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Question Number 108
. On 1 July 2017, Spider acquired 60% of equity share capital of Fly and on that date made a $ 10 million to fly at a rate of 8% per annum
What will be the effect on group retained earnings at the year end date of 31 December 2017when this intragroup transaction is cancelled ?
a) Group retained earnings will increase by $ 400,000
b) Group retained earnings will be reduced by $ 240,000
c) Group retained earnings will be reduced by $ 160,000
Answer
Question number 108108. C
a) Loss of investment income(10m*8%*6/12)
b) Saving of interest payable (400*60%)
c) Net reduction in group retained earningsa (400)
b 240
= (160)Sir i have not understood this calculation
Why have they deducted this as loss of investment income and and what is saving of interest payableIn Spider’s (S) records there is a line for investment income (the interest on the loan made to Fly) of $400,000
In Fly’f (F) records there is a line for finance charges (the interest on the S loan) of $400,000
On cancellation, the S retained earnings will decrease by $400,000 and the F retained earnings will increase by $400,000
Let’s say that, before cancellation, S had retained earnings of $3,000 and F had retained earnings of $1,600
Without cancellation, the consolidation would be $3,000 + 60% x $1,600 = $3,960
Following cancellation S now has $2,600 and F has $2,000
The consolidation now will be $2,600 + 60% x $2,000 = $3,800
And that is a decrease of $160
OK?
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