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Sir,
In the solution given for the above question , for finding out the profit up to the absorption date , it is added 2000 to the given profit of 21000 and divided by 2 for finding the six months. I have no idea where from this 2000 came from? it is not given in any part of the question
Can you make me clear the point
Regards
It’s the interest on the loan
Normally revenues and expenses are deemed to accrue evenly but, in this case, there is an expense that relates solely to the post-acquisition period – the loan interest
So profit for the year after interest is 21,000
Therefore profit for the year before interest is 21,000 + 2,000
Now time apportion into 2 half years of 11,500
Now deduct the loan interest from the second half
And we arrive at a profit split of 11,500 and 9,500
OK?
Sir,
I have not seen any scope for interest on loan in the question.
I strongly doubt you are mentioning about a different question. The following is the question which I was referring. :-
Question 8 On 1 April, 2009 P purchased 80% of the equity shares in S. The acquisition was through a share exchange of three shares in P for every five shares in S. The market prices of P’s and S’s shares at 1 April, 2009 were $6 per share and $3.20 respectively.
The following information for the equity of the companies at 30 September, 2009 is available:P S Equity shares of $1 each P-200,000 s-120,000
Share premium P- 300,000
Retained earnings 1 October, 2008 P- 40,000 S- 152,000
Profit for the year ended 30 September, 2009 P- 47,200 S- 21,000The fair values of the net assets of S at the date of acquisition were equal to their carrying amounts with the exception of an item of plant which had a carrying amount of $12 million and a fair value of $17 million. This plant had a remaining life of five years (straight-line depreciation) at the date of acquisition of S. All depreciation is charged to cost of sales.
In addition S owns the registration of a popular internet domain name. The registration, which had a negligible cost, has a five year remaining life (at the date of acquisition); however, it is renewable indefinitely at a nominal cost. At the date of acquisition the domain name was valued by a specialist company at $20 million. The fair values of the plant and the domain name have not been reflected in S’s financial statements.
The non-controlling interest in S is to be valued at its (full) fair value at the date of acquisition. For this purpose S’s share price at that date can be taken to be indicative of the fair value of the shareholding of the non-controlling Interest.
No, it’s the same question
HOWEVER!!!!!
If you look at the solution on page 251, right at the bottom of the page, you’ll see the line ‘Immediately after acquisition P invested $50 million in an 8% loan note issued by S’
THAT accounts for the $2,000 add back before we split the profit
It’s on my list of corrections-to-be-made – that information should, of course, have been included in the question on page 225
Sorry
Incidentally, if you had checked lower down on this forum, you would have found the same question and the same response!
(It was exactly one week ago, 17 August, and asked by ‘bojanbih’)
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