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The following paragraphs in the Kaplan study book (p 470) do not make sense to me so I do not really understand how the consolidated interest charge is calculated in mid-year acquisitions:
‘However, if the parent loaned the subsidiary $2 m with 10% interest, there will be $100,000 in the second six months that wouldn’t be in the first month.
The true interest charge would be £300,000 without the intra-group interest and therefore six months of this would be $150,000. This is the figure that would be included within the consolidated statement of profit or loss.’
Could you please explain?
Thank you.
Regards
In consolidation questions, with mid-year acquisitions, revenues and expenses are deemed to accrue evenly through the year unless we are told otherwise.
When a parent lends money to its new subsidiary, the associated interest relates only to the post-acquisition period
So from the total loan interest expense in the subsidiary’s results for the full year, we need to deduct that intra-group loan interest that we KNOW relates only to the post-acquisition period to then find out the figure for finance charges in the subsidiary that HAVE accrued evenly through the year
We are then able to allocate that calculated amount to the pre- and post-acquisition periods (typically it will be a 50/50 split)
So, on consolidation and having eliminated the intra-group element, we are simply including the post-acquisition finance charge that relates to matters external to the group
If the subject matter had not been an intra-group cancellable item, we would have needed to do the same exercise and then add on to the appropriate period the amount that related specifically to one or the other period
There is an example of that in the comprehensive example Ausra and Danute in the free course notes
Better?
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