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Dear John,
I had a question regarding the book value of equity and book value of debt.
Book value of equity – Why is equity of 24,600 not added to 15,965 in year 1? Nothing is mentioned in the question about it not being transferred.
Book value of debt – Why is trade and other payables of 7900 not added to 43,342 in year 1? In the question, it is mentioned that trade and other payables will be transferred to the new company when Ozaku Co is sold.
Thank you in advance!
Equity: Always when a company is sold, the existing shares no longer exist.
Debt: The debt is only shown in the answer for the purpose of calculating the gearing. Trade and other payables are never included when calculating the gearing – it is only long-term debt that is relevant.
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