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On 1 July 2017, P Ltd acquires 25% of the ordinary issued capital of K Ltd for $1 125 000. Upon acquisition of this financial interest in K Ltd, P Ltd appoints three directors to the twelve-seat board of directors of K Ltd. The share capital and reserves of K Ltd at 1 July 2017 are:
Share Capital
$1 200 000
Retained earnings
$825 000
General reserve
$225 000
$2 250 000
On 1 July 2017 all identifiable net assets of K Ltd are stated at fair value except for the following:
Land – the fair value was above the carrying value by $750 000.
Depreciable assets – the fair value was above the carrying value by $180 000, which considered to have a further 10 years useful life.
Reconciliation of Retained Earnings (opening and closing) for the year ending 30 June 2018
P Ltd
($)
K Ltd
($)
Profit before tax
Income tax expense
Profit after tax
Retained earnings – opening
Transfer to reserves
Dividend paid
Dividend proposed
Retaining earnings – closing
1 500 000
585 000
915 000
780 000
1 695 000
–
90 000
210 000
1 395 000
1 365 000
555 000
810 000
825 000
1 635 000
75 000
270 000
90 000
1 200 000
Balance Sheets as at 30 June 2018
P Ltd
($)
K Ltd
($)
Current assets
Inventory
Cash
Non-current assets
Investments in associates
Property, plant and equipment
Total assets
Liabilities
Net assets
Shareholders’ funds
Share capital
Retained earnings
Revaluation reserve
General reserve
4 275 000
2 610 000
6 885 000
1 125 000
6 750 000
7 875 000
1 4760 000
(7 152 000)
7 608 000
3 000 000
1 395 000
963 000
2 250 000
7 608 000
2 025 000
360 000
2 385 000
–
3 786 000
3 786 000
6 171 000
(3 471 000)
2 700 000
1 200 000
1 200 000
–
300 000
2 700 000
Additional Information:
On 30 June 2018, P Ltd holds inventory sold to it by K Ltd at a profit of $22 500. This inventory is sold to P Ltd for $30 000.
On 30 June 2018, K Ltd holds inventory sold to it by P Ltd at a profit of $7 500. This inventory is sold to K Ltd for $15 000.
The tax rate is 39%.
P Ltd has a number of subsidiaries.
P Ltd recognises dividends only when received.
K Ltd has a policy of paying dividends out of current year profits before utilising previous years’ profit.
Required:
(i) Determine goodwill and record relevant journal entries of acquisition using the ‘cost method’ of accounting for P Ltd for the year ending 30 June 2018.
(ii) Record relevant journal entries using ‘equity method’ of accounting for P Ltd and its associates K Ltd for the year ending 30 June 2018, in accordance with AASB128.
(iii) Calculate the final amount at which the investment in the associate; K Ltd. would be shown in the consolidated worksheet prepared by P Ltd as at 30 June 2018.
Skill Required:EconomicsPosted:10 days ago
