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Hello,
(ii) immediately after the acquisition, Square issued $4 million of 11 % loan notes, $ 2.5 million of which were bought by Pyramid. All interest due on the loan notes as at 31 Mar 2012 has been paid and received.
the answer to this question provided on ACCA page, does not cancel the interests on the loan notes of 275 and gives therefore different values of NCI – 8,480 and Retained Earnings – 36,380,
which approach is correct then…?
The cancellation of 275,000 is a “consolidation adjustment” ie it doesn’t affect the retained earnings calculation. It merely affects the consolidated statement of income by reducing the interest expense and the interest income on consolidation by the same amount of 275,000
No adjustment is made to the statement of income of the subsidiary – so far as the nci is concerned, the subsidiary actually does have an interest expense of 11% x 4m = 440,000
Is that ok?
Thanks. If the question changes to All interest due on the loan notes as at 31 Mar 2012 has NOT been paid and received.
Does it change anything?
For my understanding, for retained earning, it means not recorded at P, S’ book. So we need to adjust amount 275,000 ?
In S, they would need to accrue the full amount of the interest payable (Dr Interest Expense, Cr Accruals) and in P they would need to acknowledge the interest receivable (Dr Receivables, Cr Investment Income)
Then cancel the 275,000 receivable against 275,000 of the 440,000 payable
So, in summary, if S has not recorded the interest payable at all, and therefore P also has not recorded the receivability of 275,000, we need to put the correcting entries through to record fully the payable and the receivable, and then cancel
OK?
In its answer , BPP does not take pre aqn profit off Square’s in the Consolidated Retained Earnings working. Why?
Yes they have – it’s just that you can’t see it! It’s not possible to prepare a working W3 Consolidated Retained Earnings without adjusting for the subsidiary’s pre-acquisition retained earnings.
Have another look and, if you still cannot see what they have done in the printed solution, post again.
However, be aware that I do not have available the BPP texts
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