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On 1 July, 2018 Bundoora Ltd acquires 25 per cent of the issued capital of Preston...

On 1 July, 2018 Bundoora Ltd acquires 25 per cent of the issued capital of Preston Ltd for a cash consideration of $150,000. At the date of acquisition, the share capital and retained earnings of Preston Ltd are as follows: Share capital $120,000 and Retained earnings $480,000 (Total Shareholders’ equity $600,000). Additional information:  For the year ending 30 June, 2019 Preston Ltd records an after tax profit of $50,000 from which it pays a dividend of $30,000.  For the year ending 30 June, 2020 Preston Ltd records an after tax loss of $30,000. On 30 June 2020, Preston Ltd declares dividends of $10,000.  Bundoora Ltd has a number of subsidiaries.

Required:

(i) Prepare the journal entries using both the cost and equity methods of accounting in context of parent entity for the investment in Preston Ltd for each of the years ended 30 June 2019 to 2020.

(ii) Calculate the carrying amount of the investment in Preston Ltd at 30 June 2020.

Solutions

Expert Solution

Journal entries
Cost method
2019
Investment in Preston 150000
To cash 150000
Cash 7500
To Dividends income 7500
2020
Cash 2500
To dividend income 2500
JOurnal entries
Equity method Dr Cr
2019
Investment in Preston 150000
To cash 150000
Investment in Pretson 37500
To income from Preston 37500
Cash 7500
To investment in Preston 7500
2020
income from Pretson 7500
To investment in Pretson 7500
Cash 2500
To investment in Preston 2500
Carrying amount
Equity method Cost method
Cost 150000 150000
Net income 2019 37500
Dividends 2019 -7500
Balance 2019 180000 150000
Net income 2020 -7500
Dividends 2020 -2500
Balance 2020 170000 150000

ekkarill92 answered 1 year ago
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