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Dear Sir,
I know that for CSOPL we eliminate the effect of interest on the loan from finance costs and investment income by the same amount.
But I have a doubt in the following question where you had said that the Group retained earnings reduced by 160000 in this post
https://opentuition.com/topic/intra-group-loan/I have bought latest BPP exam kit and now they rectified this same question’s answer from C to D.
”On 1 July 20×7, Spider acquired 60% of the equity shares capital of FLY and on that date made a $10Mn loan to FLY at a rate of 8% per annum.
What will be the effect on group retained earnings at the year-end date of 31 December 20×7 when this intragroup transaction is cancelled.
A) RE will increase by $400K
B) RE will be reduced by $240K
C) RE will be reduced by $160K
D) There will be no effect on group retained earnings.”But I know that we actually take into account the effect of the interest when we workup the group retained earning.
So why the Answer is D now. I have got C as my answer.
Answer in BPP
D There will be no effect on group retained earnings
$’000
Loss of investment income(10m × 8% × 6/12) (400)
Saving of interest payable 400I also arrive at C
Spider’s RE will fall by 400
Fly’s RE will increase by400
Of that 400 Fly increase, the NCI is entitled to 40% (40% * 400 = 160)
So NCI will increase by 160
Overall, group retained earnings will fall by 400 and increase by 240 (60% * 400) giving a net decrease of 160
OK?
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