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- June 29, 2020 at 9:56 am #574918
Hello
Question
Pylos plc’s investment in Terpsithia plc is a 25% holding of the equity shares acquired on 30
September, 2014. The acquisition cost had comprised of an issue of 300,000 shares in
Pylos plc that were worth $1.50 each on the date of acquisition. Added to this was a
payment due to be made in 2 years‘ time of a further $220,000. This acquisition technique
was consistent with the manner adopted by Pylos plc as it has built up investments in
numerous subsidiaries even though the cost of capital at 10% was substantially greater than
in previous yearsIn the year to 31 December, 2014 Terpsithia plc achieved a profit before tax of $96,000 and
a profit after tax of $80,000At what value will the Investment in Terpsithia plc be shown in the consolidated statement of
financial position for the Pylos plc group as at 31 December, 2014? (Answer to the nearest
$000)Answer
shares 300,000 @ 1.50 = 450,000
deferred cash 220,000 x1!1.10 X 1/1.10 = 181,818
profit share 25% x 8’12 x 80,000 = 5,000
investment at year end 450,000 + 181,818 + 5,000 = 636,818I have a problem with this part
deferred cash 220,000 x1!1.10 X 1/1.10 = 181,818July 5, 2020 at 7:35 am #576020Hi,
It is the present value of the deferred cash payment. $220,000 is due in two years’ time and we need to calculate its value using the 10% cost of capital.
220,000 / 1.10^2 = 181,818
Hope that clears it up.
Thanks
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