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Many thanks for the Pedantic/ Sophistic answer. That was a fabulous explanation.
Another question
Samsons development project was completed on 30 September 20X4 at a cost of $50 million. $10 million of this has been amortised by 31 March 20X5. Development cost capitalised by Samson at the date of acquisition were$18 million.
Highveldt’s directors are of the opinion that Samson’s development costs do not meet the criteria in IAS 38 Intangible Assets for recognition of an asset.
The solution was to write back amortisation at $10 in retained earnings, besides for this in retained earnings 50-18 was deducted.
Also, 18000 was deducted from goodwill. Why?
Thanks in advance.
Let’s deal with this last one first:
“Also, 18000 was deducted from goodwill. Why?”
At date of acquisition there was included within the fair value of the subsidiary’s net assets an amount of $18 million capitalised development expenditure
On reflection, the Highfeldt’s directors felt that this should not have been capitalised as at date of acquisition and nor should the subsequent additional amount of $32 million (giving us the aggregate of $50 million capitalised development expenditure)
So, assets at date of acquisition are overstated and that means that goodwill is understated … are you sure that $18 million was DEDUCTED from goodwill?
Subsequent to acquisition a further $32 million has been spent on this project leaving us with a $50 million asset that is now being amortised
But it should never have been capitalised and therefore should never have been amortised
What we have is a $50 million asset less $10 million amortisation so let’s reverse that $10 million to start with
Dr Asset $10 million
Cr Retained Earnings $10 millionNow we’re back to a $50 million asset that shouldn’t be an asset at all
Of this amount $18 million was included as part of the assets at date of acquisition and reduced the excess of the purchase consideration element that represented goodwill and the other $32 million was added subsequent to acquisition
Dealing with the $18 million, the double entry should be to:
Dr Goodwill $18 million
Cr Development expenditure account and that brings that account down to $32 millionand now write off that $32 million as it should have been written off previously – as incurred
the aggregation of these entries is:
Dr Development Expenditure asset $10 million
Dr Goodwill $18 million
Dr Retained earnings $32 million
Cr Retained Earnings $10 million
Cr Development Expenditure asset $18 million
Cr Development Expenditure asset $32 millionWe started this exercise with a net asset of $40 million, Retained earnings of (say) $100 million and Goodwill of (say) $20 million
We have now made adjustments of net figures:
Dr Goodwill $18 million
Dr Retained Earnings $22 million
Cr Development Expenditure asset $40 million and we finish up with:a net asset of $Zero, Retained earnings of (say) $78 million and Goodwill of (say) $38 million
OK?
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