Mini Exercises

Q3 page 202 – it’s not being depreciated over five years . The time since acquisition is 6 months up to the year end. That’s half a year out of 2.5 years remaining useful life – so 1/5

Question 1 page 203 – it’s not a requirement but it’s seen as good practice to transfer out of revaluation reserve each year to statement of comprehensive income an amount equal to the extra depreciation charged as a result of the revaluation

Question 2 – there should be. I was so excited at getting the rest of the question correct that I missed the easy $600!

Question 4 page 204 – “(I don’t know why it is saying that as there is no double entry for COS re this amount)” surely I didn’t need to show you the cost of sales calculation!

“and 4,800 should be Capitalised (also no double entry in the answer sheet for it, and moreover why should it be capitalised if in the question it tells you that all expensed research and development is charged to cost of sale?)” – it has to be capitalised as soon as the criteria are met.

“if in the question it tells you that all expensed research and development is charged to cost of sale” – all EXPENSED research and development costs. The importance of this bit of the question is that it’s telling you to add any expensed research and development costs to cost of sales and not to, for example, administrative expenses

OK?

“So in Question 1 what if the depreciation is less with the revaluation? Would there need to be an entry?” – yes, the estimated remaining useful life would be re-assessed and the newly impaired value depreciated over that revised useful life

“Re Question 2: for the $600, the double entry has to be Dr: Investment in SOFP and Cr SOCI?” – correct

“Re Question 4: I still couldn’t understand why there is no double entry for the $4,800, since it is not included in the extract :/ Should I do the double entry in an exam question?” – these mini-exercises are extracts from past exam questions. This particular question gave a trial balance and a number of adjustments to make (including the one for the capitalisation of development expenditure)

Once you had completed all the workings for the adjustments then you could start to prepare the statements of financial position and profit or loss

I thought that it was sufficient to say that the development expenditure incurred during the period when the criteria were satisfied was enough – I didn’t think it was necessary to show the Capitalised Development Expenditure Account.

In the same way I didn’t think it necessary to show a Cash account to reflect the spending of the money on the development of the project!

“Should I do the double entry in an exam question?” – yes ….. if that’s what the question requires!

The brand from page 205 ….. how can you get it so wrong!!!!

It is NOT “depreciation is calculated (15,000/10yrs) =1,500 and (12,000/3 years) = 4000-1500=2,500? Can it be calculated immediately with 12,000/3 years = $4000 dep?”

For the first 6 months of the year to 30 September, 2009 ie for the 6 months to 31 March, 2009 depreciation is $30,000 / 10 x 6/12 = $1,500 bringing carrying value down to $19,500

Then we have an impairment review that takes a further $4,500 off the value of the asset and brings it down to $15,000

And now we need to depreciate for the second 6 month period ended 30 September, 2009 and that’s $15,000 / 3 x 6/12 = $2,500

And as for “Can it be calculated immediately with 12,000/3 years = $4000 dep?” the answer is an emphatic NO, NO, NO!

“Pg208 Q.11: How is the 500 of the Rev Reserve and Ret Ears calculates please?” – the words in the question – “The company makes an annual transfer to retained profits to reflect the realisation of the revaluation reserve.” – explain that!

“Q11, Shouldn’t the current tax be debited by $3000 instead of $1,800 please?
Deferred tax liability is decreased by 200 and the Current tax showing in the trial balance is an expense, thus added to the current tax. Therefore 2,400-200+800=$3000”

I believe that you’re wrong with this one!

Deferred Tax:

debits: 200; 3,000
credits: 3,200

Current Tax:

debits: 800
credits: 2,400; 200

Therefore a missing debit in Current Tax credited to PorL

“Pg 219 Goodwill
Q8: Re. Retained earnings for the year from where did the $2,000 come from please? As the calculation in the ans is (21000 + 2,000)/2”

The extract is from the question Pandar from December 2009. Note (ii) to that questions states that:

“(ii) Immediately after its acquisition of Salva, Pandar invested $50 million in an 8% loan note from Salva. All interest accruing to 30 September 2009 had been accounted for by both companies”

I believe the expression is “That’s my bad” I should have included that information within the question so, once again, I am in your debt

“Pg213, Q.2 Revenue
Why is there a double entry of Dr Inventory and CR Cost of sales instead of Dr COS and Cr Inventory please? There was no adjustment for Inventory so like this, isn’t it adding an extra 1.8m to inventory?”

I believe that this is page 223 not 213!

Yes, we are adding $1.8 to inventory because goods “sold” on a sale or return basis are not treated as sales until the consignee accepts them and indicates that they will not be returned. Until then not all the risk and rewards of ownership have passed, so the ownership of those goods remains with us, the consignor

To bring those goods back into inventory, we simply increase the value of inventory

But closing inventory has a dual effect on financial statements.

It’s a deduction from cost of sales on SoPorL and it’s an addition to the asset on the SoFP

So reduce cost of sales (Cr COS) and increase inventory on the SoFP (Dr inventory)

OK?

“Pg224, Financial instruments
Re Q.3 and Q4, how can I know whether to use the loan rate or the rate that attracts investors to calculate similar questions for Finance charge and equity please? Since, I am not noticing any difference between Q3 and Q4.”

I’m not sure why you think there should be any difference between questions 3 and 4

As a general rule (and I can’t immediately think of an exception) you would use the higher rate

Or, looked at another way, you would use the rate indicated in the sentence “The finance director has calculated that to issue an equivalent loan note without the conversion option would have an interest rate of (a higher) percent”

OK?

“Q8: Re. $2,000Retained: $50m x 8% is 4,000. P invested in the loan note immediately after acquisition, thus 6 months to year end, and the remaining $2000 becomes pre acq RE. However, the question tells you that all interest has been accounted by both companies. Doesn’t that mean that the amount is already included in Profit for the year end? Moreover, shouldn’t it be a reduction since money is being paid out from S, instead of an addition, if it will be accounted for?”

This is a new loan – it’s not a loan note that P is buying from some existing loan note holder. This is a situation where the subsidiary wants to borrow money and the parent says “OK here’s 80% of what you want – you’ll have to raise the rest from other people”

So there is not a full year of the loan note in issue.

Now, consider this. If that loan interest had not been due, what would the profits for the year have been? $23,000! $23,000 divided by 2 = $11,500 pre-acquisition and $11,500 post-acquisition

But the loan interest did exist, but only in the post acquisition period

So now the profit split is $11,500 pre and $9,500 post

“the question tells you that all interest has been accounted by both companies” – this is simply telling you that there’s no need to start messing around with accrued interest – it’s already been paid and properly accounted for