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Loan notes and consideration

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Loan notes and consideration

  • This topic has 9 replies, 6 voices, and was last updated 4 years ago by P2-D2.
Viewing 10 posts - 1 through 10 (of 10 total)
  • Author
    Posts
  • May 11, 2015 at 2:35 pm #245264
    Green Activist
    Member
    • Topics: 22
    • Replies: 18
    • ☆

    If consideration paid to subsidiary by parent include some cash as well as some loan notes, how will the loan notes be treated in consolidation? Should we record a liabilty as well or not?

    May 11, 2015 at 8:53 pm #245331
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    First of all, when a parent acquires control of a subsidiary, the consideration is NOT paid to the subsidiary! It’s paid to the people that used to own the shares in the subsidiary – people like you and me.

    So when loan notes are issued as part of the consideration, the double entry is:

    Dr Cost of investment
    Cr Loan notes

    What you may be getting confused with is the situation where, (typically) after the acquisition, the subsidiary issues loan notes in exchange for money borrowed. This is, in exams, in part at least money borrowed from the parent

    In this situation, the parent is holding a financial asset (loan notes in the subsidiary) and the subsidiary has an obligation (loan notes issued)

    On consolidation the loan notes owned by the parent will be cancelled against some (or sometimes, all) of the loan note obligation in the subsidiary’s sofp

    Is that any clearer?

    May 12, 2015 at 4:52 am #245371
    Green Activist
    Member
    • Topics: 22
    • Replies: 18
    • ☆

    Yeah thats crystal clear now as usual. Thanks a heap.

    May 12, 2015 at 7:00 am #245394
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    You’re welcome

    April 14, 2019 at 11:00 am #512354
    dizzytwum10
    Member
    • Topics: 0
    • Replies: 2
    • ☆

    please do you add the loan note to the consideration when calculating the goodwil?

    April 16, 2019 at 8:34 pm #513154
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    Yes we do. The debit entry to the investment will increase the consideration part of the goodwill calculation.

    Thanks

    April 23, 2020 at 6:37 am #568976
    lisaenti
    Member
    • Topics: 0
    • Replies: 2
    • ☆

    Hi, is loan not interest subject to the persons personal tax rate? eg if they earn 100K annually, would the additional interest paid on top of this salary be taxable at the higher rate of interest?
    thanks in advance

    April 23, 2020 at 8:18 pm #569084
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    I teach FR and not tax, so I don’t know the answer, sorry.

    Thanks

    November 17, 2020 at 9:27 pm #595359
    balleith
    Member
    • Topics: 1
    • Replies: 19
    • ☆

    hello sir,,,what about the interest we pay from the loan notes, should we subtract it from the groups’ retained earnings ?
    One question had a loan note consideration and no interest on the loan note was deductable from the group retained earnings
    while another question had a loan note consideration of which the interest on the loan note was deductable from the group retained earnings.

    This confused me whether there was a limitation to subtract it or not.
    I went back to the question on which it had the loan note interest NOT deductable and the extra information given on the question in reference to the loan notes was that
    “Paradigm Co has
    not recorded any of the purchase consideration, although it does have other 10% loan notes already in issue.”

    does this information actually make the interest NOT deductable from the Group retained earnings?

    i fail to understand, thank you in advance Sir.

    November 21, 2020 at 5:34 am #595837
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    It all depends on if the interest has been recorded already or not. If it has been recorded already then it will be included within the group retained earnings and no adjustment required.

    If the interest has not been recorded then we will need to adjust the group retained earnings so as to record the amounts in the accounts.

    Thanks

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