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Hi Mike,
I have a question regarding the deferred tax liability in the Pyramid – specimen paper.
It says Square has an unrecorded def tax liability of $1m which was unrecorded. When calculating the cons. ret ears, why do we not deduct this from Square’s Ret ears b/f when calculating the cons. ret ears?Well, I think we do in fact take it into account.
When calculating goodwill in working W2, the $1 million extra liability will be used when arriving at the fair value of the subsidiary’s net assets (share capital + reserves + / – fair value adjustments including this additional tax liability)
Now, when we come to working W3, the retained earnings figure at date of acquisition as used in working W2 (as adjusted for the deferred tax liability) will be used in the calculation of the consolidated retained earnings
Are you really sure that it hasn’t been taken into account?
Hi Mike,
Thanks for getting back to me. Unless I’m missing it. This is the answerFV of net asset
Shares 9000
Ret ear 19000
FV 3000
DT Liab (1000)
Total 30000Cons ret ears workings
Per Q 27000
Less Pre acq (19000)
8000
depn of fv (600)Then that’s it they get “our share” of 7400
Unless I’m missing something… ??
Now I’ve looked at the question! The question actually tells you what the post acquisition retained earnings are for Square! The only reason for the traditional working W3 is to find those post-acquisition retained earnings!
We can still do it in the “normal” way
As reported 27,000 – dt liability 1,000 = 26,000
At acquisition 19,000 – dt liability 1,000 = 18,000Post acquisition retained 8,000
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