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If consideration paid to subsidiary by parent include some cash as well as some loan notes, how will the loan notes be treated in consolidation? Should we record a liabilty as well or not?
First of all, when a parent acquires control of a subsidiary, the consideration is NOT paid to the subsidiary! It’s paid to the people that used to own the shares in the subsidiary – people like you and me.
So when loan notes are issued as part of the consideration, the double entry is:
Dr Cost of investment
Cr Loan notesWhat you may be getting confused with is the situation where, (typically) after the acquisition, the subsidiary issues loan notes in exchange for money borrowed. This is, in exams, in part at least money borrowed from the parent
In this situation, the parent is holding a financial asset (loan notes in the subsidiary) and the subsidiary has an obligation (loan notes issued)
On consolidation the loan notes owned by the parent will be cancelled against some (or sometimes, all) of the loan note obligation in the subsidiary’s sofp
Is that any clearer?
please do you add the loan note to the consideration when calculating the goodwil?
Hi,
Yes we do. The debit entry to the investment will increase the consideration part of the goodwill calculation.
Thanks
Hi, is loan not interest subject to the persons personal tax rate? eg if they earn 100K annually, would the additional interest paid on top of this salary be taxable at the higher rate of interest?
thanks in advancehello sir,,,what about the interest we pay from the loan notes, should we subtract it from the groups’ retained earnings ?
One question had a loan note consideration and no interest on the loan note was deductable from the group retained earnings
while another question had a loan note consideration of which the interest on the loan note was deductable from the group retained earnings.This confused me whether there was a limitation to subtract it or not.
I went back to the question on which it had the loan note interest NOT deductable and the extra information given on the question in reference to the loan notes was that
“Paradigm Co has
not recorded any of the purchase consideration, although it does have other 10% loan notes already in issue.”does this information actually make the interest NOT deductable from the Group retained earnings?
i fail to understand, thank you in advance Sir.
Hi,
It all depends on if the interest has been recorded already or not. If it has been recorded already then it will be included within the group retained earnings and no adjustment required.
If the interest has not been recorded then we will need to adjust the group retained earnings so as to record the amounts in the accounts.
Thanks
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