Consolidated account

When Lake receives the invoice, they will put through the entry Dr Administrative Expenses Cr Current Account with Hill

That entry will now reconcile the two current accounts

Before the adjustment, the Lake Current Account in Hill’s records was $500 and we have not adjusted that balance with the above entry – so the Lake Current Account in Hill’s records is still $500.

But so too is the Hill Current Account in Lake’s records

So we can now reduce Receivables by $500 and Payables by $500

In addition, in Lake’s records, by the above entry we have increased Administrative Expenses by $100 and decreased Receivables by $100

The overall summarised combined adjusting entry is therefore:

Dr Administrative Expenses $100
Dr Payables $500
Cr Receivables $600

BUT! I wouldn’t in the exam room tackle the problem as a combined adjustment – I would take it one step at a time

Hope that helps

It’s because the subsidiary profits / retained earnings need to be reduced by this $100. At the moment, the parent has paid / incurred these administrative expenses. Now they’re passing them on to the subsidiary.

So, in the parent’s records, Admin Expenses have been reduced but, so far as the group is concerned, those Admin expenses have actually been incurred. So the subsidiary profits for the year and retained earnings to carry forward should reflect this re-charge from the parent

In working W3, we need to include as an adjustment to “today’s” retained earnings a deduction of $100 in the subsidiary column

That will lead to a reduction of $100 in the calculation of post-acquisition retained earnings and hence a reduced amount against which the nci percentage is to be applied

Does that answer it for you?

You’re welcome

The question tells us that the GOODWILL attributable to the nci is $1.5m but we need to know the value of the nci INVESTMENT

To arrive at that figure, the value of the nci investment is the combination of their proportional share of the subsidiary’s fair valued net assets at date of acquisition plus the value of the goodwill attributable to them

The Sophistic fair valued net assets at date of acquisition are calculated as:-

Shares 4,000
Retained earnings brought forward 3,500
Retained earnings for 6 months 1,500
Fair value adjustment 2,000

Total 11,000

Their share 40% x 11,000 4,400
Attributable goodwill (given in question) 1,500

Value of nci investment at date of acquisition 5,900

Ok?

Based on my own experience of DipIFRS I suggest that just F7 material is necessary – no need for P2 and, yes, opentuition material should be enough.

Not sure exactly what you mean by “question pattern of consolidation” but from memory the consolidation question is similar to a consolidation question in F7 papers.

Why not look up the DipIFRS past exams and see for yourself?

Good morning,
Do you have any video with December 2012 ACCA F7 pass paper under the revision on open tuition

Also why was the goodwill deducted from administrative expenses.

Is the answer not simply 10% x $2.50 share price at date of acquisition? $2,500,000 (answer not loading on my machine)

Dear Sir,
If we are deducting it from Parent’s ‘Income from investment’ then why do we not add it from Subsidiary’s side? If Subsidiary has paid it, shouldn’t we add this 4000 in Subsidiary’s record?

Swati, I don’t see any dividend payment in the figures we shall use to prepare a consolidated statement of profit or loss. Do you?

The dividend payment by the subsidiary is not an expense to be included in the pre-tax figures (and that’s as far down the statement of profit or loss that we are going to consolidate)

A dividend is an appropriation of earnings to be shown within the statement of changes in equity.

Alright Sir,
got it,
Thanks..

OK, number 1)

“1) While calculating ‘pup’, we have to see how much is the profit element in the inventory still there with the buyer (say Subsidiary is the buyer & Parent is selling). Right. Now we are given the amount of opening (2000,000) and closing inventory (1200,000) of Subsidiary in respect of goods purchased from Parent. Profit is 25% mark up on Cost. Sales to Subsidiary is say, 10 mn. So how do we calculate the pup when opening & closing inventory is given?”

The first “p” in “pup” is “provision”

By statutory definition a provision is a credit balance. So the opening position is a creit balance brought forward of 25/125 x 2m = 400,000

The closing balance to carry forward is 25 / 125 x 1.2m = 240,000

But these into a T account and you’ll see that there is a “missing figure” in the T account needed to make it balance. The figure is 160,000 and should be debited to the T account and credited to …… where?

To the statement of profit or loss as a provision no longer required. An increase in a provision would be added to cost of sales but here we have a decrease in a provision and that will be deducted from cost of sales

“2) What does it mean when ques says: the FV adjustments arising on DOA of Subsidiary will be regarded as Temporary Differences for the purposes of computing Deferred Tax. Any unrealised profit on Inter entity trading will also be regarded as Temporary Differences for this purposes. – What would be the accounting treatment & why?”

It means that we should apply the deferred tax principles to these temporary differences in calculating the movement on the deferred tax account. So, apply the income tax rate to the temporary differences, put that calculated amount in the deferred tax account “above the line” on the debit side and “below the line” on the credit side.

Balance off the deferred tax account and take the balancing figure to the Current tax account. Balance off the Current Tax account and take the missing figure to the statement of profit or loss

OK?