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For transaction (ii) on loan notes
Its an issue of loan note of 2500 from subisdiary to parent. Therefore, it must be eliminated as its a intragroup transaction. Therefore we need to deduct the 2500 in the consolidated sofp right.
We are not required to do the SOPL, but for this transaction since its stated that all interest due on the loan notes as at 31 mar 2012 has been paid and received, therefore there will be no adjustments on the SOPL right ?
If for example, they didnt state the sentence above and we are asked to do the SOPL , what will the adjustment be like on the SOPL ?
“Therefore we need to deduct the 2500 in the consolidated sofp right.”
We need to deduct 2,500 twice! Once from the loan note liability and once from the parent’s line “Investment in subsidiary loan note”
You also need to be very careful with the calculation of pre- and post-acquisition profits because the loan interest is a period specific expense applicable to the post-acquisition period only
“its stated that all interest due on the loan notes as at 31 mar 2012 has been paid and received, therefore there will be no adjustments on the SOPL right ?”
NO! We need to eliminate the interest received from the parent’s investment income and we need to eliminate the interest paid from the subsidiary’s finance costs
Why?
Because it’s intra-group
“If for example, they didnt state the sentence above and we are asked to do the SOPL , what will the adjustment be like on the SOPL ?”
You would need to put through the adjustments to record investment income in the parent and finance costs in the subsidiary, and then ignore both for the consolidation.
Why put the entries through?
Because they affect the subsidiary’s results and that affects the nci and “our share of S post-acq retained”
OK?
Okay. For transaction (iii) if we are asked to do the SOPL, we have to eliminate sales of 16000 and COS of 16000 and not 14500 right ?
Anuja, every time you ask me a question I have to reload the question from the internet.
Can I ask you please to let me know at the start of your questions on a particular past exam that there are likely to be others following?
In answer to your question, you need first to account for the goods in transit (1,500) and THEN eliminate 16,000 from both revenue and from cost of sales
Okay sure. Sorry. I just saw the lecture on this question. I understand how to do the GIT. But i still dont understand how the CIT figure and the intragroup figure of 3200 is calculated.
Could you explain ?
Pyramid $’000 Square $’000
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid’s receivables 4,400
Included in Square’s payables 1,700When Square receives the goods in transit the double entry in Square’s records will be:
Dr Purchases 1,500
Cr Pyramid 1,500so that will mean that Square is showing a credit balance due to Pyramid of $1,700 (per question) + $1,500 (re the goods in transit) …. so, an adjusted balance due to Pyramid of $3,200
But Pyramid is showing a receivable from Square of $4,400 so that means that Square must have sent a remittance of $1,200 to Pyramid just before the year end and when Pyramid receives that cash the double entry in Pyramid’s records will be:
Dr Cash $1,200
Cr Square $1,200so that will mean that Pyramid is showing a debit balance due from square of $4,400 (per question) – $1,200 ( re cash in transit) …. so, an adjusted balance due from Square of $3,200
and now everyone is happy 🙂
Are you happy too? 🙂
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