plateau 12/07

Until about 6 years ago, that was acceptable but then it changed. Nowadays legal and professional costs associated with an acquisition must be expensed in the year of the acquisition

Aisha – I don’t understand your question – sorry.

The double entry (if that’s what you are asking about) is Debit Professional costs in the Statement of Income and Credit Cash

Debit it to the Income Statement within a heading like “Professional fees” – probably included within the same heading as the audit fee

You’re welcome

The $500,000 HAS been adjusted for within the subsidiary’s own records whereas the $1,200,000 HASN’T been reflected in the subsidiary’s records

Is that making any sense to you or does it need more from me?

You seem to be very confused. In addition, you’re trying to memorise a “rule” without understanding the logic behind it and that’s not a sensible approach

Let’s deal with the $500,000. You tell me that the question indicates that this $500,000 unwanted value was “written off shortly after acquisition”

(I’m presuming that this was an asset such as “development expenditure”)

In working W2 Goodwill, we needed to find the fair value of the newly acquired subsidiary assets and this $500,000 was one of those assets. But, when we carried out our preparatory work before the actual acquisition, we discovered that in fact this asset was worthless

So in working W2, when listing the fair valued assets, we deducted the $500,000 and the subsidiary actually put through the adjustment shortly after take over.

So now, at consolidation date, when we look again at subsidiary worth to determine by how much it has changed (post acquisition retained earnings) since we looked at the equivalent value as at date of acquisition, there is no further adjustment to make ….. because the subsidiary has itself written off this worthless asset

IF the subsidiary had NOT written it off, then the “worth” of the subsidiary as at the consolidation date would have needed to be reduced by the $500,000 in the same way that we had to reduce the fair value worth as at date of acquisition

Is this beginning to make any more sense to you?

You’re welcome

Don’t try to learn by rote! Learn by understanding

You need to see which way the cash (or goods) are going. Are they moving from parent (P) to subsidiary (S) or are they moving the other way from S to P?

Let’s deal with just one type of in-transit (but they both work exactly the same way)

Let’s consider cash of $2,000 moving from S to P and there is a balance in P’s records of a receivable from S of $5,200

Now p doesn’t know about this $2,000 in transit, but S does and S has recorded the payment in the S records (Dr Payables P $2,000, Cr Cash $2,000)

So, so far as S is concerned, that transaction is completed and S has a balance remainings due to P of $xxxxx

Now accelerate the in-transit item into the records of P and the resultant entry is Dr Cash $2,000, Cr Receivables S $2,000

That brings the balance due from S down to $3,200 and the question will now normally suggest that the two current accounts reconcile

So now reduce the combined Receivables figure by $3,200 and the combined Payables figure by $3,200

All of this is covered in the course notes and in the associated video lecture!

OK?