Question

In: Accounting

Starr Ltd holds 70 per cent of the voting rights of Lennon Ltd. Harrison Ltd has...

  1. Starr Ltd holds 70 per cent of the voting rights of Lennon Ltd. Harrison Ltd has 30 per cent of the voting rights of Lennon Ltd as well as an option to acquire half of Starr's voting rights. The option is exercisable for the next two years at a fixed price that is deeply out of the money (and is expected to remain so for that two-year period). Starr has been exercising its votes and is actively directing the relevant activities of Lennon Ltd.

Required:

Which investor (Starr Ltd or Harrison Ltd) has control over Lennon Ltd in accordance with AASB 10 Consolidated Financial Statements? Explain.                                                                                             

Solutions

Expert Solution

Facts as per question:

Star Ltd ....holds....70% voting rights of Lennon Ltd.

Harrison ltd...30% voting rights of Lennon Ltd as well as option to acquire half of Starr's voting rights.

Option is exercisable for next 2 years.

As per AASB 10 - Consolidated financial statements

To determine whether it controls an investee an investor shall assess whether it has all the following:

(a)power over the investee;

(b)exposure, or rights, to variable returns from its involvement with the investee; and

(c)the ability to use its power over the investee to affect the amount of the investor’s returns.

Conclusion -

Since, Harrison ltd has 30% voting rights of Lennon Ltd as well as option to acquire half of Starr's voting rights which need to be exercised within period of 2 years. However, as per current scenario they are deeply out of cash / money, so they can't exercise rights, hence, Harrison Ltd can't consolidate the financial statement by virtue of above definition.

Star Limited hold more than 70% of voting rights and can direct the activities, hence Star Limited has control over Lennon Limited and consolidate the financial statement.

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Mwanza and Tasila are in Partnership. They share profits in the ratio: Mwanza 70 per cent...
Mwanza and Tasila are in Partnership. They share profits in the ratio: Mwanza 70 per cent ; Tasila 30 per cent. The following trail balance was extracted as at 31st December 2019.                                                                                                                         Dr                    Cr                                                                                                                         ZMK                ZMK Office equipment at cost                                                                               9,200 Motor Vehicle at cost                                                           ...
Adjaye Ltd has current sales of GH¢1.5m per year. Cost of sales is 75 per cent...
Adjaye Ltd has current sales of GH¢1.5m per year. Cost of sales is 75 per cent of sales and bad debts are one per cent of sales. Cost of sales comprises 80 per cent variable costs and 20 per cent fixed costs, while the company’s required rate of return is 12 per cent. Adjaye Ltd currently allows customers 30 days credit, but is considering increasing this to 60 days credit in order to increase sales. It has been estimated that...
The Wholesale Ltd acquired 80 per cent of the shares of House Construction Ltd on 30...
The Wholesale Ltd acquired 80 per cent of the shares of House Construction Ltd on 30 June 2020 for a consideration of $800,000. The share capital and reserves of House Construction Ltd at the date of acquisition were: Share capital $550,000 Retained earnings $100,000 Revaluation surplus $150,000 All assets of House Construction Ltd were fairly valued at the date of acquisition, except for a major plant that had a fair value $26,000 greater than its carrying amount. The cost of...
Poison Corporation holds 70 percent of Snake Company’s voting common shares but none of its preferred...
Poison Corporation holds 70 percent of Snake Company’s voting common shares but none of its preferred shares. Summary balance sheets for the companies on December 31, 20X1, are as follows: Poison Corporation Snake Company Assets Cash $ 20,000 $ 29,000 Accounts Receivable 32,000 42,000 Inventory 120,000 74,000 Buildings and Equipment 295,000 215,000 Less: Accumulated Depreciation (138,000 ) (63,000 ) Investment in Snake Company 123,900 Total Assets $ 452,900 $ 297,000 Liabilities and Owners’ Equity Accounts Payable $ 77,900 $ 64,000...
Plexis Corporation holds 70 percent of Solar Company's voting common shares, acquired at book value, but...
Plexis Corporation holds 70 percent of Solar Company's voting common shares, acquired at book value, but none of its preferred shares. At the date of acquisition, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Solar Company. Summary balance sheets for the companies on December 31, 20X5, are as follows: Plexis Corp. Solar Company Cash and Receivables $ 70,000 $ 55,000 Inventory 60,000 35,000 Buildings and Equipment (net) 180,000 160,000 Investment in...
On 1 July 2016, Soff Ltd purchased a 20 per cent shareholding in Willaott Ltd for...
On 1 July 2016, Soff Ltd purchased a 20 per cent shareholding in Willaott Ltd for a cash consideration of $480 000. On the date of acquisition, the shareholders’ equity of Willaott Ltd is shown below: Share capital $1 900 000 Retained earnings $ 500 000 Total shareholder’s equity $2 400 000 Additional information: For the year ending 30 June 2017 Willaott Ltd recorded an after-tax profit of $280 000 and paid a dividend of $60 000 from the profit...
(b) Melbourne Ltd owns 100 per cent of the shares of Bendigo Ltd, acquired on 1...
(b) Melbourne Ltd owns 100 per cent of the shares of Bendigo Ltd, acquired on 1 July, 2019 for $900,000 when the shareholders’ funds of Bendigo Ltd were: Share capital $450,000, Retained earnings $225,000 and Revaluation surplus $100,000. All assets of Bendigo Ltd are fairly stated at the acquisition date. The goodwill has been impaired by 10% in the year 2020. The following intra-group transactions took place during the 2020 financial year: Bendigo Ltd paid $60,000 dividend to Melbourne Ltd....
(b) Melbourne Ltd owns 100 per cent of the shares of Bendigo Ltd, acquired on 1...
(b) Melbourne Ltd owns 100 per cent of the shares of Bendigo Ltd, acquired on 1 July, 2019 for $900,000 when the shareholders’ funds of Bendigo Ltd were: Share capital $450,000, Retained earnings $225,000 and Revaluation surplus $100,000. All assets of Bendigo Ltd are fairly stated at the acquisition date. The goodwill has been impaired by 10% in the year 2020. The following intra-group transactions took place during the 2020 financial year: Bendigo Ltd paid $60,000 dividend to Melbourne Ltd....
Remote Removals Ltd has no debt and its WACC is currently 12 per cent. Remote can...
Remote Removals Ltd has no debt and its WACC is currently 12 per cent. Remote can borrow at 8 per cent. The corporate tax rate is 30 per cent. a. What is Remote's cost of equity? b. If Remote converts to 20 per cent debt, what will its cost of equity be? c. If Remote converts to 50 per cent debt, what will its cost of equity be? d. What is Remote's WACC in part (b)? In part (c)?
Parent Corporation holds 70 percent of Subsidiary Company's voting common stock. On January 1, 2011, Parent...
Parent Corporation holds 70 percent of Subsidiary Company's voting common stock. On January 1, 2011, Parent paid $500,000 to acquire a building with a 10-year expected economic life. Parent uses straight-line depreciation for all depreciable assets. On December 31, 2016, Subsidiary purchased the building from Parent for $180,000 and resumed the same remaining useful life. Prepare Parent’s adjusting journal entries and the consolidation entries that related to intercompany sale of building for 2018. (Remember to include all necessary reversal journal...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT