q1 dec 09,
on 1 april 2009 pander purchased 80% of the equity shars in Salava. profit of salva for the year ended 30th sept is 21m. Immediately after its acquisition of salva, pandar invested $50 m in an 8% loan note from salva.
so, salva’s profit is split as pre and post acq.
pre acq is (21+2)/2 =11.5 m
and post acq is 11.5 -2=9.5 m
2m being intra group interest.
my doubt is , 85 loan instead of taking from parent if they had taken from a third party.
what would became pre and post acq? will the calculation be the same? this is my doubt.
No, the post acq profit is still going to be 9.5. Before the loan interest expense, the profit for the year would have been 23, so an 11.5 / 11.5 split.
If salva had borrowed 50m from outside, it would have paid 2m. So it doesn’t matter from whom the 2m is borrowed, the second period ( ie post acq period ) would still have been 11.5 – 2m loan interest.
The impact of borrowing from within the group is that finance charges and investment income of 2m will be ignored for the purposes of the Consolidated Statement of Income and the cancellation of 50m investment and 50m long term debt will be applicable.
You may be asking what the position would be if there was NO borrowing of 50m neither from within nor without the group ie salva did not borrow any money. In that situation, there would be no 2m deduction against this post acquisition profits and the profit for the year of 23m would be split 11.5 / 11.5
Hope that helps
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