Question

1. On 1 January 2018, Wu’s Tea Ltd, a bubble milk tea chain, acquired a 20 percent interest in UnluckyCoffee Ltd for $120,000 in cash. As of the acquisition date, the assets of UnluckyCoffee Ltd were reported at fair value. For the year ending 31 December 2018, UnluckyCoffee Ltd recorded an after-tax loss of $20,000. Wu’s Tea Ltd accounts for its investment in UnluckyCoffee Ltd using the equity method of accounting.

• The assets of Wu’s Tea Ltd, inclusive of its investment in UnluckyCoffee Ltd accounted for under equity accounting was $4,000,000 as of 31 December 2018.

• The EBIT of Wu’s Tea Ltd, inclusive of its investment in UnluckyCoffee Ltd accounted for under equity accounting is $200,000 as at 31 December 2018.

• The fair value of UnluckyCoffee Ltd was assessed to be only $70,000 at the end of the year. What is the ROA for Wu’s Tea Ltd? What would their ROA be if their investment in Unlucky Coffee Ltd was accounted for as a financial instrument?

2. Following from 1 above, explain whether you think equity accounting or financial instrument accounting provides more useful information to the shareholders of Wu’s Tea Ltd and why?

Answer 1

1) Current ROA of Wu's tea limited = 5% (200000/4000000 * 100)

ROA of Wu's tea limited under financial instrument policy = 5.6% ((200000+20000)/(4000000-120000+70000)) * 100

2) As Wu's tea limited have siginificant influence over unluck coffee ltd they have treat unluck coffee ltd as their associate and account equity method under IFRS 3 Business combintion, the accounting as financial instrument could lead to providing wrong information to the shareholders which could affect the decisions they take

answered by: anonymous