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A CO acquired a 60% holding in B Limited 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 totals for finance costs for the year to 31 December 20X6 in the individual financial statements are shown below.
A CO $200,000
B CO $70,000
What are consolidated finance costs for the year to 31 December 20X6?
A $215,000
B $225,000
C $230,000
D $250,0001. The answer is B
2. My working is as follows.
$200,000+(70,000*6/12)=235,000. We then remove interest income( A co) and finance cost of $20000(B co) which gives us a consolidated figure of $235000.3. Please locate where I am getting things wrong
Hi,
This is a tricky one and the key is that the intra-company interest needs to be removed from the subsidiary before the finance cost is pro-rated.
The intra-company interest is $20,000 for the 6 months to December 20X6 (8% x $500,000 x 6/12).
We then deduct this from the $70,000 to give $50,000 which is external to the group and will have been accrued over the year. We can now pro-rate this for the 6 months to give $25,000.
This is then added to the $200,000 to give the $225,000.
Thanks
“We can now pro-rate this for the 6 months to give $25,000.”
I’ve not understood this part. Could you re explain it?
Thanks
Hi,
July to December is 6 months, to pro-rate it we take 6/12ths of the $50,000, as the cost has accrued over the year and we only want the amount since the date of acquisition.
Thanks
Hello Chris,
Thank you for your answer.
1.If we pro-rate the $70,00, it will be $35,000 for the first 6 months and $35,000 for the last
6 month( july-Dec)2.If we pro-rate the finance cost, we would obtain $20,000(8% x $500,000 x 6/12).
3. Now if we consolidate the figures we would obtain $200000+35000-20000=$215000
The working I’ve done above is wrong but could you please locate where I am getting thing wrong?
Hi,
You need to do your step #2 first. You then deduct this from the $70,000 and finally pro-rate, before adding to the $200,000.
Thanks
I understand that A gave B a loan, so finance cost for the loan is paid to B by A, I think it should be removed from finance cost of A? could you please help me understand more?
If the cost is paid by B to A then the cost is removed from B’s accounts and the income removed from A’s accounts.
Thanks
A-200,000
B-35,000
Intra finance -(20,000)
And my answer is 215,000
Can you explain how to get the answeri have a doubt that as per the rule we nullify the common interest income and interest expense.. so in this question common interest exp and income was $20000. so why are we only deducting this from subsidiary’s finance cost and the apportioning it? should it not be that we just do like this
i.e $200000+$35000(70000*6/12)-$20000 (intra group interest)= $215000.. please could you just tell where exactly is my logic going wrong ?? and help me out with it?Thanks
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