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Group Accounts – Comprehensive example

VIVA

ACCA F7 lectures  Download F7 notes

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:

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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.

Reader Interactions

Comments

  1. Hi,
    in Point 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.
    Why do we take transfer value of $26000 as cost and not selling price.
    Thanks

      • No! The transfer value is the value for which the goods are transferred so that’s selling price

        I have never heard that distinction drawn and I cannot agree with it as a summary

        What you will (probably) find in exam questions is the information along the lines of “A sold to B goods that had cost A $XXXX. A always sells goods at a mark-up of …. (or A always achieves a gross profit on sales of X%)”

        OK?

  2. Dear Sir,

    I am confused in step W1: we calculate NORMAL PROFIT 60k – 36k, and then split the balance into pre and post acquisition parts: 10k and 24k receptively.

    Could you kindly define Normal Profit for me? I cannot find the definition in the notes.

    In addition, what are the key words to look out for in the exam text to identify if “abnormal profit” (here 36k from the intergroup PPE sales) has to be deducted from the whole year’s profit (60k) – split to post and pre acquisition proft – and finally to be added back to the post acquisition profit (14k+36k)?

    Kind regards, Jeremy

    • “and then split the balance into pre and post acquisition parts: 10k and 24k receptively.”

      Er, no! 60 – 36 = 24 and that’s the figure that we split in the ratio 5:7 = $10,000 and $14,000

      I’ve called it ‘normal profit’ because the $60,000 includes that unusual one-off profit that arose on the disposal of the item of plant

      When you take away that abnormal profit of $36,000 from the reported $60,000 then you’re left with $24,000 profit from ordinary activities … or ‘normal profit’ as I have called it

      “In addition, what are the key words to look out for in the exam text …”

      Sorry Jeremy, but that’s an impossible question to answer

      But now that you’ve seen the issue in Ausra and Danute, maybe you’re just that bit better prepared to be aware of the possibility within an examination question

      🙂

  3. Hi Mike,

    Great lecture, can you just clarify for Note 7 dividends how you got 100,000 shares for Ausra, I can see where you got the 20,000 added on.But unsure on the 100,000 shares as Ausra only bought 60,000 shares.

    Thanks in advance

    Nayem

      • Hi Mike,

        Thanks very much for the lecture. Can you help clarify where you got the 20,000 shares added to the100,000 in the calculation of proposed dividend for Ausra please.

        Thanks

      • Danute has $40,000 worth of 50 cent shares so that’s 80,000 shares

        And Ausra acquires 75% of those 80,000 shares

        So Ausra acquires 60,000 shares in Danute

        The terms of acquisition involve, amongst other things, Ausra issuing new shares on the basis of 1 new Ausra share for each 3 Danute shares acquired

        Do you see now where “the 20,000 shares added to the100,000 in the calculation of proposed dividend for Ausra please.” has come from?

  5. Hi Mike

    Point 4 – To reconcile by removing the 11.5 from Ausra’s receivables and the same from Danute’s payables.

    Was that your way of just cancelling out the intra group balance, sorry I got quite confused.

    It would have already been recorded as a payable in Danute’s records?

    Thanks

  7. Mr.Little
    For the dividends calculate (W7) why was it .3c X 80,000(shares) = 2400 and not 24000.
    And how come for Goodwill Calculation (W2) to come about the 196,000 you added a shares of 20,000…isn’t the 20,000 a figure # and not a value?????

  9. Thank you for this great lecture… at first sight this exercise looks like a huge dinosaur…

    Where does the £40,000 on minute 10:00 come from? I understand there are 80,000 shares, but just cannot see where the £40,000 within the working comes from…

    • What is this post doing as a comment on a lecture / comprehensive example Ausra and Danute?

      This is a post for the Ask ACCA Tutor forum

      In future please post your questions in the appropriate forum

      The notes are fine for December 2016 – which particular changes to which particular standards did you have in mind?

  13. Hello sir, I have a question for the solution. Please help me 🙁
    I am confusing that why the rec account has to be reduced by 6,500 in CS of FP.
    I think it does not have to be because the rec account had already been deducted by 11500. Thus if it is deducted by 6500, then isn’t it double deduction for that account? In Addition, that 6500 amount alreday had been reduced in Cash account.

      • Think double entry, but keep the two parts within the same set of records (for the in-transit cash)

        In the records of Danute, the paying entity, the cash payment HAS already been processed and correctly recorded, so no entry necessary for this $6,500 cash payment

        However, the cash has not yet been received by Ausra, the receiving entity.

        But that cash that is now not in either Danute’s records nor in Ausra’s records is nevertheless an asset of the group

        So accelerate the receipt into Ausra’s records

        Dr Ausra Cash 6,500
        Cr Ausra Receivables 6,500

        That deals with the cash in-transit

        Now all we have to do is cancel the intra-group receivables and payables

        We are told that, before any necessary adjustment for the in-transit cash, the payables balance in Danute’s records was $11,500

        And we have NOT made any adjustment to those Danute records with respect to the in-transit cash

        So the balance in Danute’s records AFTER the adjustment has been made is still $11,500

        And that is now also the receivables balance in Ausra’s records

        So, as a consolidation adjustment, deduct from both combined receivables and combined payables the $11,500

        Is that better for you?

      • The profit of 60,000 for the year (therefore 64,000 brought forward!!!) has the strange time apportionment (see the printed solution to check out the calculation for the pre- and post-acquisition elements of that 60,000)

    • Open two T Accounts

      The first is in Plastik’s records and is called Receivables Account and it includes an amount of $1,200,000 receivable from Subtrak

      The second is in Subtrak’s records and is called Payables Account and includes an unknown amount payable to Plastik

      However, we ARE told that there is $400,000 in transit from Subtrak to Plastik, so let’s record that

      When we accelerate that cash into Plastik’s records, we shall Dr Cash (or, in this case, Dr Overdraft) and Cr Receivables Account with $400,000

      The Receivables line now looks like:

      $4,700,000 – $400,000 + $2,500,000

      And the Overdraft line looks like $1,700,000 – $400,000

      And now the Receivable from Subtrak in Plastik’s records shows an amount of $1,200,000 – $400,000 = $800,000 and the Current Accounts reconcile so we can cancel that $800,000 from both Receivables and Payables

      Now the Receivables line looks like:

      $4,700,000 – $400,000 – $800,000 + $2,500,000 = $6,000,000

      The overdraft line looks like:

      $1,700,000 – $400,000 = $1,300,000 and

      the Payables line looks like:

      $3,400,000 + $3,600,000 – $800,000 = $6,200,000

      OK?

    • Go back to basic double entry principles!

      Read the question about the current accounts not balancing.

      Accelerate the in-transit item into the receiving company’s records – and do the double entry on the question paper

      there may be more than one in-transit item, so repeat the above – again, on the question paper

      Now the current accounts should reconcile so, again on the question paper, cancel the reconciled balance by reducing both receivables and payables by the amount of the reconciled balances

      There is an example in the course notes (Dovile and Jurate I seem to remember)

      Work through that and understand the moves as you work through the solution

      Post on the Ask ACCA Tutor forum if you’re still stuck ( I rarely look at Recent Topics so, if you continue to post here, there’s a good chance that I won’t see it!)

  17. Hi Sir,

    I am confused with the Finance charge unrolled discount calculation. the 30,000 you took to calculate it is the 30,000 shares or the 30,0000 deferred consideration(ans) please? since they actually are the same number and I’ve got confused. Moreover, can you kindly explain it to me more and why would we include it in Ret Ear please?

    Thank you in advance and enjoy your weekend.

    • It CANNOT be the $30,000 worth of shares because that’s actually 60,000 shares acquired and, in exchange, 20,000 Ausra shares issued

      So it’s the deferred consideration.

      We know that we’re going to have to pay cash of $36,300 in 2 years’ time but, because it’s only to be paid in the future, the effect is that we’re “borrowing” money to be “repaid” in 2 years

      If, in fact, we had to invest money today earning interest at 10% per annum in order to have $36,300 in 2 years’ time, how much must we invest?

      $30,000

      The effective borrowing from the former shareholders of Danute that have allowed us to defer payment for 2 years is therefore $30,000 and, as time rolls by, that due date of payment comes ever closer and we shall need to pay out $36,300

      We started with a present valuation of a future obligation of $30,000 and we then unroll the capital amount at the rate of 10% per annum in order to find the present value at a different date in the future

      In the case of Ausra, the different date in the future is 7 months after the date of acquisition

      So the unrolled discount is 7 / 12 x 10% x $30,000 = $1,750

      That’s a finance cost and should be deducted from the retained earnings of Ausra on an accruals basis

      Is that better?

      • Dear Sir,

        Can I say the unrolled discount is like an interest of borrowing $30,000 (present value)?

        However if I calculate two year interest (31/3/3011 to 31/3/2013) it is $6,000 ($30,000 * 10% * 2) $30,000+ 6000=$36,000 and compare with the future value there is difference of $300 how can I deal with this $300 in the accounting treatment?

        Thank You!
        Koey

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