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Sir,
When subsidiary sells loan notes to parent, why do we add interest on loan notes in subsidiary’s post acquisition profit while calculating NCI for statement of profit /loss?Thankyou.
What’s the name of the question? To be honest, I’m not clear exactly what you mean “why do we add interest on loan notes”
ie – where is this interest added and to what is it added?
Sir,
Question name is Pandar, Kaplan exam kit.
The question asked us to prepare SPL, we are given that Parent invested 5000 8% loan notes from Subsidiary.
while calculating NCI for attribution, the 8% interest on loan notes is added to subsidiary’s post acquisition profit, and also this interest is reduced from finance cost.
Why are we doing this?When we are deciding how much of the subsidiary’s profits have been achieved post-acquisition, the ‘normal’ assumption is that revenues and expenses (ie profits) have accrued evenly throughout the year
However … sometimes we are told that there is a revenue item or an element of expense that is specifically attributable to either the pre- or the post-acquisition period … and that’s what we have with Pandar and Salva
We know from the question that the Salva year’s profits are $21 and that the acquisition took place half way through the year
So our natural instinct is to say “Ah 6/12 * profits is pre-acquisition and 6/12 is post-acquisition
But the loan interest recorded by Salva is related ONLY to the post acquisition period so profit has NOT accrued evenly
So take the year’s profits of $21, add back the loan interest to find the pre-loan interest profit for the year, split that figure on a 50 / 50 basis and then deduct the loan interest from the second half-year’s profit
Does that now make sense?
OK?
PS Have you watched the video where I work through the full Pandar question?
It’s here:
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