In: Accounting
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:
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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.
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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.
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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.
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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.
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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 $80,000 on 1 April
2009.
a) Prepare the notional journal entry, as at 31 March 2018, to account for Parent Ltd’s
investment in Subsidiary Ltd using the equity method as required by
NZ IAS 28 Investments
in Associates.
The directors do not believe the investment is impaired. The tax rate is 28%.
Your workings must be included on each line of your notional journal entry. Complete a ‘quick
estimate’ in the space provided.
(b) Calculate the carrying amount of the asset Investment in Subsidiary Ltd that would appear
in the equity adjusted financial statements as at 31 March 2018. Your workings must be
shown.
(a) The equity method notional journal entry as at 31 March 2018: All workings must be shown clearly on each line of your notional journal entry. If necessary round up or down to the nearest whole dollar. |
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$ |
$ |
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Workings for the ‘quick estimate’: |
(b) The equity adjusted carrying amount of the investment would be: |
$ |
Workings: |