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Hi teacher,
I have 2 questions that takes from BPP revision kit.
1. On 1 July 20×7, Spider acquired 60% of the equity share capital of Fly and on that date made a 10mil loan to fly at a rate of 8% per annum.
what will be the effect on group RE at year end 31/12/x7 when intragroup transaction is cancelled?
My answer is : interest =10mil*0.08=400000
so group RE will be reduced by 400000*0.6=240000 but their answer is 160000. I don’t understand it.
2. A acquired 80% of B on 1/1/x8 . at that date of acquisition B had a building which had a fair value 22mil and CV of 20mil . The remaining useful life was 20 years . at the year end of 30/6/x8 the FV of the building was 23mil.
B’s profit for year end 30/6/x8 was 1.6mil
A measures NCI at FV. At 30/6/x8 it estimated that goodwill in B was impaired by 500000$.
What is total CI attribute to NCI at 30/6/x8?
My answer is: RE = 1.6*6/12-0.05(dep)-0.5(impairment)=0.25
RR=(22-20)+(23-22)=3
so total CI is 3.25 => % NCI =0.65
But my answer is wrong. Their answer is 0.25. Could you revise it for me?
Thank you in advance 🙂Q1 – are you 100% sure that this is the question? ‘what will be the effect on group RE at year end 31/12/x7 when intragroup transaction is cancelled?’
And their answer is 160,000 – is that an increase or a decrease in the group retained earnings?
Surely their answer tells you how they have arrived at $160,000
Q2 –
$1000,000 post acquisition increase in building valuation
($50,000 post acquisition depreciation on first fair value adjustment)
$800,000 six months’ profits
($500,000 goodwill impairment)$1,250,000 total x 20% = $250,000
Sorry as it don’t clearly.
Q1: their answer is Group RE will be reduced 160000
their calculation: interest =10mil*0.08=400000
saving of interest is 400000*0.6=240000
s0 reduced in group RE 160000
But
I think group RE will be reduced by 400000*0.6=240000 🙁
Q2: the revaluation in building is 1000000, not 3000000?
am I wrong to calculate RR=(22-20)+(23-22)=3?Q1 I see this as an increase in the consolidated retained earnings!
Imagine P and S with $7,000,000 and $3,000,000 relevant profits before interest
After the $400,000 is put through, we have P $7,400,000 and S $2,600,000 so consolidated profits will be $7,400,000 + 60% x $2,600,000 = $8,960,000
IF that $400,000 had not been relevant and therefore would not have appeared neither in S as an expense nor in P as an income, the consolidated retained earnings would have been $7,000,000 + 60% x $3,000,000 = $8,800,000
So by putting through the intra-group loan interest transaction the consolidated retained earnings have increased from $8,800,000 to $8,960,000
UNLESS (using my figures) the $7,000,000 and the $3,000,000 are stated AFTER the loan interest has been accounted for and the question is asking you to cancel the income of $400,000 against the expense of $400,000 bringing the retained earnings down to $6,600,000 and $3,400,000 respectively
That would then give us consolidated retained earnings of $6,600,000 + 60% x $3,400,000 = $8,640,000
But that’s not what we do when cancelling intra-group transactions so it’s a silly question (as well as being so vague that I can’t tell what’s happening)
Q2 ‘am I wrong to calculate RR=(22-20)+(23-22)=3?’
Yes – we’re only interested in POST-acquisition movements
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