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- September 5, 2016 at 10:41 am #337854
Dear Mike,

Below is your response to a unrolling discount query, I am struggling to find how the figure of 1,183 interest (unrolled discount) was calculated.

I assumed $11,270 is unrolled is 11,270 * 10% * 6/12

Therefore should be 1127 + 563.5 = 1690.5?

Please explain where I am going wrong.

Many thanks

Let’s assume that the company’s cost of capital is 10% and that the deferred consideration of $15,000 is the actual amount payable in 3 years’ time

The present value of that $15,000 discounted at the rate of 10% is $11,270

That figure is calculated by successively dividing $15,000 by 1.1 ie by (1 plus the cost of capital expressed as a percentage)

15,000 / 1.1 = 13,636

13,636 / 1.1 = 12,397

12,397 / 1.1 = 11,270So, in working W2, goodwill, the present value of $15,000 payable in 3 years’ time is $

At 1 July, 2011, 6 months after the takeover, we need to unroll that discounted value and debit finance charges in the statement of profit or loss , credit the long term liability on the statement of financial position

The amount by which the $11,270 is unrolled is 11,270 * 10% * 6/12

That works out to be $563.5

You ask about the consideration as at 1 July, 2012

The value of the consideration will not change after you have calculated it as at date of acquisition. It will have been recorded in the goodwill calculation at a value of $11,270 and that’s the figure it will stay at (together with the $20,000 cash payment on the date of acquisition)

Well, having unrolled for half a year to July 2011, you’re now in the position for next year 2012 to unroll for the full year ie 10% x 11,270 + 563.5

That gives, for the year 2012, the amount of 1,183 interest (unrolled discount)

Debit finance costs, credit long term liability (because it’s still more than 12 months to payment date)

September 5, 2016 at 12:41 pm #337885‘I assumed $11,270 is unrolled is 11,270 * 10% * 6/12

Therefore should be 1127 + 563.5 = 1690.5?

Please explain where I am going wrong.’

The * means ‘multiplied by’

Do you want to re-consider your question above?

Now to your question

11,270 * 10% * 6/12 = 563

This figure adds on to the obligation as at 30 June, 2011 which now becomes 11,833

We now need to get to 30 June, 2012 so unroll another full year

11,833 * 10% = ????

OK?

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