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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

(i)Journal entries using both cost and equity method of investment are as follows

Note : Equity Method is used when a company has significant influence over another company, or owns shares between 20%-50%

Cost Method is used when a company does not have significance influence over another company or owns less than 20% of stake in the company.

(ii) Carrying Value of Investment

ekkarill92 answered 1 year ago
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