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Reference: BPP 2016-2017 Kit, 106 Highveldt..
Highveldt acquired 75% of Samson’s ordinary shares on 1 april 20×4. Year ended 31 March 20×5.
“Included in highveldt’s investments is a loan of $60M (interest 10%) made to Samson at the date of acquisition. interest is payable annually in arrears. Samson paid the interest due for the year on 31 March 20×5, but highveldt did not receive this until after the year end. Highveldt has not accounted for the accrued interest from Samson.”
In this particular note, there is a cash in transit, Dr. Cash 6M, Cr. Investment Income 6M. However, for the consolidated statement of profit or loss purpose, the investment income and investment expense will be cancelled out, Am I right?
If so, why the 6M is added to retained earning of Highveldt when calculated the Retained earning at the year end?
thank you in advance for your answering sir…
The cancellation of the investment income against the finance cost is for the purposes of the consolidation only
So far as Highveldt is concerned, its profits are improved by that investment income and so far as Samson is concerned, there is correctly a charge against its profits for the year
So, when it comes to calculating the group retained earnings in working W3, we take the retained earnings according to Highveldt’s own records and H’s share of the Samson post-acquisiiton retained earned earnings (as adjusted for matters like pups and excess depreciation)
If we didn’t take those figures and therefore we added back the loan interest in Samson’s records, that would result in an improved result for Samson and the nci would gain an unwarranted benefit
No! The finance cost is a fair expense so far as Samson is concerned
But, when it comes to preparing the consolidated statement of profit or loss, we can’t show ourselves receiving income from ourselves
OK?
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