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Hi
In Qn 1 of the consolidated question Traveller paid 541m for Captive. 441m was cash and 64m was the FV of the land. The CA of the land was 56m at DOA. At year end the asset was still included in NCA and sale proceeds was credited to PL.
Is the sale proceeds actually 56m? Is there no gain or loss on disposal which should be recorded in RE. Maybe I’m overthinking this?
Second question is related to the financial asset (also part of this consolidation question). The financial asset is recognised at amortised cost but now the entity wants to recognise it at FV. They give you the current market interest rate, original interest rate and revised payment interest rate.
The original interest rate was used. Please explain why the current market interest rate and the revised payment interest rate was not used?
Thanks
Hi Anisa
First point – there’s no point in you consistently including “urgent” in your posts – if I see the post, I’ll answer it! So “urgent” doesn’t change anything 🙂
The land – should not have been recorded as sale proceeds and profits are therefore overstated. To correct the overstatement, but at the same time to recognise the profit of $8m being the excess of fair value over carrying value, we need to remove the land ($56m) from TNCA and remove the $56m from revenue. That has the effect of leaving the $8m profit in the Statement of Income and that’s ok.
It’s an interesting idea that, on the acquisition of 80% of the company Captive, part of the purchase consideration paid to the former holders of the Captive shares should be a piece of land worth $64 million – I wonder how they sub-divided it into their respective shareholdings or do they work the land as a cooperative?
Re the financial asset – Traveller cannot change from amortised cost to fvtpl
That can only happen when the business model changes and that hasn’t happened here
The printed solution actually explains it:- “The classification of an instrument is determined on initial recognition and reclassifications are only permitted on the change of an entity’s business model and are expected to occur only infrequently. Traveler cannot measure the instrument at fair value as the objective for holding the financial asset has not changed.”
So the subsequent calculations are based on the original effective interest rate of 6.7%
OK?
Thanks mike…..my apologies….just that I was busy doing the questions and reviewing the solutions and things I didn’t understand I posted and would have forgotten to come back to it if I didn’t get n immediate reply
Thanks for all your assistance
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