Jack Price, The finance director of Humpty Doo Investment Ltd $($HDIL$),$ is unsure whether

he should consolidate some of the investments that the company owns. He has asked

your advice as business adviser to HDIL. The details of the investments are as follows:

$($a$)$

$($b$)$

$($c$)$

HDIL had provided a loan to Down Ltd $($DL$)$ some years ago. When it looked as if

DL would be unable to repay the loan it was converted into equity which gave HDIL

a $70\%$ holding in DL$.$ DL continues to have a substantial accumulated losses

balance and the company$$s results have been consolidated with HDIL for some

time. HDIL does not take an active role in the day to day operations of DL as it has

no directors on the board and it takes no part in the operating or financing decisions

of the company.

HDIL has also provided a loan to the Wagaman Prospecting Ltd $($WPL$).$

Unfortunately, due to an industrial economic downturn the WPL has failed to meet

its loan repayments as required by the loan contract. The board of HDIL is

concerned that not only would the WPL continue to have problems but also that the

whole of the loan would become unrecoverable.

The board of WPL has agreed, as part of a bailout package, that HDIL would take

charge of WPL$$s finances for the next four years. The HDIL deputy chief finance

officer would control all payments made by WPL and no payments would be made

without prior approval. HDIL does not have board representation on WPL which is

appointed by the WPL shareholders.

The Middle Company Ltd $($MCL$)$ is part funded by HDIL, which owns $50\%$ of the

shares, and by Boxer Ltd $($BL$)$ which owns the other $50\%.$ The votes of the ordinary

shares in the annual general meetings and the board representation are shared

equally between HDIL and BL$.$ BL and HDIL have agreed that HDIL will provide the

finance on a standard commercial basis with the loan being secured by a mortgage

on MCL$$s property.

The agreement also stipulates that BL will provide the necessary managerial and

entrepreneurial expertise in return for a management fee. The management fee will

be paid out of MCL$$s net profits after providing for all HDIL$$s loan interest

payments. MCL does not make a profit the interest payments will still take place but

no management fee will be paid.