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PANDAR Walk in the footsteps of a top tutor
On 1 April 20X9 Pandar purchased 80% of the equity shares in Salva. On the same date Pandar
acquired 40% of the 40 million equity shares in Ambra paying $2 per share.
The statement of profit or loss for the year ended 30 September 20X9 are:
Pandar Salva Ambra
$000 $000 $000
Revenue 210,000 150,000 50,000
Cost of sales (126,000) (100,000) (40,000)
––––––– ––––––– –––––––
Gross profit 84,000 50,000 10,000
Distribution costs (11,200) (7,000) (5,000)
Administrative expenses (18,300) (9,000) (11,000)
Investment income (interest and dividends) 9,500
Finance costs (1,800) (3,000) Nil
––––––– ––––––– –––––––
Profit (loss) before tax 62,200 31,000 (6,000)
Income tax (expense) relief (15,000) (10,000) 1,000
––––––– ––––––– –––––––
Profit (loss) for the year 47,200 21,000 (5,000)
––––––– ––––––– –––––––ADDITIONAL INFORMATION
immediately after its acquisition of Salva, Pandar invested $50 million in an 8% loan
note from Salva. All interest accruing to 30 September 20X9 has been accounted for
by both entities. Salva also has other loans in issue at 30 September 20X9.WORKINGS
Finance costs
$000
Pandar 1,800
Salva post?acquisition (((3,000 – 2,000) × 6
/12 ) + 2,000) 2,500
Intra?group interest (W2) (2,000)
––––––
2,300
––––––Good day,Please i don’t understand how salva’s post-acquisition was calculated.I’ll appreciate if you can explain better.
Hi,
This is a tricky one and I doubt you’d see it again in an exam.
We assume that the profits accrue evenly for the year, unless told otherwise. Here we are told otherwise but not in an obvious fashion. What has happened is that in the finance costs for the year there are finance cost incurred due to the issue of the loan notes as the acquisition date (given in the additional information).
The finance cost in the post acquisition period (6 months) will not have accrued evenly, so we need to remove them from the total charged, to find the amount that has been accrued evenly throughout the year so that it can be pro-rated.
The finance cost on the loan notes is 8% x $50 million = $4 million, and is therefore $2 million in the post-acquisition period. This is the 2,000 in the answer where you can see it has been deducted from the 3,000 to find what needs to then be pro-rated before it is then added back on to get the consolidated finance cost for the year.
Hope that clears it up a bit and I doubt you’ll see similar elsewhere, so don’t spend too much time on it or worry about it.
Thanks
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