complexity compared to all previous examples taken together.
This example is timed to be given at the start of the second day of teaching consolidations. Students are positively warned NOT to look at the example on the evening of the first day but instructed / recommended instead to work through all the previous day’s work on the topic so that, when we look at Ausra and Danute, there is nothing in there that would leave them in the dark.
Yes, it’s a tough question! Yes, it’s as tough as any they are likely to meet in F7. And, yes, if they can follow Ausra and Danute with all its little twists and turns, then the consolidation in the F7 exam should hold no fears for them
Work through it again, one evening next week, and see how you get on.
W you able to drive a car the first time you sat in the driver’s seat? Consolidations work on you the same way as learning to drive.