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Hi Mike,
question taken from:
Kaplan revision kit question 210 Pandar Co:Subsidiary – Salve (S co)
Parent – Pandar (P co)
Acquisition date: 1 April 2009
Year end: 30 Sept 2009“Immediately after its acquisition of S co, P co invested $50 million in an 8% loan note from S co. All interest accruing to 30 September 2009 had been accounted for by both companies.”
S co accounts:
Profit for the year $21,000
Retained earnings as at 01 October 2008= $152,000I know the retained earnings pre acquisition has to be adjusted accordingly, but should the retained earnings post acquisition be adjusted as well?
Profit pre acquisition= (21,000+2,000) x 6/12 = 11,500
Which is the correct option?
1) Profit post acquisition = 21,000-11,500= 9,500
OR
2) Profit post acquisition = $11,500 (because the interest expense relating to the intra group loan note has to be cancelled with the interest income)?
Judging from the calculation of NCI – SOPL, it seems option 1 is the correct answer, why then isn’t option 2 correct?
Because the $2,000 loan interest relates to and appertains to only the last 6 months ie the post-acquisition period
If that loan interest had not been involved, the profit for the full year would have been $23,000 so $11,500 pre-acquisition and $11,500 post-acquisition
But that $2,000 is specifically a post-acquisition expense
So the pre-acquisition profits are $11,500 and the post-acquisition profits are $9,500
Better?
Why shouldn’t the $2,000 expense be cancelled out such that the post acquisition profit adds up to $11,500 as well?
So… under the NET ASSETS working:
Retained earnings at acquisition
(152,000+11,500) = $163,500Retained earnings at reporting date
(152,000+23,000***) = $175,000Retained earnings at post acquisition
$11,500RATHER THAN……
Retained earnings at acquisition
(152,000+11,500) = $163,500Retained earnings at reporting date
(152,000+21,000) = $173,000Retained earnings at post acquisition
$9,500?The $2,000 finance cost in the post acquisition period is ignored (as also is the finance income of $2,000 received by Pandar) … in the consolidated Statement of Profit or Loss
But for the calculation of the retained earnings as at date of acquisition, that loan didn’t exist and therefore the loan interest (paid in the second half of the year) also didn’t exist
Better yet?
I think I get it now, whether the finance cost of $2,000 is ignored or not S CO’s profit still remains at $21,000 in its financial statement, and not at $23,000. Hope I’m at least a little right on this one…
Sorry, I have another similar question: P co issues loan note to S co as part of a purchase consideration.
Paradigm Co:
Acquisition date- 01 October 2012
Year end- 31 March 2013Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in strata. Paradigm has NOT recorded any of the purchase consideration, although it does have other 10% loan notes already in issue.
Since the “old” shareholders of Strata are now the outsiders of the group, shouldn’t we record the finance cost and charge it to retained earnings?
Finance cost= 0.1 * 6/12 * $1,500 = $75
The answer however did not charge any finance cost to the group retained earnings, why?
Hoping you could help me again on this one, thank you 🙂
“CO’s profit still remains at $21,000”
Correct
“shouldn’t we record the finance cost and charge it to retained earnings?”
What makes you think that the loan interest has not been recorded?
I see nothing in the question to suggest that the loan interest has not been paid and recorded 🙁
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