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Hi Mr Mike, I have a question concerning with investing loan note of Sco after acquisition by Pco.
For instance, If I acquire Sco, and after that if I invest loan note of Sco, why do I add loan note’s interest over Sco’s profit for the year?
For instance,loan note is 50million 8% and its finance will be 4000 and i have to add it over Sco’s profit for the year say for instance profit for the year 12000
It reminds me the question which related to borrowing cost capitalised and we added it over Sco’s profit for the year.
Usually, if we invest loan note of Sco, it is a finance cost and it should reduce the amount of Sco;s profit for the year because it is not the same as borrowing cost capitalisation as previous question i asked.
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Have you tried the comprehensive example Ausra and Danute from the free course notes, chapter 9?In that example there is an issue with time apportionment because one particular figure related purely to the post-acquisition period so the year’s profits could not be split simply on a monthly basis
This issue that you have identified seems to me to be the same problem – that loan interest that has been included as an expense in S results relates purely to the post-acquisition period
So if we add it back to the results for the year, then time apportion, and then deduct it again from the post-acquisition split, then you’ll arrive at the correct results apportionment
Does that answer it?
The question has been taken from Becker revision question bank page number 115
I just showed it in real example, frankly speaking, when i see this case i just add it over profit for the year (taking into account when the p co acquired Sco sth like that 4/12 or 6/12 ) but i can not understand the logic behind it:(
Could you explain it here on real example?Pandar acquired Salva on 1 April 2016
Salva
RE at 1 october 2015-152000
Profit for the year ended
30 September 2016-21000Pandar
Finance cost-1800
Salva
Finance cost-3000?mmediately after its acquisition of Salva,Pandar invested $50 million in an 8% loan note from SAlva. All interest accuring to 30 September 2016 had been accounted for by both companies.Salva has also loans in issue at 30 September 2016
Loan note:50000*8=4000*6/12=2000
this 2000 is added over 21000(profit for the year)=23000
Profit for the year
from 1 october 2015 to 1 april 2016-23000*6/12=11500-pre acquistion
from 1 april 2016 to 30 september 2016-23000*6/12=11500post acquistionAd
152000+11500=163500
DR
152000+23000=175000
Post acquistion period
11500Then we deduct this 2000 from SAlva’s finance cost (3000-2000) which will be 1000*6/12=500+1800(pandar’s finance cost)
I also want to see the question that you offered me ”Ausra and Danute” , if you embed the link here
If profit for the year is $21,000 and there is a finance expense of $2,000 that relates specifically to only the second half of the year, ie the post-acquisition half, the we need an adjustment
Without the adjustment, the post-acquisition half looks like 6/12 x $21,000 = $10,500
But that profit for the year of $21,000, WITHOUT that finance cost, would have been $23,000 and that represents $11,500 profits pre-acquisition and $11,500 post-acquisition
But we cannot simply ignore that $2,000 finance cost. It is a cost related just to the post-acquisition period
So pre-acquisition profits are $11,500 and post-acquisition profits are $9,500 giving a total for the year of $21,000
As for the link to Ausra and Danute, you should download the free course notes from this site – go to the home page, click on F7, scroll down a little bit until you see “download ACCA F7 lecture notes March / June 2017 exams
Look at chapter 9 in those notes and you’ll see Ausra and Danute
OK?
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