2012 june q1 share exchange

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    desperatedan
    Participant
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    Hello,

    In the goodwill calculation (working (i)) the share exchange is taken into account but in working (v) the NCI’s share of the share exchange is not listed. I think the subsidiary owns a share of the parent?

    Please could you tell me why working (v) (non-controlling interest) does not include the NCI’s share of the share exchange?

    Thank you,

    DD


    Avatar of MikeLittle
    MikeLittle
    Keymaster
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    A share-for-share exchange is when the acquiring company issues its own shares TO THE SHAREHOLDERS OF THE ACQUIREE. The ( now ) subsidiary company DOES NOT receive any shares in the parent – the shareholders received the shares, not the company.

    It is against the law for a company to own shares in its parent!.

    So, in answer to your question, the nci DO NOT have any interest in the parent – only in the subsidiary in so far as the parent did not acquire 100% of the subsidiary’s shares – some of the subsidiary shareholders didn’t want to sell their shares and that’s why the parent could only acquire ( say ) 80% of those subsidiary shares.

    Is that clear?


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    pt
    Participant
    • Topics: 7
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    Hi Mike,

    It’s regarding the same question.

    Why the interest on $2.5M 11% loan note bought by Pyramid from Square isn’t deducted from Pyramid’s Retained Earnings and added back under Square’s post-acquisition profit?

    Thanks.


    Avatar of MikeLittle
    MikeLittle
    Keymaster
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    The working 3 calculation is “H’s own + H’s share ….” H’s own retained profits must include their investment income including the investment income from the subsidiary. When S declared the loan interest as payable, they will have Dr Retained earnings and Cr Amounts Payable. At the same time, H will be Dr Amounts Receivable and Cr Retained Earnings

    Now cancel. The value of the H loan interest receivable is cancelled against the total S loan interest payable leaving just loan interest payable to the outside lenders.

    But in those above journal entries, there’s no mention of cancelling the Retained Earnings entries.

    In the CSoI we ignore the loan interest receivable from the subsidiary and at the same time we ignore the element of finance charges paid / payable to the parent from the cross-addition to arrive at consolidated finance costs.

    OK


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    pt
    Participant
    • Topics: 7
    • Replies: 13

    Hi Mike

    Sorry I’m a bit confused. I can’t see “H’s own + H’s share….” in working 3 in the answers. The working 3 in the answer book is Reconciliation of Current Accounts.

    The information (ii) in the question said all interest due on the loan notes has been paid and received so this means Pyramid has Dr Bank Cr Retained Earnings while Square has Dr R.E. Cr Bank.

    The answer has stripped out inter-group loan notes $2.5 M from Assets (from Pyramid) and Liabilities (from Square) so I don’t understand why the answer hasn’t stripped out inter-group loan interest ($2.5M x 11% loan notes rate) from Retained Earnings of both parent (deduct R.E.) and subsidiary(add back R.E.)

    Many thanks.


    Avatar of MikeLittle
    MikeLittle
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    If this were a Statement of Income question, then you’re correct in that cancellation should eliminate part of parent investment income received against part of loan interest paid.

    But for the Balance Sheet, we’re looking for post acquisition RETAINED earnings, and dividends are not retained – they’re paid out in arriving at the retained earnings figure.

    is that better?

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