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Hi,
Why do we take $66,600 (total comprehensive income) figure instead of $66,000 (profit for the year) figure when calculating the net assets of sentinel for the purpose of finding goodwill?
And what does this mean:-
“Prodigal Co had included the profit on this transfer as a reduction in its depreciation costs”I have calculated the profit on disposal of $1000, does that mean I have to calculate depreciation charge saved on this $1000?
Hi,
The net assets are equal to the equity. Within equity we have share capital plus reserves. The reserves are retained earnings (includes profit) and other components of equity (includes other comprehensive income). To get the full net assets figure we must incorporate the profit for the year and other comprehensive income, which when combined is the total comprehensive income figure.
The profit on disposal calculated by the parent will be that based on the proceeds less carrying value of PPE. There will also be an adjustment required for any difference in depreciation following the transfer, which will need to be included.
Thanks
I don’t understand how they calculated the adjustment for the transfer of plant
My calculation for the adjustment is
Disposal:
Consideration received 5000
Carrying value of the plant 4000
Profit on disposal 1000Depreciation for the plant:
Carrying value 4000
Depreciation 800 (4000/2.5yrs x 6/12)Therefore, adjustment of the plant to be added to cost of sales is -200 (800 – 1000), since they said “Prodigal Co had included the profit on this transfer as a reduction in its depreciation costs.”
But the answer shows +800
Hi,
The working to the answer highlights how they have got the 800 and highlights where you’ve gone wrong.
You’ve correctly adjusted for the 1,000 profit on disposal but have not adjusted for the depreciation correctly. The depreciation adjustment needs to be for the difference between what would have been charged prior to the transfer (800 = 4,000/2.5 x 1/2) and what was charged following the transfer (1,000 = 5,000/2.5 x 1/2). We therefore need to remove a net amount of 200 for the additional depreciation charged.
The overall adjustment is then the 1,000 – 200 to give 800.
Hope that helps clear it up.
Thanks
P2-D2 wrote:Hi,
Hi, not to write the whole question I want to clarify my understanding. My logic is:
Total comprehensive income will be included into the calculation of Net Assets, but we have it split into components including RE and Equity Investment (OCI). Assuming FV of Equity investments is distibuted equally over the year we make an adjustment for the figure @ acquisition (6/12) which means if we now take full Comp. Income into net assets (66,600 – which is figure for the YE after bizcom) it will not make sense as we already removed effect that happened after acquisition. In addition the land revaluation included there also happened post acquisition. That then would mean that we adjusted for all the Comp Income, we have equity and we should take only profit for the year to finally arrive @ Net Assets.
Where am I going wrong?
Thanks!
Hi,
I don’t quite fully follow what you are saying. I get your first bit in that we use both figures in the net assets calculation and then split them when working out the movement on each to go to the different group reserves.
After that then I’m a bit confused by what you are trying to logic out.
Thanks
Hi,
Sorry if I was unclear, I’ll try to break it down a bit.
The SPLOCI @ 31.03.X1goes like this:
Profit for the year 66,000
OCI:
Revaluation (after acquisition) 1,000
Loss on FV of equity instrument (400)Total comprehensive income 66,600
For GW calculation, net assets are therefore:
As represented by:
-Equity shares 160,000
-Investment in equity instrument (2,200 – 400*6/12) 2,000
-Retained earnings @ 1.10.X0 (66,000*6/12) 33,000My main argument is RE above, we should take Profit for the year figure as basis for calculation, not Total CI, because we already factored in the accruing of equity instrument FV change and the revaluation from SPLOCI, as given in the question narrative, got revalued after business combination: “during the post-acquisition period Sentinel Co’s land had increased in value over its value at the date of acquisition…”. That means it shouldn’t be a part of Goodwill calculation, should it?
So I get your point: “To get the full net assets figure we must incorporate the profit for the year and other comprehensive income, which when combined is the total comprehensive income figure.”
But in the context of this question the OCI is something that comes in after merger (land) and we consider accruing of other equity component (equity instrument), so then bringing 66,600 into Net Assets is not correct.
Thanks!
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