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Dear P2 tutor,
There’s one question crossed my head. When there’s inter company loan, where the parent provides loan to its subsidiary, we will eliminate it upon consolidation.
But, what about loan provided by the parent to the subsidiary during pre-acquisition period above or below par value? What is the accounting treatment at the date of acquisition? How will it affect goodwill on acquisition?
I hope to get your guidance as soon as possible. Thank you very much.
Isn’t there enough to get to grips with without hypothetical difficulties?!!!
I imagine ( and I seriously doubt that Graham Holt will ever put this in an exam question ) that it will make no difference in the goodwill calculation. Net assets at date of acquisition will not change so the goodwill calculation will not change.
there will of course be cancellation of investment ( loan ) against long term debt recorded in the subsidiary. Also cancellation of finance charges in subsid with investment income in the parent.
I have never seen this in practice, and I can’t remember seeing it in ACCA exams – but I could be wrong
Well, I’ve seen one question which came from past sittings before the change of the syllabus to P2 but I’m not sure which sitting was that.
The question is something like follows:
H acquired 80% of interest in S(which has 500m of $1 ordinary shares) for $800m on 1 Apr 20X4 and the reserves at this date was $100m and acquired the whole of $40m 10% debentures in issue by S at a cost of $60m.
Abstract of SOCI ftye 31 Dec 20X4:
H
Interest receivable $4mS
Interst payable $4mThe answer for Goodwill is $339m.
Could you please explain to me about the treatment?
Thank you!
Yes, you’re correct – there was a question many years ago and I too cannot remember the name. Net assets are 600 ( shares + reserves ) so 80% of 600 = 480. In addition, H is paying off an S debt by a cash payment of 60m. The debt is 40m PLUS the accrued interest up to the date of acquisition ( 10% x 40m x 3/12 ).
That means that H is paying 60 – ( 40 + 1 ) = a surplus payment of 19.
Goodwill is therefore 800 + 60 – ( 480 + 41 )
I seem to recollect that that was how we arrive at 339 goodwill
My problem now is, what is the sense behind this treatment? I just can’t get it out of my head with a sensible understanding.
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