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Week12_Discussion_Question_Solutions - Week 12 Discussion...

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Week 12 Discussion Questions 16.28 Equity accounting in accounts of the investor Frika and Wotan Frika Ltd is not a parent entity and does not prepare consolidated financial statements (as there is no applicable information we assume also that it is not a subsidiary of some other parent). Therefore the company must apply equity accounting to its investments in associates in a set of single- company financial statements. Frika may also have to produce separate financial statements, in which cost is used for associates. It is uncertain whether there is such a requirement and, in any event, it concerns a situation that is probably uncommon, due to a belief that only a few reporting entities that have associates are not parents. (a) Frika’s journal entries, equity method 20X2 1 January Dr Investment in associates 75 000 Cr Cash 75 000 Purchase 25% of associated company shares Not stated Dr Cash 3 000 Cr Investment in associates 3 000 Partial recovery of investment cost by receipt of share of associate company’s dividend from pre-acquisition profit (0.25 x $12 000) 31 December Dr Investment in associates 9 000 Cr Revenue from associates 9 000 Share of associate’s profit of the year (0.25 x $36 000) Dr Investment in associates 17 000 Cr Reserves 17 000 Restate investment to include investor share of the increase to associate’s asset revaluation reserve (0.25 x $68 000) Dr Profit or loss 54 000 Cr Retained profits 54 000 Close profit or loss account to retained profits ($45 000 + $9000) Note that to record a dividend we must recognise an appropriation from retained profits but only if the dividend is also a liability. Whether the dividend is a liability will depend on how and when it is to be paid and its timing relative to the financial year end. The word ‘proposed’ implies that Fricka’s and the associate’s dividend require ratification (it is not a declared dividend) and are therefore not liabilities until that event. Accordingly, neither the investor nor the associate recognise this dividend before ratification; however Frika does record its share of all Wotan’s profit for the period under the equity method.
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(b) Financial statements Frika Ltd financial statements at 31 December 20X2 $ $ Comprehensive profit statement
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