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Why wasn’t the accrued loan interest for the 10 % Loan Note added back to profit before multiplying by 6/12 as was done for Pandar -Qu.1 in Dec.’09?(2+.5) *6/12=1.25 instead of 2*6/12=1 . Please explain.Thanks.
Silverton’s profit after tax for the year was $2m. That year’s profits is after deducting a year’s worth of loan interest. There is no information that the loan was only issued part way through the year, so loan interest must have been accounted for for the full year within that $2m profit figure.
In Pandar, the $50m loan was issued AFTER the acquisition and therefore existed only for 6 months. Thus, profit for the year in Pandar did NOT accrue evenly – the loan interest of 2,000 was entirely post acquisition
Thanks, but I am still a bit confused ,since it was on 1/10/05 Pumice acquired the 10 % loan note and the statement date is 31/3/06 which is a six months period.
Er, No! It’s a 12 month period we’re looking at.
Profits for the year were 21,000 after loan interest. Add back the 2,000 loan interest to get to evenly accrued profits = 23,000. Divide by 2 = 11,500 for each half year. Now deduct the 2,000 from the second half 11,500 to find post acquisition profits = 9,500.
Profits for 6 months up to the date of acquisition ( ie pre- acquisition profits for the 6 months is 11,500.
Add that to the retained earnings brought forward will give you total retained earnings pre-acquisition
Is that any clearer?
Yes I do agree with this explanation,but why is the treatment in Pumice different?What is the difference between Pandar and Pumice?To me it is the same. In Pumice the net profit for the year 1/4 09 -31/3/10 was $2m.The 50% loan note s was acq’d on 1//10/09 which should be in the post acq period.Profit was assumed to accrue evenly throughout the year,that’s why
Thanks, I do agree with your explanation and applied the same technique for Pumice,since the n/profit for the year 1/4 /09-31/3/10 was $2m; the 50.% of S 10% loan note was acq’d 1/10/09 which should be in the post acq. period – 6/12 mths;profit was assumed to acquire evenly throughout the year.Wasn’t this post acq. interest for the loan note to be added back to the n/profit also to calculate the pre acq R/E like in Pandar? Why is it treated differently? Please explain.Thank you.
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