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Dear Sir ,
I remember few months ago , i have ask a question about the same topic , here are the link https://opentuition.com/topic/intra-group-loan-4/ . In your reply , you told me that we eliminate the intra group interest only for the sake of the consolidated financial statement , which mean we will not present any investment income and finance cost due with the intra group loan interest , but we actually take into account the effect of the interest when we workup the earning attribute to owner of parent and non-controlling interest , group retained earning and the figure of non-controlling interest . However, there has a question in BBP revision kit given a different answer .Here are what the question said
On 1 July 20X7, Spider acquired 60% of the equity share capital of Fly and on that date made a $10 million loan 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 20X7 when this
intragroup transaction is cancelled?The answer given by BPP
$10m x 8% x 6/12 = – $400,000 ( loss of investment income )
$400,000 x 60% =$240,000 ( Additional sharing profit from Fly )So , that will result the group retained earning reduced by $160,000 . However, i think the answer should be no effect (one of the option in the answer ) , since we only eliminate the interest only for the sake of consolidated financial statement , and actually take into account the effect of interest when we calculate the group retained earning .
So is this question got problem or this is a question set on a different point to test the ” what if we really want to eliminate the intra- group loan interest ” , and what are the consequence if we eliminate the interest ?
For the sake of the cross-addition to arrive at the figures for the consolidated statement of profit or loss, $400,000 is ignored on the investment income line and $400,000 is ignored on the interest payable line
Ignoring that $400,000 interest payable / finance charges will increase the subsidiary’s profits by that amount and, when calculating the group retained earnings, the subsidiary’s profits have now been increased so the group’s share of those subsidiary profits is greater by 60% x $400,000 = $240,000
The effect on group retained earnings is a decrease of $400,000 investment income and an increase of $240,000 share of subsidiary’s post acquisition profits = a net decrease of $160,000
This was my earlier reply:
“In your reply , you told me that we eliminate the intra group interest only for the sake of the consolidated financial statement , which mean we will not present any investment income and finance cost due with the intra group loan interest , but we actually take into account the effect of the interest when we workup the earning attribute to owner of parent and non-controlling interest , group retained earning and the figure of non-controlling interest”
The reply that I have just given is consistent with my earlier esponse
OK?
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