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On 1 July 2014 Padma Ltd acquires 25 per cent of the issued capital of Jamuna...

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

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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% )

In case of any doubts plz let me know tanq

ekkarill92 answered 2 years ago
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