Tutorial+Solutions_Week+8_+Equity+Accounting
ACCT2542 – Corporate Financial Reporting and Analysis
Session 2, 2009
Solutions to Tutorial Questions for Tutorials held in:
Week 8 – Accounting for Associates
PLEASE NOTE THAT THESE SOLUTIONS ARE NOT AVAILABLE TO STUDENTS UNTIL THE END OF ALL RELEVANT TUTORIALS
WEEK 8 (Sept. 14 – 18): Accounting for Associates
Picker, Chapter 22, Ex. 22.1
MOUTIER LTD – ROMONT LTD
30%
Moutier Ltd Romont Ltd
At 1 July 2006:
Net fair value of identifiable assets,
liabilities and contingent liabilities
of Romont Ltd = $150 000
Net fair value acquired = 30% x $150 000
= $45 000
Cost of combination = $50 000
Goodwill = $5 000
1. Journal Entries in the Accounts of Moutier Ltd
1 July 2006 Investment in Romont Ltd Dr 50 000
Cash/Payable Cr 50 000 (Acquisition of shares in Romont Ltd)
2006 – 2007 Cash Dr 24 000
Investment in Romont Ltd Cr 24 000 (Dividend received from Romont Ltd:
30% x $80 000)
30 June 2007 Investment in Romont Ltd Dr 15 000
Cr 15 000
Share of profit or loss of
associates
(Recognition of profit in Romont Ltd:
30% x $50 000)
2007 – 2008 Cash Dr 4 500
Investment in Romont Ltd Cr 4 500 (Dividend received: 30% x $15 000)
30 June 2008 Investment in Romont Ltd Dr 13 500
Cr 13 500
Share of profit or loss of
associates
(Recognition of profit in Romont Ltd:
30% x $45 000)
2008 – 2009 Cash Dr 3 000
Investment in Romont Ltd Cr 3 000 (Dividend from associate:
30% x $10 000)
Investment in Romont Ltd * Dr 12 000
Cr 12 000
Share of profit or loss of
associates
(Recognition of profit in Romont Ltd:
30% x $40 000)
2. Consolidation Worksheet Entries
30 June 2007:
Investment in Romont Ltd Dr 15 000
Share of profit or loss of associates Cr 15 000 (30% x $50 000)
Dividend revenue Dr 6 000
Investment in Romont Ltd Cr 6 000 (30% x $20 000)
30 June 2008:
Investment in Romont Ltd Dr 9 000
Retained earnings (1/7/07) Cr 9 000 (30% x $30 000)
Investment in Romont Ltd Dr 13 500
Share of profits or losses of associates Cr 13 500 (30% x $45 000)
Dividend revenue Dr 4 500
Investment in Romont Ltd Cr 4 500 (30% x $15 000)
30 June 2009:
Investment in Romont Ltd Dr 18 000
Retained earnings (1/7/08) Cr 18 000 (30% [$30 000 + $30 000])
Investment in Romont Ltd Dr 12 000
Share of profit or loss of associates Cr 12 000 (30% x $40 000)
Dividend revenue Dr 3 000
Investment in Romont Ltd Cr 3 000 (30% x $10 000)
Deegan Chapter 33, Question 17
33.17 Calculations
Cost as per ABC’s accounts$50 000
Add back dividend from pre-acquisition profits 10 000 see workings
Original cost of investment 60 000
Net assets acquired at 1/7/04 Share capital 100 000
Retained earnings 40 000
Total 140 000
@40% 56 000
Goodwill $4 000
Pre-acquisition dividend
A dividend of $80 000 was paid by DEF. All current-year earnings are paid first as
dividends. Current year earnings are $55 000. Thus, the balance of $25 000 must be
pre-acquisition which would have been off-set against the investment cost on the basis
of the proportional interest in the pre-acquisition dividend. The proportional interest
in the pre-acquisition dividend was $10 000 (25 000 × 40%). It is assumed that the
cost of the investment was reduced by the interest in the pre-acquisition dividend.
Equity accounting result
40% of current year profit of $55 000 $22 000 Less dividend from current year profits, $55 000×40% 22 000 Share of equity accounted results 0 Add cost 50 000 Equity accounting value of investment $50 000 The equity accounting entries would therefore be:
Dr Investment in DEF Ltd 22 000
Cr Share of associated company’s profits22 000 Dr Dividend revenue 22 000
Cr Investment in DEF Ltd 22 000