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PLANK CO.
ADJUSTMENT # 3;The investment income of Plank Co for the year ended 31 December 20X8 includes
dividends from Strip Co and Arch Co (see note (4)). It also includes $5m interest
receivable on a loan made to Strip Co on 1 April 20X8.(W3) NCI Share of profit and total comprehensive income
Strip NCI
@ 15%
$000 $000
Strip profit for the year 66,000
Add back: post?acquisition interest (see W5) 5,000
––––––
71,000
––––––
Post?acquisition element (× 9
/12) 53,250
Less: post?acquisition interest (5,000)
––––––
48,250
Less: Fair value depreciation (W1) (2,000)
––––––
Adjusted Strip profit 46,250 6,937
Other comprehensive income 3,000 ––––––
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Strip total comprehensive income 49,250 7,387CAN YOU PLEASE EXPLAIN WHY WE JUST ADD BACK POST ACQ INTEREST AND THAN LESS?
Hi,
It is a complication that I wouldn’t worry about in the exam.
The profit figure that we have of 66,000 is for the full year (12 months), and will be a figure after the interest that has been paid (9 months). We need to pro-rate the profits for the year to be able to work out the post-acquisition profits but the added complication of the interest being made makes things more difficult.
This interest has only arisen since the acquisition date, it does not relate to the full year, so to just pro-rate the 66,000 would not be right as the profit is after deducting the 5,000 for the 9 months. If we don’t do this then we would be assuming that the 5,000 that has been paid is for the full year and it isn’t.
So, to get to the correct profit for the year so that we can pro-rate for the 12-months we need to add-back the 5,000 to give us the 71,000 before then multiplying by the 9/12, to give the post acquisition profits. As this figure now relates to the 9 months we can deduct the 5,000 as this also relates to 9 months too.
As I said it is far too complicated and even more so when trying to explain in just words.
Thanks
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