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Hi Sir
I have a question on the answer in question Paradigm exam paper June 2013. In W3, why is $9000 not deducted from $2200 making the post acq figure ($6800)?Because 9,000 pre-acquisition is a pre-acq loss. If today’s retained earnings balance is a positive 2,200 and the figure as at date of acquisition was a negative 9,000, then the company must have made 11,200 to move from -9,000 to +2,200
Ok?
I have another question for this same exam question. In W2, there’s a FV adj of $3000 with regards to the plant. And then in W3, there’s the same adj of $3000 for the plant. My question is, if this adjustment has already been made in pre-acquisition, why is it adjusted again in the post-acquisition part where we arrived at $2200?
Hi Sheha
Working W2 is an historic working to determine goodwill and an integral element is finding the fair value of the subsidiary’s net assets at date of acquisition. In the case of Paradigm there needs to be a fair value adjustment to the plant that is worth $3,000 more than its book value.
But no adjustment is made in the subsidiary’s accounting records for that $3,000
Working W3 is a “today” working to find the consolidated retained earnings as at the year end. Within the subsidiary there is an asset (plant) that is still carried at historic cost less accumulated depreciation and yet is worth more than that carrying value. By how much more is it worth? $3,000 less the depreciation on that $3,000. So that net figure is at the top of working W3.
But we need to know what is the extent of post-acquisition retained earnings for the subsidiary and, to find that, we deduct from “today’s” retained earnings (in the top section of working W3) “yesterday’s” retained earnings – and we’ll find that figure in working W2.
So we add $3,000 in to the top of working W3 and deduct the associated depreciation since acquisition calculated on that $3,000 increase.
Then we deduct the $3,000 that was the adjustment at the date of acquisition
It seems a bit long winded and Kaplan (possibly also the other publishers) simply in working W3 deduct the “excess” depreciation ie the amount by which the revalued asset has depreciated since acquisition
Personally, I prefer to set it out without taking advantage of that “short cut”
Ok?
Dear sir,
I am writing f7 in June and I am attempting the Paradigm question. I have trouble to understand how the pre aquisition profit is arrived at $ (6000.00)
I understand that the retained earning c/f is $4000 and therefore the post acqisition has to be $10000 in order to come back to RE c/f $4000. Can you please help me?The statements of financial position tell us that the deficit brought forward was $4,000 and point (I) tells us that a further $2,000 loss had been made this year up to date of acquisition
That gives us the $6,000 loss / deficit brought forward
Ok?
Thank you I understand now. I feel a bit stupid though lol. Thanks so much for your knowledge.
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