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Hi Mister,
May I ask two questions about the Q1 of June 2013 sitting?
1. Why there is no finance charge for the 10% loan note consideration? Paradigm was paying the consideration to Strata’s shareholders, not Strata itself. So it can’t be intra-group loan note, right? And the examiner specifically said Paradigm hasn’t recorded any of the considerations. So why didn’t Paradigm add the accrued interest to the loan note payables and the finance cost?
2. The other equity investment for Strata. They were carried at their fair value on 1 Apr 2012 in the drafted accounts, one year later, they had the value of 3.9 million. So the profit for the year of the investment is 700,000. But why was 700,000 as taken as a whole to consol, shouldn’t only the post-acqn period be included, ie 350,000 assuming the profit accrued evenly every month.
Thank you.
1 – where have you read that Paradigm hasn’t paid the loan note interest? I can’t see that information anywhere in the question!
2 – I believe that this extract from the question sorts out your second question “Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets which were equal to their carrying amounts (including Strata’s financial asset equity investments)”
OK?
- Topics: 43
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Re point 1, but Paradigm hadn’t recorded the consideration. If it didn’t record, how could it already pay the charge. And in any case, even if they had paid, shouldn’t the finance cost still have been an adjustment item for the retained earnings of Paradigm?
Thanks.
Re point 2, I get now.
“Re point 1, but Paradigm hadn’t recorded the consideration. If it didn’t record, how could it already pay the charge” – Paradigm themselves knew that they owed loan interest so why shouldn’t they have paid? The payment has no affect on the outstanding capital debt so what’s the matter with Dr Finance Costs Cr Cash?
“shouldn’t the finance cost still have been an adjustment item for the retained earnings of Paradigm” – why would you want to adjust the Paradigm retained earnings?
Think about it and then post again with your answer 🙂
- Topics: 43
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But they knew they had other 10% loan note already in issue. But these loan notes are not concerned about the purchase consideration, are they. Because they did not record the loan note of the consideration. These should have been issue of new loan notes, shouldn’t they? If that is the case and Paradigm didn’t record the consideration, how could they include the interest payment of the consideration along side with the interest of other loan notes in issuing?
How should I not adjust? There is finance cost arising from the loan note consideration there. Again if Paradigm hasn’t recorded the consideration yet, the drafted statements couldn’t have included them, could they? Thus isn’t it our job to adjust when we consolidate?
Thank you.
First paragraph – how not? They don’t need to look at their accounting records to know how much they owe as interest on the 10% loan notes!
“There is finance cost arising from the loan note consideration there. Again if Paradigm hasn’t recorded the consideration yet, the drafted statements couldn’t have included them, could they? Thus isn’t it our job to adjust when we consolidate?”
The only adjustment is to the statement of financial position and the adjustment necessary is to increase the recorded 10% loan note figure by the value of the new loan notes issued.
And, from memory, that has happened
Nothing else to do – interest has been paid and recorded, liability has been increased by the new loan notes value – what more do you want? Chief Accountant needs a boot up her / her back-side and told to record the purchase consideration – they’ve had a full 6 months to do it so no excuse is acceptable
Other than that, everything is hunky-dory
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Sorry, I still don’t understand. If they didn’t record the purchase consideration of the 10% loan notes new issue, shouldn’t they record and pay only the interest for those available loan notes? How could they not record the new loan notes but already record and pay the additional interest that was arising from the new issue? Isn’t that contradictory to accrual accounting?
“shouldn’t they record and pay only the interest for those available loan notes? ” – Why? Why should they not pay the interest on the new loans?
“How could they not record the new loan notes but already record and pay the additional interest that was arising from the new issue? Isn’t that contradictory to accrual accounting?” It’s contrary to up-to-date accounting!
How can the company the size of Paradigm not find an accountant competent enough to make a simple transaction record like Dr Cost of Investment, Cr Long term Liability 10% loans
But they haven’t and the accountant hasn’t and IT’S NOT FOR YOU TO ASK WHY NOT!!!!!
The examiner tells you that the loan note issue has not been recorded.
OK, you’ll need to do that.
But the examiner does NOT tell you that the loan interest hasn’t been paid and therefore you must assume that it has been paid
Don’t get into the realms of reality! There is one question in P2 where the company involved (in a consolidated cash flow question) has a revenue figure of $700+ million and correspondingly large figures throughout the statement of profit or loss.
The question then says that “The company accountant was unsure how to deal with certain matters ….”
You’re talking of a multi-million dollar turnover company and the “accountant was uncertain how to deal with certain matters”!!!!
This is clearly nonsense! So how do you tackle this in the exam room?
Your answer would go along these lines…..
“Clearly the company accountant is useless and should be sacked” or would you prefer “The examiner has obviously made a mistake here and the figures in the question are unreliable” or maybe “This question is stupid. There’s no way that an accountant for a multi-million turnover company could have admitted this” or do you….
….accept that the information given is what the examiner intended to write and get on with answering the question
Lukayl, get on with it! Move on! Do NOT worry that the company is paying interest on a debt that has not been recorded. Just because it’s not recorded does not mean that Paradigm doesn’t have to pay interest on it
OK now?
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But shouldn’t the interest arising from the purchase consideration loan note be implicit based on that the examiner said they did not record the new notes in issue. After all we come across a lot of these implicity finance charge and other adjustment for the past papers. I am not asking why they did not record the consideration. After all this is exam, and the examiner is expecting us to take this information for workings. It’s just a bit weird why for an unrecorded consideration, the examiner is expecting us that the finance charge is already made and paid.
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