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P acquired 80% of S share capital two year ago, when the RE of S stood by $125,000.It is agreed that P would pay $500,000 in 3 years time, Current interest are 10% pa. and S$1 receivable in 3 years can be taken as $0.751.Extract for year 31 dec 20X4:
P-RE $1400,000
S-RE $300,000-I actually have some problem with the discount.
-From your previous explanation, I do have now understand the concept of ‘unwinding discount’ and after 2 years I have calculated the discount which is $45,496. But in the answer of the book, when calculating the group RE, it says 1400+(300-125-79)-This “79,000” is the unwinding discount. I don’t understand where does this “79,000” comes from? Why $45,496 has not been deducted?
Thanks.
The discounted present value of $500,000 as at date of acquisition is $375,500
Discounted for 1 year, this amount moves by $37,550 to $413,050
Discounted for a second year and the amount moves by $41,305 to $454,355
So the present value after 2 years stands at $454,355 whereas it originally stood, two years earlier, at $375,500
That’s an increase of $78,855
Is that maybe close enough to $79,000?
If you were to use exact figures, the present values would be $375,657 + $37,566 = $413,223 + $41,322 = $454,545 + $45,454 = $500,000
In this case, the “79,000” to which you referred would be the addition of $37,566 and $41,322 = $78,888
OK?
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