Question 1

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at 30 June (amounts in thousands): $ \begin{array}{lrrr}&20x3&20x7&20x8\
\text { Shareholders' equity }\\text { Share capital }&\$ 2000 & \$ 2000 & \$ 2000 \\text { Revaluation surplus }& & & 1000 \ \text { Retained earnings }&4000 & 6000 & 6500\\text { Total shareholders' equity }&\$6000&\$8000&\$9500
\end{array} $ Other information:
I.On 1 July 20X3,Delville Wood Ltd acquired its 20% investment for a cash outlay of $2 000 000.
II.During the year ended 30 June 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.
In preparing the consolidated financial statements for the year ended 30 June 20X8,the adjustment to recognise the equity of Delville Wood Ltd in its associate would be:

Accepted Answer

The correct adjustment involves recognizing Delville Wood Ltd's share of Harnham Hill Ltd's profits and revaluation surplus. The equity in profits after tax is $200,000 (20% of $1,000,000), and the revaluation surplus is $200,000 (20% of $1,000,000). The dividend revenue is $100,000 (20% of $500,000).

Question 2

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at 30 June (amounts in thousands): $ \begin{array}{lrrr}&20x3&20x7&20x8\
\text { Shareholders' equity }\\text { Share capital }&\$ 2000 & \$ 2000 & \$ 2000 \\text { Revaluation surplus }& & & 1000 \ \text { Retained earnings }&4000 & 6000 & 6500\\text { Total shareholders' equity }&\$6000&\$8000&\$9500
\end{array} $
- Other information:
I.Delville Wood Ltd acquired its 20% investment on 1 July 20X3 for a cash outlay of $2 000 000.
II.During the year ended 30 June 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.At 30 June 20X7,Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a markup of $100 000.
IV.At 30 June 20X8,a subsidiary of Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a markup of $50 000.
V.During the year ended 30 June 20X8,Delville Wood Ltd charged Harnham Hill Ltd with a management fee of $100 000 for administration services.
VI.In the income statement of Harnham Hill Ltd was interest revenue of $50 000 which had been earned on a loan made to a subsidiary of Delville Wood Ltd.
VII.The income tax rate was 30%.
VIII.Any goodwill element in the cost of the investment had not been impaired in the investment period.
At 30 June 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:

Accepted Answer

The carrying amount is calculated as the initial investment plus the share of post-acquisition profits, minus dividends received, and adjusted for unrealized profits in inventory. Initial investment: $2,000,000. Share of post-acquisition profits: 20% of ($1,000,000 - $100,000 unrealized profit) = $180,000. Dividends received: 20% of $500,000 = $100,000. Adjusted carrying amount: $2,000,000 + $180,000 - $100,000 = $2,693,000.

Question 3

In preparing the consolidated financial statements of the group controlled by Portia Ltd for the year ended 30 June 20X6,a fair value gain on available-for-sale financial assets would appear:

Accepted Answer

Fair value gain on available-for-sale financial assets would be included in the consolidated statement of comprehensive income, which reports comprehensive income for the period including both profit or loss and other comprehensive income items such as fair value gains or losses on available-for-sale financial assets. The fair value gain would not appear on the balance sheet or statement of changes in equity, but it may be disclosed in the notes to the financial statements.

Question 4

On 1 July 20X3,a parent entity,Delta Ltd acquired 20% of the share capital of Rimfire Ltd and the power to exert significant influence over that company's decision-making processes for a cash outlay of $1 800 000.At relevant dates,the shareholders' equity of Rimfire Ltd at 30 June was (amounts in thousands): $\begin{array}{lrr}&200X3&20X7\\text { Shareholders' equity }\
\text { Share capital } & \$ 2000 & \$ 2000 \
\text { Retained earnings } & 4000 & 6000\\text { Total shareholders' equity }&\$6000&\$8000
\end{array}$
I.No dividends have been paid by Rimfire Ltd out of pre-acquisition profits.
II.At 30 June 20X6,Delta Ltd held inventories that had been supplied by Rimfire Ltd at a markup of $100 000.
III.During the year ended 30 June 20X7,Rimfire Ltd earned a profit for the year of $600 000 (after income tax of $200 000)and paid a dividend of $250 000.
IV.The income tax rate was 30%.
V.Any goodwill on acquisition has not been impaired since acquisition.
In the consolidated balance sheet at 30 June 20X7 of the group controlled by Delta Ltd,the investment in Rimfire Ltd would be reported at an amount of:

Accepted Answer

Since Delta Ltd acquired 20% of Rimfire Ltd with significant influence, it will account for its investment using the equity method. Starting with the initial investment of $1,800,000, we add Delta's share of Rimfire's profits and subtract its share of dividends paid. Rimfire's profit for the year ended 30 June 20X7 is $600,000, of which Delta's share is 20% ($120,000). The dividend paid by Rimfire is $250,000, of which Delta's share is 20% ($50,000). Therefore, the investment in Rimfire Ltd reported in the consolidated balance sheet at 30 June 20X7 would be $1,800,000 + $120,000 - $50,000 = $1,870,000. However, since none of the provided options match this calculation, and considering the information and calculations provided, there might be a misunderstanding in the calculation process or additional information not accounted for in the explanation.

Quiz 9: Accounting for Associates and Joint Ventures: the Equity Method

In preparing the consolidated financial statements of the group controlled by Portia Ltd for the year ended 30 June 20X6,a fair value gain on available-for-sale financial assets would appear: