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Heidveldt is parent of 75% subsidiary Samson.
Included in Highveldt’s investments is a loan of $60m made to Samson at the date of acquisition. (1st April 20X4)
Interest is payable annually in arrears. Samson paid the interest due for the year on
31 March 20X5, but Highveldt did not receive this until after the year end. Highveldt has not
accounted for the accrued interest from Samson.In the answer for Group retained earnings, $6m accrued interest is added to Highveldt.
I thought that intra-group items should be cancelled out, so my expectation was that as Highveldt had not accounted for the interest, nothing would be added/removed from their retained earnings, and $6m would be added back to Samsons RE (with Highveldt eventually receiving 75% share of it).
Could you please explain why the answer book has added $6m interest to Highveldt and why my thinking is wrong?
Thank you.
Hi,
The intra-group interest is eliminated in the group SPL, but the amounts need to be firstly recorded within the individual accounts of the two companies first. As the interest has not yet been received by the parent then it needs to be accrued for in their books, and hence we increase the retained earnings as it is income received.
Thanks
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