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Should front lid classify back lid as an associate

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Question :

On 1 July 2015, Front Lid acquired 60% of the shares of Back Lid. On the same day it was decided that the CEO of Front Lid would also become the CEO of Back Lid and Front Lid would charge Back Lid a management fee for this service. The two companies began to undertake significant inter-company Ltd to Back Ltd. transactions including the regular sale of inventory and the granting of an interest free loan from Front One year later, on 1 July 2016, Front Ltd sold three-quarters of its shares in Back Lid to another company, Side Lid. All other arrangements between Front Lid and Back Lid remained unchanged.

Front Lid does not own shares in any other companies.

(a) i. For the year ending 30 June 2016, should Front Lid classify Back Lid as an associate, a subsidiary, or neither? Fully justify your decision with reference to the information given.

ii. What is the accounting implication (if any) for Front Lid of your decision in part (a)(i)?

(b) i. For the year ending 30 June 2017, should Front Lid classify Back Lid as an associate, a subsidiary, or neither? Fully justify your decision with reference to the information given.

ii. What is the accounting implication (if any) for Front Lid of your decision in part (b)(i)?

Reference no: EM132359939

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