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I am doing kaplan text ch 2 and its test ur understanding 4 “Hazelnut”. In the previous questions invloving deferred consideration, the unwinding of discount is simple (deferred consideration x Rate in the question) but in Hazelnut TYU 4, he has done this:
(W6) Unwinding of discount
Present value of deferred consideration at acquisition 376
Present value of deferred consideration at reporting date 455
79Why he is doing that in this specific question ?
Thanx
Maybe ( and I don’t have the question in front of me ) the acquisition date was, say, at the start of the year and the question asks you to consolidate at the end of the year. Is there a liability shown in the solution for the deferred consideration which is shown at the year end as 455? Yet the value of the deferred consideration in your acquisition calculation was 376?
The double entry for the year since acquisition up to reporting date would therefore be Dr I/S finance charges 79 and Cr deferred liability 79
Does that help?
Also in this question, what the kaplan author has done is, in Group Retained Earnings working, he has taken 80% (which is ownership) of not the post-acquisition profits (which is Ret. Ergs. @ reporting – Ret. Ergs. @ acqn.) but the NET ASSETS @ reporting – NET ASSETS @ acqn..
Is this because of the Fair Value adjustments in the question ?
Which means that if the question doesn’t have any FV adj. then we will take the diff. b/w Ret. Ergs. @ reporting – Ret. Ergs. @ acqn.
If it has FV adj. then NET ASSETS @ reporting – NET ASSETS @ acqn.
Is this the treatment (in calculating Group ret. Erngs.)??
Thanks
Hi
If you go back to the fundamental accounting equation ( which is applicable to any business – sole trader, partnership, limited company ) a change in net assets can only be attributed to capital introduced + profit – “drawings”
In the case of a company, the drawings are the distributions – typically but not exclusively by way of dividend.
So, if there has been no new capital introduced, the change in net assets = the change in retained earnings or, put the other way round, a change in retained earnings ( ie post acquisition retained ) must equal a change in net assets ( as adjusted for fair values )
Does that make sense?
I think it’s the same as you were proposing – it’s merely an explanation of why what you posted was correct – I think!
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