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Global Corporate Accounting - Question 1

a) NPV =(13842.3) as calculated below in the working notes, indicates that Make Up Ltd should not manufacture the face wash. This is not going to be positive project and if directors accepts this project they will be decreasing the shareholder’s wealth, by putting the cash into an negative or highly risky project.

Working Notes:

Working:

         

WN 1:Tax benefit on capital Allowance

1

2

3

4

5

Asset balance(A)

650000

520000

416000

332800

Capital allowance(B=A 020%)

130000

104000

83200

90800

Tax benefit(C=B030%)

39000

31200

24960

27240

WN 2: Working CapitaI Cash Flows

       
 

0

1

2

3

4

WC required

 

31500

39500

47500

55500

WC Cash Flow

-31500

-8000

-8000

-8000

55500

 

Year

0

1

2

3

4

5

No.of un its (i)

 

15000

15300

15606

15918

 

Selling price per un it( ii)

20.00

21.00

22.05

22.49

22.94

 

Material cost(i i i)

2

2.100

2.205

2.300

2.430

 

Labour cost( iv)

5

5.250

5.125

5.788

6.070

 

Sales{A= i*ii)

 

315000

337365

350994.5

365174.7

 

Direct Materials{B=i*i i i)

 

-31500

-33736.5

-36131.8

-38697.1

 

Direct Labour{C=i*iv)

 

-78750

-84341.3

-90329.5

-96742.9

 

Fixed Overhead{D)

 

-40000

-40000

-40000

-40000

 

Taxable Cash Flow{E=A+B+C+D)

 

164750

179287.3

184533.3

189734.7

 

Tax @ 30%{F=E*30%)

   

-49425

-53786.2

-55360

-56920.4

Tax benefit its on Capital a allowance{G=WN.1)

   

39000

31200

24960

27240

Working Capital Cash Flow{H=WN.2)

-31500

-8000

-8000

-8000

55500

 

Initial investment{I)
Scrap Value(J)

-650000

     

242000

 

Net Cash Flow{K=E+F+G+H+l++J)

-681500

156750

160862

153947

456835

-29680.4

Df @ l1%{L)

1

0.9009

0.8116

0.73119

0.658731

0.593421

PV @ 11%{M=K *L)

-681500

141216

130556

112565

300931.1788

-17613

NPV{Sum of PV) -13842.3

-13845.3

         

b) Payback period is useful as follows:-

  • Simplicity – It is extremely simple concept to calculate and understand. It is first thing to know that by when our investment will be recovered so quite easy to predict the profitability, payback period method can even be used without a calculator or electronic mode.
  • Focus on Risk: This analysis is primarily focuses on how quickly the money can be recovered for an investment. which is nothing else but measurement of risk. So if to projects need to be compared anyone will choose the one will shorter payback period to reduce the risk.
  • Liquidity : Payback period method of analysis favours with shorter payback period which tends to result in investment with higher degree of liquidity.

c) In a decision making process it is financial analysis is a important step and the factors which are key for decision making other than financial are :-

Social – There are various objectives linked to doing things which are ethical and environmentally important. So, if an investment which might be profitable but not ethical or environmentally and socially. Illegal projects howsoever profitable it may be should not be accepted.

Personal Satisfaction - Any projects which aims to satisfy the personal ambition or wish of an entrepreneur even if NPV is negative will be given preference to get the desired output.

Challenge and Control: - Sometimes entrepreneur select a project to accept a challenge or take high risk project to prove and control the things may be sometimes to capture the market A company launch a project which may not be successful initial years of its operation of commencement. But the long term future is rewarding.

Independence- It relates to working for oneself , that is a entrepreneur thinks that they want to perform and take decisions independently they might choose a project without giving much importance to its viability.

Global Corporate Accounting - Question 2

a) And b) Answers

Consolidated Balance sheet as on 30th June 2020

 

Fx rate

         
 

01-Jul

0.714285714

       
 

30-Jun

0.757575758

       
 

Kellar

Kellar

Eviar

     

Assets/liabilities

Z'000

E'000

Euro 000

Goodwill acquisition accounting (E000)

NCI allocation for profit made post acquisition (E000)

Consolidated figure (E000)

             

Non current assets

           

Property, plant and equipment

16805

12,731.06

31058

-

-

43,789.06

Investment in Kellar at cost

-

 

13650

-13650

-

0.00

Goodwill

     

8199.685

-

8,199.69

Total non-current assets

16805.00

12731.06

44708.00

-5450.32

0.00

51988.75

             

Current assets

5255

3,981.06

7875

-

-

11,856.06

             

Total assets

22060.00

16712.12

52583.00

   

63844.81

             

Share capital

3920

2,969.70

7875

-2289.37

-

8,555.33

Retained earnings

7890

5,977.27

29138

-4608.235

-840.45

29,666.59

             

Total shareholder's fund

11810

8946.97

37013.00

-6897.61

-840.45

38221.92

Non-controlling interest

0

 

0

1447.29

840.45

2287.74

Total equity

11810

8946.97

37013

-5450.315

0

40509.65

             

Current liabilities

10250

7,765.15

15570

-

-

23,335.15

             

Total equity and liabilities

11,500

7,130

28,175

-2,745.3

-

63844.81

 

Computation of goodwill on 01July-

Ziare 000

Fx rate

Euro 000

Consideration given

   

13650

       

Less:

     

Share capital acquired (65%) of Keller

2548

0.71

1809.08

Reserves of Kellor

5128.5

0.71

3641.235

Total net assets acquired

7676.5

 

5450.315

       

Goodwill on acquisition

   

8199.685

       

Following JV's shall be posted in Consolidation-

     
       

Share capital of Kellar A/c---Dr

1809.08

   

Retained earnings A/c--- Dr

3641.235

   

Goodwill A/c---Dr.

8199.685

   

To Investments A/c

 

13,650.00

 

(Being goodwill accounted)

     
       

Share capital of KellarA/c---Dr

480.29

   

Retained earnings A/c--- Dr

967

 

To Non Controlling Interest A/c

 

1447.29

 

(Being NCI accounted on 01 July)

     

Computation of Non Controlling Interest for profit made by kellar post acquisition-

Computation of NCI for profit made post 01 July to 30 June 2020-

   
     

Profit made- zaire

3170000

 

Fx rate

0.7575

 

Profit made- Euro

2401275

 

NCI share

35%

 

NCI- Euro

840446.25

 

Note-

  1. Share capital of Kellar is converted at historical value i.e. 01 July
  2. Reserve as on 01 July has been converted at July 01 Rate
  3. Income statement and balance sheet is converted at closing rate of 30 June, 2020

c) Fair value of accounting is the concept of using current market value of the various tangible and intangible assets under the IFRS. IFRS is an international accounting standard which is getting popular because of its practical and realistic approach towards accounting treatments of transactions. Fair Value is estimated price of an asset in which it can be sold to a third party.

Fair Value adjustments are necessary while calculating goodwill to know the real worth of investment to adjust the investment to that extent, According to IAS 21, effects of changes in Foreign Exchange rates, treatment of goodwill is considered as an assets and re-translated at each reporting date. And accordingly the exchange gain and loss on goodwill valuation is also translated at each reporting date.. So when a company prepares its consolidated statement it is very much expected to show the real value of the investments and true value of its assets and liabilities. Goodwill is an intangible asset and it is very important to book it to its real value i.e current value. Generally, there are two approaches adopted to ascertain fair value of an asset

  • Market Approach
  • Income approach

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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