Reference no: EM132984937
Question - The following financial information of Sub Ltd has been extracted from its financial records for the year ended 31 March 2020:
Sales: $780 000
Cost of Sales: 324 000
Gross profit: 456 000
Expenses: 358 000
Profit before taxation: 98 000
Taxation: 39 200
Profit after taxation: 58 800
Retained earnings - opening balance: 290 000
Dividends declared: 20 000
Retained earnings - closing balance: $328 800
Equity and liabilities
Share capital: 180 000
Retained earnings: 328 800
Asset revaluation surplus: 90 000
Dividend payable: 14 000
Various liabilities: 207 200
Assets
Various assets: 736 000
Accounts receivable: 48 000
Inventory: 36 000
On 1 April 2004, Investor Ltd acquired a percentage of the equity of Sub Ltd. The identifiable assets were considered to be fairly valued at the date of acquisition.
At the date of acquisition the equity of Sub Ltd comprised the following:
Share capital $180 000
Retained earnings 60 000
Asset revaluation surplus 80 000
Additional information:
(i) During March 2020 Sub Ltd had made sales to Investor Ltd of $9 000. The inventory sold had cost Sub Ltd $6 500. Inventory of Investor Ltd, held at 31 March 2020, included this purchase from Sub Ltd.
(iii) During March 2019 Investor Ltd had made sales to Sub Ltd amounting to $7 000. The Inventory sold had cost Investor Ltd $5 000. Inventory of Sub Ltd, held at 31 March 2019, included the inventory purchased from Investor Ltd.
(iii) During the year ended 31 March 2020 Sub Ltd had incurred and paid Investor Ltd $17 000 of consulting fees.
Required -
1. Assume that Investor Ltd acquired 40% of the equity of Sub Ltd on 1 April 2004 and paid a cash sum of $175 000 for the acquisition; because of this acquisition Investor Ltd has significant influence over Sub Ltd.
2. Prepare the notional journal entry as of 31 March 2020 to account for Investor Ltd's investment in Sub Ltd using the equity method as required by NZ IAS 28 Investments in Associates. The tax rate is 28%.