Interest on loans

Yes, that’s an easy one!

In the parent entity’s statement of profit or loss you should find an item that reads “Investment Income” or “Finance Income” or something similar

That income in the parent entity’s records is the loan interest received from the subsidiary

Upon consolidation, we account for the entities within the group as though they were combined into just one large single entity

That means that we would be showing Finance Costs as an expense and that same money would also be shown as Finance Income – in other words we’re showing ourselves paying ourselves money … and that would be stupid

So, on consolidation, we eliminate all those transactions that have taken place within the group and where no outside parties were involved

OK?

No (you’re possibly correct but I’m struggling to work out exactly what it is you’re saying – sorry)

The loan was only taken out on the day of acquisition so the loan interest relates only to the post-acquisition period

The profit for the year is shown and, normally, we assume unless told otherwise that profits are deemed to accrue evenly through the year

But we ARE told otherwise because we know that the expense of the loan interest relates only to that post-acquisition period

So, add back the loan interest to the year’s profit figure and arrive at $23

Divide by 2 to get the pre-loan-interest profit split of $11.5 and $11.5

Now deduct the loan interest from that second period’s figure

The purpose of that exercise is to discover the retained earnings of the subsidiary as at date of acquisition and also to calculate the subsidiary’s post-acquisition retained figure

Then we have the separate issue of cancellation of intra-group transactions

When preparing the statement of profit or loss and the statement of financial position, we must eliminate from the consolidated statements all those items that are domestic / in-house transactions

Within that category there is the intra-group loan and the corresponding intra-group loan interest

For the purposes of the statement of profit or loss, deduct from the subsidiary’s figure the intra-group loan interest and then add across the figures for Finance Costs (remembering to time-apportion the figure for the subsidiary)

From the Investment Income / Finance Income line, deduct from the parent’s figure the loan interest received from the subsidiary and then add across (again, remembering to time-apportion the figure for the subsidiary if appropriate)

OK?

That’s good, and you’re welcome