Equity Accounting (student)

Equity Accounting (student) - Week 9 Investments in...

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Week 9 – Investments in associate and joint arrangement Illustration 1 On 1 January Year 1, Company A issued 200 $1 shares at par and used the entire proceeds of $200 to acquire 25% of the share capital of an associated company at a cost of $200. The key figures in the financial statements of the associated company for Year 1 were as follows: $ Net assets at 1 January Year 1 700 Income Statement for Year 1 Profit before tax 200 Taxation 60 Profit after tax 140 Dividend paid 40 Profit retained 100 Net assets at 31 December Year 1 800 The following assumptions will be made. 1. Fair values of assets are the same as book values. 2. It is the group’s accounting policy to recognize goodwill arising on acquisition as an asset less any accumulated impairment losses. As at 31 December Year 1, there was no foreseeable impairment on goodwill arising on consolidation. Goodwill on acquisition: Cost of investment Net asset acquired: 700 x 25% Goodwill Consolidated journal entries: Debit($) Credit($) Investment in associates All rights reserved by W.F.Hui. No further copying is permitted. 1
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Statement of income (200 x 25%) (To record group’s share of profit before tax in associates) Statement of income (60 x 25%) Investment in associates (To record group’s share of tax in associates) Dividend income (or Cash) Investment in associates (To record dividend received from associates) Illustration 2 The following balances relate to Park Ltd. and Gate Ltd. at 31 December Year 1. Park Ltd. ($m) Gate Ltd. ($m) Land - 99 Other fixed assets (net) 182 35 32 m shares at Gate Ltd at cost 72 - Current assets 62 68 316 202 All rights reserved by W.F.Hui. No further copying is permitted. 2 Investment in Associate Cost 200 Share of profit 50 Share of Tax 15 Dividend 10 Bal c/d 225 Investment in associate Goodwill arising on acquisition not yet impaired 25 Share of net asset from associate 800 x 25% 200 225
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Share Capital – ordinary share $1 each 200 80 Retained profits at 31 December Year 0 45 40 Profit for Year 1 18 20 Long term loan - 30 Current Liabilities 53 32 316 202 1. Park Ltd acquired its shares in Gate Ltd on 1 January Year 1. 2. It is the group’s accounting policy to recognize goodwill arising on acquisition as an asset less any accumulated impairment losses. As at 31 December Year 1, there was no foreseeable impairment on goodwill arising on consolidation. 3. The company use net asset approach to value NCI. Required: (a) Consolidate Park and Gate using acquisition method of accounting. (b) Consolidate Park and Gate using equity method of accounting. Consolidated Journal entries: Acquisition: Debit($m) Credit ($m) Share capital Retained profits Goodwill Investment in Gate NCI (Elimination of investment in Gate) Statement of income NCI (20m x 60%) All rights reserved by W.F.Hui. No further copying is permitted. 3
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(Current income to NCI) Goodwill on acquisition: $m Cost of investment Net asset acquired: (80m + 40m) x 40% Goodwill NCI: NCI at acquisition Add: current year profits
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This note was uploaded on 02/24/2012 for the course ACT 407 taught by Professor Mshui during the Fall '11 term at The Open University.

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Equity Accounting (student) - Week 9 Investments in...

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