1. Homework 3 – due November 8 by 10 am Auto correct your Homework 2
Compare your answers to this solution.
Explain the difference between your answer and the solution.
Mark your answers, 10 marks per correct answer.
Send me your analysis and result.

2. Solution to Homework 2 Questions about Wales
Why are Cardiff’s net assets higher by $500 at date of acquisition then at year-end decreased by $25? The $500 is associated to an intangible asset: Brand ‘Bay’ which was not recognized in Cardiff’s books at doa. At year-end the asset was depreciated to recognize its use over 6 months.
What is the amount of provision for unrealized profits? Who is doing the buying? Wales purchased Cardiff’s goods. The purp is computed by applying the 25% margin to the $20m unsold inventory.
Why is it deducted from the subsidiary’s year end profits? Because Cardiff’s sold to Wales and Cardiff is the subsidiary.
Why do we deduct depreciation from the subsidiary’s profits at year end and not at the date of acquisition?
Because at the date of acquisition the added value adjustment has just been recognized. Its useful life starts at doa.

3. Why is the differed consideration discounted
Why is the differed consideration discounted? A differed consideration is an amount which will be paid in the future. Therefore to recognize its value now, it must be discounted to its net present value.
What is the amount of the post acquisition profits and why does it not go 100% to Wales?
The PAP is $1220m. Wales only controls of 60% of Cardiff’s net assets. Therefore it’s entitled to 60% of its post acquisition profits which are Cardiff’s profits since the date of acquisition.

4. Why is it necessary to unwind the differed consideration
Why is it necessary to unwind the differed consideration? Where are the numbers accounted in the Group Wales? The differed consideration is unwinded to recognize two amounts:
the interest incurred at yearend which will be deducted from the Group Retained Earnings in W5 and
A non-current liability including its incurred interest of the Group.
Why is the impairment loss split between Wales and Cardiff? Because the non controlling interest according to Wales’ policy is to consider NCI at doa at fair value.
Why are Wales profits reduced by $75 in Group retained earnings? To recognize the interest incurred by the differed consideration.
Why do we create W5’? Because the shares issued to acquire Cardiff had not been recorded. We needed to recognize the 300m shares issued and the share premium associated with the issue of new shares.