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Preparation question: Associate
Hello
The question states in point b: At date of acquisition of P co., the F.V. of its freehold property was considered to be $400,000 greater than its value in P’s co.’s SOFP. P co. had acquired the property 10 years earlier and the buildings (50% of the total value) is depreciated on cost over 50 years.
The fair value working showed a movement in the buildings of (30). This gave a value of 200-30=170, which when added to the land amount of 200 gives 370.
1.I do not understand how the 30 was arrived at, I got 40 as the depreciation.
2.Also, next to the 170 was a working [200 x 34/40], I do not understand the 34.
Please explain.Hi,
I haven’t got the question to hand but I think you need to read the dates in the question carefully on this one.
I think that when the acquisition was made 10 years had already passed of the property’s life, so we are therefore depreciating it over the remaining life of 40 years, not the 50 years as you believe. This should then give an annual depreciation charge of 5 per annum. As we’ve owned the subsidiary for 6 years then cumulatively this then gives the 30 as per the answer.
The extra information is just an alternative way of calculating the 170, instead of deducting the cumulative depreciation as above. If 6 years have gone out of the 40 then there are 34 years left, so the carrying value is 34/40ths of the original amount.
Hope this helps
Thanks
Very very helpful as I also got stuck on this part of the question and I really got frustrated. the 10 year thing was easy to understand but the 34/40 thing was really confusing and I couldnt make out what the reason for the fraction was. It makes a lot of sense to learn that it was because the Sub was for six years. Will now go back to the question and see if I can see things the way you have explained it. Thanks alot
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