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P owned all the ordinary shares and 40% of the the stock of S since incorporation.
Extracts of both companies:P-equity
ord shares of $1, fully paid=$100,000
RE =$95,000NCL
10% loan stock =$75,000S-Equity
ord shares of $1, fully paid =$80,000
RE =$28,000NCL
12% loan stock $50,000-In the answer, when consolidating, the NCL is 75,000+(50,000 x 60%)
-I am unable to understand the logic behind this calculation.P has acquired 40% of the loan stock, but at the end of the day, it is still a loan which needs to be repay; therefore a liability to the group which eventually should be added. Could you please explain?Thanks.
In P’s records there is an asset representing the $20,000 cost of 40% of the S loan stock
In S’s records there is a non-current liability representing $50,000 loan stock of which $20,000 is held by P
On consolidation, cancel $20,000 asset in P against $20,000 of the $50,000 liability in S and leave $30,000 liability owed to the outside world
You’re worried that it’s a loan and will need to be repaid, no matter who owns the loan stock
“but at the end of the day, it is still a loan which needs to be repay”
Ok, let’s move on in time and repay that loan
$30,000 is paid to the outside world and the remaining $20,000 is taken out of one ‘pocket’ and put into the other ‘pocket’
So how much of that $50,000 actually left the group?
OK?
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