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What is the treatment of the finance cost in the statement of financial position and statement of profit or loss, of a loan issued by a subsidiary and bought by the parent?
On the consolidated statement of financial position, the liability in the subsidiary is cancelled against the relevant asset in the parent leaving just the net debt to other lenders (where the parent did not buy the full debt)
In the statement of consolidated income, the income received from the loan investment in the parent’s income statement is cancelled against the relevant amount shown in the subsidiary in the heading finance costs
OK?
Do I reduce the R/E balance by the amount of finance cost in the statement of financial position of subsidiary and increase that of parent
No – only to the extent that the loan interest has not s far been recorded. If it in fact has not yet been recorded then, yes! Deduct the full interest from the subsidiary’s retained earnings, increase the parent’s retained earnings by the appropriate amount and then, for the purposes of consolidation, cancel that recorded interest receivable against the same amount from the interest payable.
OK?
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