[Syed Ahsan Ali]

THANKS. Please let me know if I understood correctly:

1. Share premium is when the issue price is greater than the nominal value?

2. Share discount is when the issue price is lower than market value?

3. Right issue is also like shares issued on discount which means we compare issue price with market value where issue price has to be lower than the market value?

4. A company can issue their shares on whatever they want but it must not be less than nominal value although they can be equal?

5. Normally the companies has their issue price equal to the nominal value unless they issued share on premium then they would have issue price greater than nominal value; Is that correct?

Thank you. Really Grateful.

[Syed Ahsan Ali]

I have a problem with answer (3) we always compare issue price with nominal value whenever the shares are issued at discount which means that an issue price must be less than nominal value, which on other hand is not allowed!

For eg a share discount is when the issue price is less than nominal value such a company decides to issue shares at $6 and the nominal value of $10 then shares are issued at $4 discount (correct?)

As regards to the answer (4) then we always compare rights issue price with market value which means issue price must be lower than the market value. For eg a company has issued rights shares on an issue price of $10 while the market value is $15 then it means that shares are issued at a discount price of $5 and investors would be willing to buy them?

[Syed Ahsan Ali]

Thank you very much. Please correct me:

1) IF shares are issued at an issue price of $1 and nominal is also $1 then issue price is equal to nominal price?

2) IF shares are issued at premium then issue price is greater than nominal price. For eg issue price is $2.50 nominal price is $1 then extra of $1.50 is premium?

3) IF shares are issued at discount then we compare issue price with market price (and not with a nominal value). The issue price must be less than market value. For eg issue price is $1 and market value is $2 then the discount is $1?

4) The right shares is issued at discount where we always compare right issue price with a nominal value. For eg a company issues right shares with an issue price of $8 and nominal value is $10?

[Syed Ahsan Ali]

Sorry to ask again but I am a slight confused here. Please clarify that isn’t the total equity and net assets are amount that we owed to the shareholders because they are seemingly the same amount!

1. When you say that net assets is total assets – total liabilities then we will end up having total equity which you also said is equal to net assets like (Net assets = Total assets – Total liabilities = Total equity). Is that correct?

2. Let me ask you with example:
Total assets = $100,000
Total liabilities = $40,000
Total equity = $60,000

According to accounting equation the Total equity is equals to Net assets of $60000. Is that correct too?

3. Let me ask you with Total equity breakdown as well.

Share capital = 15,000
Share premium = 5000
Retained earnings = 30,000
Other reserves = 10,000
Total equity = $60,000

The amount of equity ($60,000) is owed to shareholders because it is basically their money BUT on the other hand, the net assets is also ($60,000) then what is the basic difference?

Although Thanks again for your utmost help. Good day!

[Syed Ahsan Ali]

Thank you so much. Now i understood it.

[Syed Ahsan Ali]

Thanks for your time. Could you clear one more time.

I agree with your point answered in (Q3) but you make a distinction here between the shares traded on stock market and the fair value of the net assets. Isn’t the true market value of the net assets is actually the true value of the subsidiary?

For instance if a subsidiary has net assets worth of $1m but the value of shares traded on market worth only $600,000 then which one is actually the true market value of a subsidiary?

Are you trying to say that the difference of $400,000 is actually the Goodwill?

Secondly, isn’t it true that the post-acquisition profits increase the value of shares owned by parent and NCI respectively. That is the reason we always add the post-acquisition profits in Group retained earnings and value of NCI calculations?

Thirdly, the factors that i mentioned above in last question is not correct to change the market value of a business, and in case of a subsidiary.

Thank you very much. I appreciate your help.

[Syed Ahsan Ali]

I meant that the valuation of subsidiary net assets which you already explained. Thanks to you.

I have questions arising related to all this.

1. Is it true that the true value of subsidiary is explained by the fair value of its net assets?

2. Is it also true that there are basically one factor that causes the market value of subsidiary net assets to change which is “post-acquisition profits”?

3. However, post-acquisition profits term encompasses many factors that will increase the market value of subsidiary’s net assets eventually such as:

i) Fair value adjustments
ii) Goodwill
iii) Intangible assets bought
iv) Business Partnership
v) Research and Development initiatives
vi) Biddings / Takeovers
vii) Major business changes

[Syed Ahsan Ali]

Thank you so much. Could you correct me on the entries?

1. The journal entry for depreciation is:
DR Depreciation expense
CR Accumulated depreciation

2. The journal entry for amortization is:
DR Amortization expense
CR Accumulated amortization

3. The journal entry for impairment is:
DR impairment expense
CR non-current asset

4. In consolidation, the depreciation expense will be less from Group retained earnings while accumulated depreciation will be less from non-current asset in SOFP and same treatment goes for amortization?

5. In consolidation, the impairment expense will be less from Group retained earnings while reducing the value of non-current asset?

6. You said that ‘Impairment is the reduction in value of an asset for unforeseen circumstances as opposed to simply the ‘using-up’ of an asset’. Is that true that impairment is actually the decrease in the market value of an asset which happens due to any damage to an asset, any natural disaster or simply change in consumer demand etc?

7. I have seen that you used market value and fair value interchangeably but what is the distinction?

Is that alright?

[Syed Ahsan Ali]

In other words, you are saying that market value is effectively the fair value (they both refer to the same thing) but fair value by definition has more depth because it has three stage model and so.

BUT when we say fair value in consolidation then we actually mean the market value of the asset in the stock exchange?

Is it also true that fair value is actually the ‘estimated’ price of an asset at the time of sale (which is effectively the market price)?

[Syed Ahsan Ali]

Please do correct me if I am wrong.

Fisher equation explains the direct relationship between nominal interest and inflation which affect the real interest.

Nominal interest is the interest expected to earn whereas it is the real interest that defines the real return from the investment.

For example if an investment has nominal interest of 10% and inflation in the country is 2% then we can calculate what will be the real return received from this investment after 1 years?

Solution:
(1+i) = (1+r) x (1+inf)
rearrange the equation
(1+r) = (1+10%) / (1+2%)
(1+r) = 4.76%

This means that if we invest our money in this 10% return security the we will get the only the real return of 4.76% because the inflation of 2% will directly influence our value of money during one year until the maturity date but don’t you think that this is not really very helpful but has limitations because the inflation fluctuates drastically during the years so many times that we will never get the same calculated return! (please explain?)

[Syed Ahsan Ali]

Many Many Thanks to You… 😉

Please help me grasp this too.
In FM we learn – Payback, Disc Payback, ARR, IRR, NPV, ROCE,
Then we also learn Lease v Buy, Asset Replacement and Capital Rationing.

My question is that ALL these investment appraisal techniques as you mentioned are used in present value for investment purpose (as investment cases) but the only case where we use present value for borrowing is in the case of Lease v Buy chapter, is that ? CORRECT?

Secondly, do we also learn any chapter where future value is examined because all the techniques you have stated are used within present value scenarios?

Thirdly, please explain why the present value factors define because the factor of 10% after one-year is 0.909 (9.09%) and 0.826 and so on but what precisely is causing this interest rate to reduce over time?

Is it correct that it is caused by inflation and opportunity cost of capital which states that money has a potential to earn interest if deposited (or used for investment) but if not used then investor is literally losing the potential income?

[Syed Ahsan Ali]

Many

[Syed Ahsan Ali]

I don’t get it…

1) Redemption is the principal amount is repaid at the period-end of the loan and other securities (correct?)

2) Maturity is the end of the period of a security. For eg we took a loan for 5 years then it means the loan has maturity of five years, in other words, it is the expiration date when the loan will finish and it is also called as redemption date as well because it is the time when principal amount shall be repaid in full (correct?)

3) please explain what do you mean by mutual funds and how that works?

4) Also explain how does fixed income security works and is it true that they are called fixed income because they have fixed interest rate?

5) How many kinds of securities do we come across in paper FM in general and in overall ACCA professional papers?

[Syed Ahsan Ali]

Thanks to you for answers…

6) What i wanted to know that what causes the interest rate to diminishes every year, for example, discount factor of 10% after one-year would be equal to 0.909~ and diminish each year, and as you said it didn’t not happen due to inflation but cost of money which i presume caused by losing value of money where money potentially loses its value if not used to earn interest (please explain?)

[Syed Ahsan Ali]

Yeah, i watched them. But can you explain what is terminal value and what it exactly means?

Secondly, please explain the difference between fair value and market value?

And lastly, could you mention the factors that influence the real worth of the business that is considered before any business take over the other!?

Thank you so much!

[Syed Ahsan Ali]

Thanks it was a great relief ?

Please correct me here too.

1) Provision is when we put aside funds for uncertain losses in the future although we do not know the actual amount of the liability?

2) IF it is not certain but rather anticipated then do we adjust the amount of provision once we know the real amount of the liability in the future?

3) Let say we make provision for $10000 but the liability is $15000 then do we make adjust our understated provision by $5000?

[Syed Ahsan Ali]

YOU mean to say that we must use key factor analysis whenever anything could be a limiting factor.

BUT we must use throughput accounting when the limiting factor is only machine hours.

Is there any particular reason for this?

Secondly, Is this related to the exam only or you are saying that in real life we cannot use throughput accounting in a situation where labour hours is a limiting factor (other than machine hours)?

[Syed Ahsan Ali]

(1) I mean factory hours can be either machine hours OR labour hours because they both are used in a factory. That’s is why we call them “factory hours”.

So it could be either one of them that is refer to factory hours. correct?

[Syed Ahsan Ali]

Thank you for your response 🙂

Is it also true that in:
(1) Key factor analysis = we always have labour hours as limited factor

(2) Throughput accounting = we always have machine hours as limited factor. Factory hours is actually machine hours that is limiting factor. correct?

[Syed Ahsan Ali]

we cannot simply take the average time per unit of 12 batches using the formula (like below) because of doubling rule effect. That’s why we need to first take out the average time per unit of 16 batches less average time per unit of 4 batches.

Y = 200(12)^-0.23446 = 111.687652

Total time for 12 batches = 1340.25

Total time for 12 batches comes out different from the previous total time (so it is wrong!)

Both the Tabular approach and Formula takes the doubling rule assumption (correct?)

[Syed Ahsan Ali]

Mix and Yield variances:

Please help me with this question too on total variances.

To calculate total variances of mix and yield variance we need to accumulate their sub-variances such as:

Material Mix———————————-12000 F
Material Yield——————————–10000 A
Total Material usage variance———–$2000 F

Sales Mix————————————-12000 F
Sales Quantity——————————10000 A
Total Sales volume variance————$2000 F

Please say whether we will be asked material mix and sales mix in the exam (no labour mix is relevant for paper PM)?

[Syed Ahsan Ali]

Planning and Operational variances:

To calculate total variances of planning and operational variance we need to accumulate their sub-variances such as:

Material Price Planning——————–15000 F
Material Price Operational—————-12000 A
Total Material Price variance————-$3000 F

Material Usage Planning——————20000 F
Material Usage Operational————–18000 A
Total Material Usage variance———–$2000 F

Labour Rate Planning———————-15000 F
Labour Rate Operational——————12000 A
Total Labour Rate variance—————$3000 F

Labour Efficiency Planning—————20000 F
Labour Efficiency Operational———–18000 A
Total Labour Efficiency variance——–$2000 F

Sales Price Planning———————–15000 F
Sales Price Operational——————-12000 A
Total Sales Price variance—————-$3000 F

Sales Volume Planning——————–20000 F
Sales Volume Operational—————-18000 A
Total Sales Volume variance————-$2000 F

Is that all correct? I asked because I had doubts!

[Syed Ahsan Ali]

Thanks 🙂 Please say about this too.

Flexed Budget using Marginal costing:
In marginal costing, we include variable costs only in the production costs.

———————————Fixed———-Flexed———-Actual———-Variance
Sales units——————-8000———–8400————8400
Production units————8700———–8900————8900
32
Sales revenue————-600000——–630000——–613200———16800 (A)
less: material cost——-(156600)——(160200)——(163455)———-3255 (A)
less: labour cost———-(217500)——(222500)——(224515)———2015 (A)
less: variable OH———(87000)——–(89000)——–(87348)———-1652 (F)

Production costs———(461100)——-(471700)——(475318)
less: closing inventory—(37100)——–(26500)——–(26500)
Cost of Goods Sold——424000———445200——–448818

Contribution—————-176000———184800——–164382——–20418 (A)
less: fixed OH————-(130500)——-(130500)——(134074)——–3574 (A)
Profit————————–$45500———$54300——–$30308——-23992 (A)

The difference between absorption costing and marginal costing is the incorporation of fixed costs in the production costs.

We deduct fixed costs in both methods but the way of doing them is different.

[Syed Ahsan Ali]

Sorry but I realize it is not correct. I got the answer 🙂

Thanks anyway

[Syed Ahsan Ali]

Thanks for that 🙂

Is it also correct that all the fixed costs of $8000 would be deducted from the first product to be produced according to their C/S ratio. Since Product P would be made first so all the fixed costs would be less from the total contribution of $31800.

However, if we suppose that the fixed cost is $32000 then it would be less from the total contribution of Product P and Product C according to their respective C/S ratios.

Is that true too?

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