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Hi,
While calculating post acqn. interest expense for skeptik why he did not deduct intra group interest first and than time apportionment? why it not to be (200-75)/12*9 instead of (200/12*9)-75=75And again while calculation pre-acqn’ retained earnings why he not add the interest of 75 paid to parent which is related to post-acqn’ period first and than add 3 months in opening profits….
Hi
The question is from 2003 and ACCA no longer has 2003 exams on their website. I seem to remember seeing the question in a recent sighting of Kaplan’s exam kit and also in BPP’s Revision Kit.
Unfortunately, I have access to neither of these books.
I don’t have a revision kit in front of me (and won’t have until September!) so if this post fails to answer your questions, then post again but next time you shall need to give me FULL information about the loan, the issue date, who the loan was issued to (intra-group or issued on acquisition …..EVERYTHING relating to the loan!)I think you need to ask yourself “How much of the profits of Skeptik were achieved in the pre-acquisition period?” The fact that there is an intra-group loan expense relating to the post acquisition period is irrelevant for determining the pre-acquisition profits level. Who is to say that Skeptik would not have borrowed the same amount on the same day from a different lender and incurred that same 75 interest?
There is no indication (I assume) that this loan is anything other than a normal commercial loan that Skeptik would have borrowed anyway
The concept of cancellation of intra-group loan interest payable and receivable becomes important when preparing a consolidated Statement of Income
Does that answer it for you?
extracts…..
In recent years Hillusion has acquired a reputation for buying modestly performing
businesses and selling them at a substantial profit within a period of two to three years
of their acquisition. On 1 July 2011 Hillusion acquired 80% of the ordinary share capital
of Skeptik at a cost of $10,280,000. On the same date it also acquired 50% of Skeptik
10% loan notes at par. The summarised draft financial statements of both companies
are:
Income statements: Year to 31 March 2012
Hillusion Skeptik
$000 $000Loan interest received (paid) 75 (200)
Profit before tax 12,075 3,600
Taxation (3,000) (600)
Profit for the year 9,075 3,000Retained earnings brought forward 16,525 5,400
Retained earnings per balance sheet 25,600 8,400
Statements of financial position: as at 31 March 2012
Hillusion Skeptik
$000 $000Equity and liabilities
Ordinary shares of $1 each 10,000 2,000
Retained earnings 25,600 8,400The following information is relevant:
(i) The fair values of Skeptik assets were equal to their carrying values (book values)
with the exception of its plant, which had a fair value of $3.2 million in excess of
its carrying value at the date of acquisition. The remaining life of all of Skeptik’s
plant at the date of its acquisition was four years and this period has not changed
as a result of the acquisition. Depreciation of plant is on a straight-line basis and
charged to cost of sales. Skeptik has not adjusted the value of its plant as a result
of the fair value exercise.
(ii) In the post acquisition period Hillusion sold goods to Skeptik at a price of $12
million. These goods had cost Hillusion $9 million. During the year Skeptik had
sold $10 million (at cost to Skeptik) of these goods for $15 million.(iii) Hillusion bears almost all of the administration costs incurred on behalf of the
group (invoicing, credit control, etc). It does not charge Skeptik for this service as
to do so would not have a material effect on the group profit.
(iv) Revenues and profits should be deemed to accrue evenly throughout the year.
(v) The current accounts of the two companies were reconciled at the year-end with
Skeptik owing Hillusion $750,000.
(vi) It is the accounting policy of Hillusion that the non-controlling interests in its
subsidiary should be valued at a proportionate share of net assets.
.
Required:
(a) Prepare a consolidated income statement and consolidated statement of financial
position for Hillusion for the year to 31 March 2012. (20 marks)Wow! You really DO want to know this answer don’t you!
:-))
The Skeptik loan notes were not issued on the occasion of Hillusion’s acquisition of control. They already existed and Hillusion bought them from the existing loan note holders (in the same way that they bought the 80% controlling interest in shares from the existing shareholders.
Thus Skeptik’s loan interest has accrued evenly through the year.
(IF (and it’s not relevant to the Hillusion question) Skeptik had issued some loan notes on the date of acquisition and Hillusion had bought 50% of them, then in that situation we would have needed to time allocate the finance costs because the loan interest would only have become payable with effect from the date of the issue)
Does that make it any clearer?
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