Joe Coyle is the managing director of Easter Feast Ltd (Easter Feast), a food and beverage chain
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Question:
(a) Easter Feast’s financial controller proposed that the company take a 30% stake in Winter Delight. However, Joe is adamant that Easter Feast needs to buy over 50% of Winter Delight’s issued share capital in order for it to be a subsidiary of Easter Feast. Discuss the validity of Joe’s opinion with reference to the relevant financial reporting standard(s).
(13 marks)
(b) Some members of Easter Feast’s management team noted that Winter Delight has a large bank loan balance owing to KWC Bank (“KWC”). The loan contract has a clause that requires Winter Delight seek approval from KWC for purchases above $1,000 should Winter Delight default on any loan repayments. Joe is worried that this means KWC has control over Winter Delight even after the acquisition by Easter Feast. Advise Joe if his concern is warranted and should be addressed.
(4 marks)
(c) Summer Ray Ltd (‘Summer Ray’) currently holds 20% of the shares in Winter Delight. In an effort to raise funds for a new project, Winter Delight is issuing convertible bonds that can be converted to ordinary shares at the bondholders’ discretion. Summer Ray has indicated its interest in acquiring a significant number of the bonds. Discuss the possible impact that this may have on Easter Feast’s plan to acquire Winter Delight.
(8 marks)
Related Book For
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott
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