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MCQ question:
A acquired a 60% holding in B on 1 July 20X6. At this date, A gave B a $500,000 8% loan. The interest on the loan has been accounted for correctly in the individual financial statements. The following total costs for finance costs for the year to 31 December 20X6 in the individual financial statements are show below:
A – $200,000
B – $70,000What are the consolidated finance costs for the year to 31 December 20X6?
A. $215,000
B. $225,000
C. $230,000
D. $350,000How is the answer B? I am very confused with the concept behind this… especially with the Pandar section C with a similar thing to this… can you please make it clear to me
$500,000 @ 8% for half a year = $20,000 and that figure is included within the B finance costs
It needs to be eliminated when calculating consolidated finance costs
So B’s total finance costs of $70,000 comprise $70,000 of which $20,000 is specifically post acquisition
Therefore only $50,000 is time apportioned half pre-acquisition and half post- acquisition
Therefore pre-acquisition finance costs are $25,000 and post-acquisition finance costs (including $20,000 paid to A) are $45,000
But that $20,000 interest paid to A needs to be eliminated leaving only $25,000 finance costs payable to outside lenders
Therefore, on consolidation we have the finance costs line that reads:
$200,000 + $45,000 – $20,000 = $225,000
Is that any clearer?
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