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Hello Mike,
On 1 October 2012, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange of two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has not recorded any of the purchase consideration, although it does have other 10% loan notes already in issue.
The market value of Paradigm’s shares at 1 October 2012 was $2 each.The summarised statements of financial position of the two companies as at 31 March 2013 are:
Non-current liabilities Paradigm Strata
10% loan notes 8,000 nil
Prepare the consolidated statement of financial position for Paradigm as at 31 March 2013.The answer:
10% loan notes (8,000 + 1,500 (w (i))) 9,500The question: why the interest on the new loan issued (1,500× 10% × 6/12), is not added to the loan note as a liability ?
Thanks
Do I assume that the “+ 1,500” is the value of the loan notes issued on the acquisition?
Now, why do you want to add the interest for half a year @ 10% based on the new loans to the liabilities?
When do you expect to pay tis interest? And do the former Strata shareholders that now hold this loan note that you have issued … are they happy that you aren’t paying them the interest? What are you going to say to them?
“Remember I promised to pay you some time in the future the $1,500 that I still owe you and meanwhile I’ll pay you each year 10% interest? Well, I’ve changed my mind about the interest – I’ll owe it to you instead of paying you the cash”
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Hi Mike,
I am not sure if you are familiar with this question. In the net asset workings, the solution in the Kaplan exam kit book states that the subsidiary, Strata, retained earnings were 4,000,000 at the reporting date. I have no idea how they got here. The question is the Paradigm June 2013 (A). Any help with this would be greatly appreciated.
Kind Regards,
Hi,
I’ve not got the Kaplan kit to hand but you need to start with the retained earnings at the start of the year and add on the profits from the start of the year to the acquisition date. The profit will either be given in the question or you will need to take the PFY figure from the SPL and pro-rate it for the period you are looking for
Thanks
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