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“The interest on the 8% loan note is $2million ($50mil x 8% x 6/12). This is included in Salva’s income statment in the post-acquisition period.Thus Salva’s profit for the year of $21mil has a split of $11.5mil pre-acquisition(21mil + 2 mil interest) x 6/12) and $9.5mil post-acquisition.”
That what was written by the examiner in the suggested answers.
The loan note is issued right after the acquisition of Pandar.I am not clear about the examiner’s explaination, how did he/she end up with the figure of $11.5mil and $9.5mil.
My working is below:
Since the loan notes interest is intra group transaction, so the $2mil on the interest should be added back to the original profit of $21mil. Therefore the profit is $23mil.
However, the $2mil is an expense in post-acquisition period, so there’s no need to apportion the interest according to the number of months acquired.
Since the question is a mid-year acquition (6months). So only the original profit of $21mil (before adjusted) should be apportioned to 6/12, therefore, $10.5mil. Then, $2mil + $10.5mil = $12.5mil. – the profit post-acquisition and balance of $10.5mil (from $23mil profit) is the pre-acquisition profit in the current year.Hi
Think about this! Profits are deemed to accrue evenly unless otherwise indicated.
Well, here you have an “otherwise indication” Do you accept that the profit BEFORE interest is 23 and is deemed to accrue evenly? Ok, so 11.5 profit before interest is pre-acquisition and 11.5 profit before interest is achieved post-acquisition.
OK so far? Now we have an expense that is specifically post-acquisition leaving post-acquisition profit AFTER interest at just 9.5
Does that do it for you?
alright. thx. now i get it, your explanation is clearer than the suggested answer.
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