Accounting for Investments in Associates: A Case Study

Accounting for Investments in Associates

At 1 July 2014:

Net fair value of identifiable assets and liabilities of Chime Ltd=$20,000 + $10,000 (equity)
+ $15,000 (1 – 30%) (assets)
=$40,500
Net fair value acquired=30% x $40,500
=$12,150
Cost of investment=$13,650
Goodwill=$1,500

Depreciation:

Non-current assets: – 20% x $15,000 (1 -30%) = $2,100

A. Bell Ltd Does Not Prepare Consolidated Financial Statements

Profit for 2015-2016 period: $180,000

Adjustments for Inter-Entity Transactions:

Unrealised after tax profit in ending inventory: $30,000 (1 – 30%) = ($21,000)

Realised profit on opening inventory: $10,000 (1 – 30%) = $7,000

Pre-Acquisition Adjustments:

Depreciation($2,100)
$163,900
Investor’s share – 30%$49,170
Increase in asset revaluation surplus$30,000
Investor’s share – 30%$9,000

The required entries in Bell Ltd’s accounts for the 2015-2016 year are:

Cash Dr15,000
Investment in Chime Ltd Cr15,000
(30% x $50,000 – dividend paid)
Dividend receivable Dr15,000
Investment in Chime Ltd Cr15,000
(30% x $50,000 – dividend provided)
Investment in Chime Ltd Dr9,000
Share of OCI of associates Cr9,000
(30% x $30,000)
Share of OCI of associates Dr9,000
Asset revaluation surplus Cr9,000
(30% x $30,000, accumulation in ARS)
Investment in Chime Ltd Dr49,170
Share of profits or losses of associates Cr49,170

B. Bell Ltd Prepares Consolidated Financial Statements

Change in retained earnings balance 2014 – 2015

($50,000 bal. 1/7/15 – $10,000 o/b) = $40,000

Adjustments:

General reserve transfers: $5,000

Unrealised profit in inventory at 30/6/15: ($10,000 (1-30%) = ($7,000))

Pre-Acquisition Adjustments:

Depreciation: ($2,100)

$35,900

Investor’s share – 30%: $10,770

The consolidation worksheet entries at 30/6/16 are:

Investment in Chime Ltd Dr10,770
Retained earnings (1/7/15) Cr10,770
Investment in Chime Ltd Dr9,000
Share of OCI of associates Cr9,000

(30% x $30,000)

Share of OCI of associates Dr: 9,000

Asset revaluation surplus Cr: 9,000 (30% x $30,000, accumulation in ARS)

Investment in Chime Ltd Dr49,170
Share of profits or losses of associates Cr49,170

Dividend revenue Dr: 15,000

Investment in Chime Ltd Cr: 15,000 (30% x $50,000 – dividend paid)

Dividend revenue Dr: 15,000

Investment in Chime Ltd Cr: 15,000 (30% x $50,000 – dividend declared)