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Hi sir,
I was doing some revisions for Consolidation. There is a MCQ question that I am unclear witn and would appreciate it if you would help me with it please.
Question:
Brigham has owned 70% of Dorset for many years. It also holds a $5 million loan note from Dorset. One of Dorset’s non-current assets has suffered an impairment of $50,000 during the year. There is a balance in the revaluation surplus of Dorset of $30,000 in respect of this asset. The impairment loss has not yet been recorded.The entity financial statements of Dorset show a profit for the year of $1.3 million.
What is the amount attributable to the NCI in the consolidated statement of profit or loss?
A. $264,000
B. $255,000
C. $300,000
D. $348,000BPP gives the answer to be A.
In trying to understand how BPP got the answer, their working had :$’000
Profit for the year ————1300
Intra group interest (5m x 8%) ——(400)
Impairment (50,000-30,000) ——– (20)
____
880
____x30% 264
I am uncertain as to where the 8% for interest on loan notes had came from. Is it a mistake from BPP? Or could it be a way to calculate the interest for this question (ie number of years) ?
$5m loan note I can see in your post. But surely you have missed three elements from the question! Look again more carefully at the question within which there should be mention of the 8% Loan Note of which Brigham owns $5m
And secondly, there appears to be nothing in the question to indicate that the loan interest has not yet been recorded although your explanation of BPP’s answer suggests that that interest has not yet been recorded in arriving at the $1,3m profit
And thirdly, how am I to know that the $1,3m profit is after tax or before tax.
If you have quoted / copied the question as it is written in the BPP revision kit then (and I’m reluctant to do this!) it seems to me that the question is a poor one and lacks sufficient detail for you to be able to arrive at a definitive answer
Are you absolutely sure that this is a stand-alone mcq or is it one of 3 or 4 based upon a single stem scenario? That could explain where the missing information is
Please let me know if you can find a resolution to this problem
Hi sir,
Unfortunately, I have copied the question exactly as in the book from the beginning to the end of the question, so I assume it is a stand-alone MCQ. I would take a picture of the question and attach it over here for you to see if I could!
Assuming this question does lack necessary information (the 8% wasn’t in the question too.. I didn’t miss it. Was finding it for hours!!), can I ask in general, do we deduct the interest on loan, if any, to the profit of the subsidiary to arrive at the profit to be attributable to the Parent as well as NCI?
For this question, Brigham holds a $5 million loan note from Dorset, meaning Interest on loan would be paid by Brigham to Dorset right? As the loan note is from Dorset. If so, Dorset would be receiving the interest on loan, thus we are deducting it from its profit, to cancel out the intra group transaction, is my understanding correct?
Not quite correct. I get the impression that you want to adjust the Brigham PorL for the interest received from Dorset and that you want to adjust the Dorset PorL for the interest paid to Brigham?
NO!
The adjustment to remove the intra-group interest received and interest paid is a consolidation adjustment only.
So far as both companies are concerned, this is a finance charge / a finance income and is not adjusted in either PorL
But when it comes to adding across (consolidating) we shall add finance income received in Brigham to any finance income received in Dorset and then deduct the element of intra-group interest received.
Same exercise with the finance charges
OK?
Yup, Ok! Thanks sir!
Not related to the question above, but just to get confirmation, when consolidating, for the pre-acquisition retained earnings in Goodwill calculation (W2) and the pre-acquisition retained earnings in calculation for Consolidated retained earnings (W3) are the pre-acq retained earnings the same?
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