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Unwinding Discount

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Unwinding Discount

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • December 3, 2017 at 6:01 am #419848
    mjibola
    Participant
    • Topics: 131
    • Replies: 135
    • ☆☆☆

    I understand the concept of PVs as I have just recently passed F9 in Sept Diet, but after watching and rewatching your lectures, I’m still not getting this ‘unwinding’ or ‘unrolled’ on the discount.

    If P acquired 70% of S in Jan 20×1, and a deferred consideration was included to be paid in Jan 20×3, and we’re consolidating for year end Sep 20×2.

    As at this consolidation date, P is 21 months closer to fully paying that deferred consideration, calculating the unwinding would therefore be 3/12 x the deferred consideration x the cost of capital?

    That’s my understanding above, please further clarify as I’m not sure that even makes sense.

    December 3, 2017 at 8:07 am #419892
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23333
    • ☆☆☆☆☆

    No, not 3/12

    We unwind for the length of time that has PASSED as distinct from the period of time still to come

    Assume $1,000 payable in 3 years’ time and cost of capital is 10%

    The present value at the time of accounting for this deferred payment is therefore $750

    One year later, that payment date is closer (by one year!) so we now need to adjust the present value of that $1,000 to a two year present value

    Ie we unroll the discount. $750 * 1.10 = $825 and, to effect that adjustment we need to:

    Dr Finance Charges 75
    Cr Deferred Obligation 75

    A year later, the due date is now only one year away so the payment needs to be adjusted to just one year discounted value

    So unroll the discount. $825 * 1.10 = $90.90 (ish) and, to effect that adjustment we need to:

    Dr Finance Charges 82.5
    Cr Deferred Obligation 82.5

    Is this getting any clearer?

    The final year unrolling would be by $90.91 and that would increase the Deferred Obligation to $1,000 which is the amount that will now be paid

    OK?

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  • The topic ‘Unwinding Discount’ is closed to new replies.

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