Question

Question 1:

On 1 July 2015, I Ltd. acquired a 30% interest in one of its suppliers, G Ltd., at a cost of 13,650. The directors of I Ltd. believe they exert 'significant influence' over G Ltd. The equity of G Ltd. at acquisition was:

Share capital (20000 shares) $20,000

Retained earnings $10,000

All the identifiable assets and liabilities of G Ltd. at 1 July 2015 were recorded at fair value except for some depreciable non-current assets with a fair value of $15,000 greater than carrying amount. These depreciable non-current assets are expected to have a 10-year life.

Additional information:

a) At 30 June 2017, I Ltd. had inventory costing $100,000 (in 2016: $60,000) on hand which had been purchased from G Ltd. A profit before tax of $30,000 (in 2016: $10,000) had been made on the sale.

b) All dividends may be assumed to be out of the profit for the current year. Dividend revenue is recognised when declared by directors.

c) Information about income and changes in equity of G Ltd. as at 30 June 2017 was:

Profit before tax		$360,000
Income tax expense		$180,000
Profit		$180,000
Retained earnings at 1/7/16		$55,000
		$235,000
Dividend paid	$60,000
Dividend declared	$50,000	$110,000
Retained earnings at 30/6/17		$125,000

  

  

d) The equity of G Ltd. at 30 June 2017 was:

Share capital                                                    $20,000

Asset revaluation reserve                                $30,000

Retained earnings                                           $125,000

The asset revaluation reserve arose from a revaluation of freehold land made at 30 June 2017. The tax rate is 30%.

Required:

Assume I Ltd. does prepare consolidated financial statements. Prepare the equity-accounting consolidation adjusting entries required in I Ltd.’s consolidated financial statements for the year ended 30 June 2017. Estimate the carrying value of I Ltd.’s investment in G Ltd. for the year ended 30 June 2017.

Answer 1

Estimate of the carrying value of I.Ltd in G Ltd as on 30.06.17 is $ 47,750.

EQUITY ACCOUNTING CONSOLIDATION ENTRIES.

Initial investment in equity capital of G Ltd $ 13,650

CALCULATION OF RETAINED EARNINGS.

As on 31.06.2017 $ 1,25,000

Less : W.D.V of Non Current Assets in excess $ 12,000

of fair value.

Net Earnings as on 30.06.17 $ 1,13,000

30 % share of I.Ltd $ 33,900

Carrying value is the initial amount invested in the equity share capital plus adjusted share of retained earnings.

Since I.Ltd will be holding less than 50 % shares, therefore the consolidation system of subsidiary company with that of holding company will not apply.

Revaluation Reserve is not a part of retained earnings and hence has been excluded.