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This is part of a consolidation qstn where the hample is the parent and sopel is the subsidiary:
-included in Sopel’s property at the date of acquisition was a leasehold property recorded at its depreciated historical cost of $400,000.on 1.4.08 the leasehold was sublet for its remaining life of four years at an annual rental of $80,000 payable in advance on 1st april each yr.the directors of hample are of the opinion that the fair value of this leasehold is best reflected by the present value of its future cash flows . an appropriate cost of capital for the group is 10% pa.
the present value of a $1 annuity received at the end of each year where interest rates are 10% can be taken as :3 yr annuity : $2.5
4 yr annuity : $3.5Answer:
80+(80*2.5)=280
book value=400
reduction=120.depn is based on 280/4=70
depn in sopels bks =100
reduction: 100-70=30Can you explain this qstn and especially why 80+(80*2.5) has been done?
Thank you.I think you’ll find that 80*2.5 does not equal 280! It’s actually ( 80 + (80*2.5))
Is that clearer?
You also can calculate as 80*3.5 straight away. And no need to add 80 as it already included.
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I have a problem with the Hample question which someone may be able to advise on.
In consolidating Retained earnings for Sopel I normally use (90%)(Update – FV ret Earnings)
The Update is 1800, but the FV Ret Earnings is 2200 less 120 less 180, giving 1900. But the question gives 2200?
In all the other questions you take the Ret Earnings at Acq plus the FV Adjustments and use this figure when working out the Consolidated Ret E.
Thanks,
Tony
I ALWAYS start with ret ears per the question and then make the adjustments for fair values as hey would be “today”. From that figure, I deduct the fv of the assets at date of acquisition to arrive at post-acq profits. this is a long way round, but I find it works and I’m easier with the “logic”.
BPP take a short cut (perfectly acceptable – it’s just that I personally don’t like it!) – they adjust “today’s” ret ears by the MOVEMENT in the fair valued assets.
I don’t see where your “Update is 1,800” comes from!
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