Reference no: EM132562628
Question - On 1 July 2018, Water Ltd acquired 35% of the share capital of Melon Ltd for $8,500. At that date the equity of Melon Ltd consisted of Share Capital $10,000 and Retained Earnings $2,500. All identifiable assets and liabilities of Melon Ltd were recorded at fair value except for the following:
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Carrying Amount
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Fair Value
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Inventory
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$1,000
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$2,500
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Depreciable Assets
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$6,000
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$10,000
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Inventory was sold in the 12 months after 1 July 2018. The depreciable assets were considered to have a further 5 year life.
Additional Information:
(i) For the year ended 30 June 2020, Melon Ltd recorded a profit before tax of $5,900 and an income tax expense of $900. A dividend of $1,000 was paid.
(ii) Water Ltd regards Melon Ltd as an associated company.
(iii) During the year ended 30 June 2020, Melon Ltd sold inventory to Water Ltd for $6,000. The cost of this inventory to Melon Ltd was $3,000. Water Ltd has resold only 40% of this inventory making a profit before tax of $800.
(iv) On 1 January 2019, Water Ltd sold Melon Ltd equipment for $4,000 at a profit before tax of $1,500 to Water Ltd. Both companies charge depreciation of 20% p.a. straight line.
(v) Assume a tax rate of 30%.
Required - In accordance with AASB 128 Investments in Associates: Prepare the journal entry(s) in the records of Water Ltd in relation to the investment in Melon Ltd for the year ended 30 June 2020 assuming Water Ltd is not a parent company.
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