In: Accounting
On 1 July 2014 Padma Ltd acquires 25 per cent of the issued capital of Jamuna Ltd for a cash consideration of $360 000. At the date of acquisition, the shareholders’ equity of Jamuna Ltd is: Share capital $450 000 Retained earnings $300 000 Total shareholders’ equity 750 000 Additional information • On the date of acquisition, buildings have a carrying amount in the accounts of Jamuna Ltd of $240 000 and a market value of $300 000. The buildings have an estimated useful life of 10 years after 1 July 2014. • For the year ending 30 June 2015 Jamuna Ltd records an after-tax profit of $90 000, from which it pays a dividend of $30 000. • For the year ending 30 June 2016 Jamuna Ltd records an after-tax profit of $300 000, from which it pays a dividend of $150 000. • Assume a tax rate of 30% is assumed
Required Apply equity method of accounting to: (a) Calculate the amount of goodwill at the date of acquisition (b) Prepare the journal entries for the year ending 30 June 2015 (c) Prepare the journal entries for the year ending 30 June 2016
Answer -
a) Calculation of Goodwill / Capital reserve under equity method AT THE DATE OF ACQUISITION
Particulars |
$ |
Eq shares / common shares |
450000 |
Retained earnings |
300000 |
Increase in value of building( 300000 – 240000) / share in net assets |
60000 |
Total Net assets |
810000 |
25% of net assets |
202500 |
Less : cost of investments |
360000 |
GOODWILL |
157500 |
b) Journal entries for 30.06.2015
Investment in Jamuna Ltd (affiliate ) Dr 22500
Equity Income in Jamuna Ltd (affiliate ) Cr. 22500
( $ 90000 * 25 % )
Bank Dr. 7500
Investment in Jamuna Ltd (affiliate ) Cr . 7500
( $ 30000 * 25% )
c) Journal entries for 30.06.2016
Investment in Jamuna Ltd (affiliate ) Dr. 75000
Equity Income in Jamuna Ltd (affiliate ) Cr. 75000
( $ 300000 * 25% )
Bank Dr. 37500
Investment in Jamuna Ltd (affiliate ) Cr . 37500
( $ 150000 * 25% )
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