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In: Accounting

accounting quistion Parent Ltd acquired equity in Subsidiary Ltd on 1 April 2009. At that date...

accounting quistion

Parent Ltd acquired equity in Subsidiary Ltd on 1 April 2009. At that date the identifiable net

assets were considered to be fairly valued and the equity of Subsidiary Ltd comprised:

Share capital

$100,000

Retained earnings

30,000

Nine years later Parent Ltd is preparing consolidated financial statements for the financial

year ended 31 March 2018 and has gathered the following information:

?

Prior years’ impairment of total goodwill amounted to $26,000. For the current year

ended 31 March 2018 the directors of Parent Ltd believe that the total goodwill has

been further impaired by $4,000.

?

During the financial year ended 31 March 2017 Subsidiary Ltd made sales to Parent

Ltd of $30,000 and recorded a profit of $5,000. Parent Ltd had not sold this purchase

of inventory as at 31 March 2017.

?

During the financial year ended 31 March 2018 Parent Ltd made sales to Subsidiary

Ltd of $7,000 and recorded a profit of $3,200. This purchase remained in the

inventory of Subsidiary Ltd as at 31 March 2018.

?

Subsidiary Ltd billed Parent Ltd $2,100 for consulting advice provided on 25 March

2018. This transaction had been recorded by both entities; it remained unpaid as at 31

March 2018.

?

The following account balances have been extracted from the financial statements of

Subsidiary Ltd at 31 March 2018:

Profit after tax

$60,000

Retained earnings-opening balance

40,000

Dividends declared and paid

15,000

Retained earnings–closing balance

85,000

Share capital

100,000

Required:

Assume Parent Ltd only acquired 40% of the equity in Subsidiary Ltd for $80,000 on 1 April

2009.

a) Prepare the notional journal entry, as at 31 March 2018, to account for Parent Ltd’s

investment in Subsidiary Ltd using the equity method as required by

NZ IAS 28 Investments

in Associates.

The directors do not believe the investment is impaired. The tax rate is 28%.

Your workings must be included on each line of your notional journal entry. Complete a ‘quick

estimate’ in the space provided.

(b) Calculate the carrying amount of the asset Investment in Subsidiary Ltd that would appear

in the equity adjusted financial statements as at 31 March 2018. Your workings must be

shown.

(a) The equity method notional journal entry as at 31 March 2018:

All workings must be shown clearly on each line of your notional journal entry. If necessary round up or down to the nearest whole dollar.

$

$

Workings for the ‘quick estimate’:

(b) The equity adjusted carrying amount of the investment would be:

$

Workings:

Solutions

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