September / december 2015 exam

Qn1) For transaction (iii) on NCA , its states that Moston’s property is carried at fair value which at 30 june 2015 was $29m. So does it mean the property was revalued at 30 june 2015 to $29m. Because there is a rev.gain in the answer key? So the property will be valued at the revalued amt of $29m at the year end instead of the CV right . For question 3) transaction (iv) For the interco balances, the adj i made on the SOFP are + 800 to inventory – 800 from payables – 2400 from trade receivables – 2400 from trade payables but the answer i got for the other current liabilities is 40 700 . I took 25800 + ( 18100 – 2400 intragroup -800GIT) = 40700 In the answer key, the answer is 42300. They took 25800 + 18100 – ( 2400 intragroup -800 GIT) = 42300. Where did i go wrong ? Also can you explain to me the workings on how to calculate the post acquisition reserves of the FV of net assets table. In the answer key, I only understand where the 900, 500 and (1200) came from . I dont understand why we have to deduct the goodwill and i also dont understand how they got 6000

They haven't! That calculation in the answer - "In-substance loan (3,000 x 10% x 6/12) 150" - is calculating how much interest would be if the re-purchase were not carried out for twelve months. So, interest for a full year is $300 But the "sale" only took place half way through the year So only half a year's worth of interest is relevant this year OK?

Okay.

What about qn 3?

"Qn1) For transaction (iii) on NCA , its states that Moston’s property is carried at fair value which at 30 june 2015 was $29m. So does it mean the property was revalued at 30 june 2015 to $29m. Because there is a rev.gain in the answer key? So the property will be valued at the revalued amt of $29m at the year end instead of the CV right " The property at fair value on 1 July 2014 was 28,500 with a remaining 15 year life so 1,900 depreciation per year On 30 June 2015 there is a depreciation charge of 1,900 bringing carrying value down to 26,600 at which date the property was revalued again to 29,000 That revaluation has caused an entry into SoCI of 2,400 and an increase in SoCIE Revaluation Reserve column OK?

Yes. I understood already. Thanks.

I still cannot work out the correct answer for question 3 on consolidation . Transaction (iv). My question is above.

Tell me .... how does this double entry work! This bit's ok taking 2,400 from both payables and receivables – 2400 from trade receivables – 2400 from trade payables But this bit leaves me speechless! So you're going to Dr Inventory (agreed) with 800 and then you're going to Dr Payables with 800! Fra Luca Pacioli will be turning in his grave :-) "and i also dont understand how they got 6000" - from the question, note "(i) Stretcher’s business is seasonal and 60% of its annual profit is made in the period 1 January to 30 June each year." "I dont understand why we have to deduct the goodwill" - from the question, note "(iii) Following an impairment review, consolidated goodwill is to be written down by $3 million as at 30 June 2015." I do wish that you would stop using this expression "the post acquisition reserves of the FV of net assets table" - the list of values to which you refer is NOT a table of fair valued net assets! Look at the heading! "The adjusted post-acquisition profit of Stretcher is:"

Okay then . Can i know the total for the post acq reserves column of the FV of net assets in S.

What on Earth do you mean ... "the post acq reserves column of the FV of net assets in S." Have you thought about what the abbreviations mean? What is "the post acquisition reserves column of the fair value of net assets in the subsidiary." "the FV of net assets in S." is a value that we need to determine the goodwill figure and we use this information in working W2. The cost of the investment plus the value of the nci at date of acquisition are compared with the fair value of the S net assets at date of acquisition Then we move on to working W3 - Consolidated Retained earnings and this working uses as its base "H's own + H's share of S post acq retained (earnings - not FV of net assets!) less goodwill impaired since acquisition (just our share)" Nowhere, except in working W2 Goodwill, is there any mention of "the FV of net assets in S." Now, to your question (at least, I assume this is your question!) The adjusted post-acquisition profit of Stretcher is: $10 million x 60% 6,000,000 Gain on investments (7,900 – 7,000) 900,000 Reduced depreciation of plant (2,000 x 6/24) 500,000 Amortisation of game rights (12,000/5 years x 6/12) (1,200,000) With a total of $6,200,000 From that the answer has been deducted $3,000,000 goodwill impairment. Personally I would have shown that impairment separate from the subsidiary's post acquisition profits. I would have shown it as a deduction from ""H's own + H's share of S post acq retained" and, when deducting the goodwill impairment, I would have shown the deduction as "just our share" ie 75% of $3,000,000 It works out to the same answer (of course) Better?

Yes. For question 1 on moston we are not required to do the sofp. But i just want to check if my adjustments are correct. For transaction (iv) on loan note , there would be an accrued interest of 560 under the current liability of the SOFP right?

It's 8% x (20,000 - 500) = 1,560 1,000 is already included within the trial balance so, yes, 560 is the additional amount to accrue

Thanks.

Then why for certain qns we dont have to specify the 'accrued interest' item on the SOFP . Like example for qn 2 XTOL of june 2014 exam . There is an accrued interest of 3676- 2500 = 1176 right ? But on the SOFP , they didnt specify the 'accrued interest' of 1176 . Why ?

Without looking at the question, see if this answers it The difference in the interest calculated at the nominal interest rate compared with the effective rate is included as a finance cost (debit) in the statement of profit or loss and is rolled up into the long term liability of the loan note (credit) on the statement of financial position Does that do it? If not, post again

I dont understand. Could you explain.

"Loan note interest and dividends paid (notes (iv) and (vii)) 5,000 dr" "5% loan note (note (iv)) 20,000 cr" A full year's interest is 5% x 20,000 = 1,000 and that's included within the 5,000 loan note interest and dividends paid "The 5% loan note was issued on 1 July 2014 at its nominal value of $20 million incurring direct issue costs of $500,000 which have been charged to administrative expenses. The loan note will be redeemed after three years at a premium which gives the loan note an effective finance cost of 8% per annum. Annual interest was paid on 30 June 2015." The issue costs are to be deducted from the loan value and should not be charged to administrative expenses so the loan value should be reduced by 500,000 down to 19,500,000 and effective interest calculated on that reduced value The correct finance charge should therefore be calculated at the rate of 8% so 8% x (20,000 - 500) = 1,560 Of this amount 1,000 has actually been paid so the remaining 560 is a liability, but what to do with it The loan note is to be redeemed in two years' time at a premium so we're going to be paying rather more than the 19,500,000 sitting to the credit of the loan account that 560 should be double entered as: Dr Finance Costs (statement of profit or loss) 560 Cr 5% Loan Note account (statement of financial position) 560 Next year the effective rate of 8% will be applied to the now-increased loan note balance of 20,060,000 Is that better?