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Hi Mike!
I have some issues to tackle the following question. I need your help.
P bought S on the 1 July x1. S’s retained earnings at 31 Dec x1 are $15000 and it’s profit for the year was $8000. Immediately after acquisition, P gave S a loan of $40000 with interest 10%. What were S’s retained earnings at acquisition?
1.The answer is $12000 and I have some difficulties to obtain it.
2.In addition, concerning this question, I know that the loan is cancelled with when consolidating. How about the interest?What’s the double entry to cancel it?
I assumed that every year S accrued interest in which it DR Interest expense and CR liabilities. However when we consolidate should we also remove the interest from the liabilities of S?Thanks for your time.
1) Without the $2,000 loan interest in the second half of the year, the year’s profits would have been $10,000 … so $5,000 pre-acquisition and $5,000 post-acquisition
But there is a $2,000 post-acquisition expense of loan interest so the $8,000 splits $5,000 pre and $3,000 post
If retained earnings at the end of the year are $15,000 and that is after adding $8,000 profits for the year, then brought forward profits must be $7,000
And there’s $5,000 pre-acquisition profits mad ein this year so retained earnings as at date of acquisition must be $7,000 brought forward + $5,000 pre-acquisition this year
OK now?
2) “How about the interest?What’s the double entry to cancel it?”
Reduce finance charges by $2,000 and reduce loan interest received by $2,000 when consolidating
Why assume that? “DR Interest expense and CR liabilities.”
What’s the matter with DR Interest expense and CR cash?
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