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 Dr | 15,000 | ||
| Investment in Chime Ltd Cr | 15,000 | ||
| (30% x $50,000 – dividend paid) | |||
| Dividend receivable Dr | 15,000 | ||
| Investment in Chime Ltd Cr | 15,000 | ||
| (30% x $50,000 – dividend provided) | |||
| Investment in Chime Ltd Dr | 9,000 | ||
| Share of OCI of associates Cr | 9,000 | ||
| (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 Dr | 49,170 | ||
| Share of profits or losses of associates Cr | 49,170 |
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 Dr | 10,770 | ||
| Retained earnings (1/7/15) Cr | 10,770 | ||
| Investment in Chime Ltd Dr | 9,000 | ||
| Share of OCI of associates Cr | 9,000 |
(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 Dr | 49,170 | ||
| Share of profits or losses of associates Cr | 49,170 |
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)