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group-mid year acquisitions

Forums › ACCA Forums › ACCA FR Financial Reporting Forums › group-mid year acquisitions

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by mrjonbain.
Viewing 4 posts - 1 through 4 (of 4 total)
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    Posts
  • July 17, 2021 at 8:12 am #628011
    prakasa@123
    Participant
    • Topics: 5
    • Replies: 2
    • ☆

    Hello,
    P acquired 80% of S on 1 July 20X1. S’s retained earnings at
    31 December 20X1 are $15,000 and S’s profit for the year was $8,000.
    Immediately after acquisition, P made a loan to S of $40,000 which
    carried interest at 10%.what are’ s ‘ retained earnings at acquisition.

    . I have a doubt in this question that what will be the effect of loan in calculation of retained earnings of s at acquisition.

    Thank you.

    July 17, 2021 at 2:09 pm #628042
    mrjonbain
    Moderator
    • Topics: 6
    • Replies: 2478
    • ☆☆☆☆☆

    Firstly I would start by working out what S’s profit by for year would be without loan.Since loan interest equals $40000 X 0.1 X 6/12 = $2000. This means $10000 profit would have been earned in absence of loan which is important as profit for year will be unevenly earned as result of loan interest $8000 + $2000 =$10000. If this ten thousand were earned evenly apart from interest on loan which only applies to second half of year, then $5000 dollars would be earned in pre-acquisition period and $5000 in post-acquisition period. However, we know $2000 cost is only applicable to post-acquisition. This means that $5000 is earned pre-acquisition and $3000 post-acquisition. The above assumes that profit is earned evenly across year apart from interest on loan which can be fair assumption if stated and not contradicted by information in question. Hopefully, I have got the above right and I hope it helps you.

    July 17, 2021 at 4:26 pm #628067
    prakasa@123
    Participant
    • Topics: 5
    • Replies: 2
    • ☆

    Thank you .It helped me.

    July 17, 2021 at 11:28 pm #628111
    mrjonbain
    Moderator
    • Topics: 6
    • Replies: 2478
    • ☆☆☆☆☆

    You are welcome.

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