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Dear sir,
Just a couple of real quick doubts
1. Is regarding Mar/June 2016 Downing Co, there is an adjustment that reads:
Revenue includes an amount of $16 million for a sale made on 1 April 2015. The sale relates to a single product and includes ongoing servicing from Downing Co for four years. The normal selling price of the product and the servicing would be $18 million and $500,000 per annum ($2 million in total) respectively.
Quick and easy way to deal with these sort of questions would be…?2. While dealing with compound financial instruments’ carrying value , why do we subtract interest on the lower percentage of the loan given?
3. In deferred tax if a revaluation gives rise to a deffered tax liability, how do we deal with it?
4. How can we analyse ROCE from a question given? Not calculate, but how to interpretate?
Thanks!
1) calculate total of the component parts, compare with sale price, proportionalise the two elements, take proportioned product price in full and appropriate part of the service element
In the question given, assuming it’s a March 2916 year end, aggregate value is $20,000,000 compared with sale price of just $16,000,000
That’s a sale for just 80% of the ‘normal’ price
80% of the product value is 80% x $18,000,000 = $14,400,000 Nd 80% of the first year’s servicing is 80% x $500,000 = $400,000
Total revenue to recognise is therefore $14,800,000
2) not sure what you mean with this post
3) what should happen is that the deferred tax on the revalued gain should be credited in the Deferred Tax account and debited to the Revaluation Reserve. But in many exam questions the examiner doesn’t ask for that so we leave tax implication within the Deferred Tax account
In case that didnt come out well, here it is again in different words … deferred tax on the revaluation is part of the carry forward liability in the Deferred Tax account and, unless instructed otherwise, don’t make the transfer to the Revaluation Reserve of that deferred tax on the revaluation
But whether that transfer is done or not done, the tax on the revaluation increase will need to be part of the carry forward in the Deferred Tax account
4) How to interpret ROCE? Break it down into its component parts (net profit margin percentage and asset turnover multiple)
Then find out reasons for any movement in those two – I hope that you can manage that part!
OK?
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