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hello Mike
i was doing this question and noticed something really odd.
it specially said in this question that Parent invested in loans of subsidiary on the date of acquisition and the PnL shows the Parent receiving 75 as interest income from S.
So this means that the profit for the year in the subsidiary as shown in the question (PnL) is underrated for consolidation purposes because it shows loan interest paid to the parent in the post acquisition period. why then we are not adjusting the profit of S before calculating its pre and post acquisition retained earnings?
isnt this situation is exactly similar to the question Pander 12/09 where we added interest back to profits before calculating pre acquisition RT?
Well, if the parent hadn’t invested in the subsidiary’s loan, someone else would have done. was this a new loan note / borrowing by the subsidiary? In which case there would be a case for removing the entire loan interest, splitting the profit and then reinserting the loan interest in the post acquisition period.
But from memory (I don’t have the 2003 question available!) this was NOT a new loan issued by the subsidiary as at date of acquisition.
The importance of the item is (was this a balance sheet question) that we cancel part of the subsidiary’s long term liabilities against the equivalent value of the parent’s investments
Is that ok?
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