- June 23, 2018 at 9:58 am
I’ve found this question and its answer made me confused:
“Spender acquired Jacked for $140 million and it was financed as follows:
? a cash payment of $20 million;
? loan notes of $50 million in Spender issued at par;
? 20 million $1 shares in Spender issued when the market value of the shares was $3.50 per share;
? the acquired subsidiary had net bank overdrafts of $10 million at the date of acquisition.
Calculate the amount that will be shown as the acquisition cost of Jacked in the consolidated cash flow statement of Spender and explain where this figure would be included?”
The answer of the question was 30 millions: the cash payment of 20M + the overdraft of 10M.
So it means that we don’t count the debt into the calculation of the cash cost of the acquisition and so we also don’t show the debt proceeds in the Cash flows from financing activities.
Is the answer correct?
And does this method also applies if we buy non-current assets financed by debt?
For example if a company buys a Non current Asset by paying 1M cash and taking debt of 3M, should we show 1M or 4M for the purchase of non current assets?
Thanks in advance.June 24, 2018 at 8:14 pm
The issue of the loan notes is just the issue of debt in return for the receipt of the shares acquired in the subsidiary, so there is no cash impact. We would DR Investment CR Loan notes.
The purchase of the non-current asset is different as we are borrowing the cash, so DR Bank CR Debt, and then using the proceeds to buy the asset, so DR PPE CR Bank.
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