The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at June 30 (amounts in thousands): Other information:
I.On July 1 20X3,Delville Wood Ltd acquired its 20% investment for a cash outlay of $2,000,000.
II.During the year ended June 30 20X8,Harnham Hill Ltd earned a profit of $1,400,000 before tax (income tax expense $400,000)and paid a dividend of $500,000.
III.Any goodwill element in the cost of the investment had not been impaired in the investment period.
At June 30 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:
A) $2,500,000
B) $2,000,000
C) $2,700,000
D) None of the above.

Question

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at June 30 (amounts in thousands):  Other information:
I.On July 1 20X3,Delville Wood Ltd acquired its 20% investment for a cash outlay of $2,000,000.
II.During the year ended June 30 20X8,Harnham Hill Ltd earned a profit of $1,400,000 before tax (income tax expense $400,000)and paid a dividend of $500,000.
III.Any goodwill element in the cost of the investment had not been impaired in the investment period.
At June 30 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:
A) $2,500,000 
B) $2,000,000 
C) $2,700,000 
D) None of the above.

Quizplus · Accepted Answer

The carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd is calculated as follows:
- Original cost of investment (July 1, 20X3): $2,000,000
- Share of profit after tax (20% x $1,000,000): $280,000
- Add: share of retained earnings as of July 1, 20X7 (20% x $1,300,000): $260,000
- Add: share of profit after tax for the year ended June 30, 20X8 (20% x $1,000,000): $200,000
- Less: share of dividends paid (20% x $500,000): $100,000
Carrying amount at June 30, 20X8: $2,640,000
Therefore, the correct answer is C, $2,700,000, as this is the closest option to the calculated amount.

The Following Statements of Shareholders' Equity Were Prepared for Harnham