Question

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

On 1 July 2014 Padma Ltd acquires 25 percent 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

Solutions

Expert Solution

(a) Calculation of goodwill at the date of acquisition

Cost of investment = 360,000

Less: Share capital = 450,000*25% = 112,500

Capital Profit = 300,000*25% = 75,000

Goodwill = 172,500

(b) Journal entries or year ending 30 June,2015

Acquisition of share

Dr. Investment in associates 300,000

Cr. Cash 300,000

Receipt of dividend = 30,000*25%

Dr. Cash 7500

Cr. Investment in associates 7500

Share of profit = 900,000*25%

Dr. Investment in associates 225,000

Cr. Investment Revenue 225,000

Depreciation on building = 240,000/10

Dr. Deprecation 24,000

Cr. Building 24,000

Carrying amount of investment as on 30th June, 2015 = 517,500

(c) Journal entries or year ending 30 June,2016

Receipt of dividend = 150,000*25%

Dr. Cash 37,500

Cr. Investment in associates 37,500

Share of profit = 300,000*25%

Dr. Investment in associates 75,000

Cr. Investment Revenue 75,000

Depreciation on building = 240,000/10

Dr. Deprecation 24,000

Cr. Building 24,000

ekkarill92 answered 1 year ago
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