Exam 8: Accounting for Joint Arrangements

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. In preparing the consolidated financial statements for the year ended June 30 20X8,the adjustment to recognise the equity of Delville Wood Ltd in its associate would be:

The equity carrying amount of an investment will always be equal to the investor's proportional share of the net assets of the investee.

A gain on bargain purchase of an equity investment will be excluded from the investor's share of profit or loss of the associate.

An investment in an associate company will initially be recorded at fair value

Investor Ltd holds 25% of the voting shares of Investee Ltd.Another company holds the remaining 75%:

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.Delville Wood Ltd acquired its 20% investment on July 1 20X3 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.At June 30 20X7,Delville Wood Ltd held inventories which had been supplied by Harnham Hill Ltd at a mark-up of $100,000. IV.At June 30 20X8,a subsidiary of Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a mark-up of $50,000. V.During the year ended June 30 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 June 30 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:

Discuss the different identification and disclosure requirements for goodwill purchased as part of an investment in a subsidiary and an associate.

The use of the equity method primarily provides information to the investor in relation to:

Accounting for investment in associates by parent entities using the equity method will be done:

Explain the following statement: 'When reconciling the investor's interest in an associate's net assets to the equity accounted carrying amount of the investment in the investor's financial statements,the unimpaired balance of goodwill will be a reconciling item'

On November 1 20X6,a parent entity Helios Ltd acquired 25% (500,000 shares)of the share capital of Havers Ltd and the power to significantly influence the operating and financial policies of that company for $4,000,000 cash.In the period from the date of acquisition to June 30 20X7,Havers Ltd earned a profit for the period of $500,000 (after tax of $200,000)and declared a dividend of $100,000.At June 30 20X7,Helios Ltd recognised its equity in the dividend.At June 30 20X7,the quoted market value of the shares in Havers was $10 per share.At June 30 20X7,in the separate balance sheet of Helios Ltd and in the consolidated balance sheet of the group controlled by Helios Ltd,the investment in Havers Ltd would be reported as:

Indicia of an investor's incapacity to exert significant influence over the policy making decisions of an investee include:

On July 1 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 June 30 was (amounts in thousands): Additional information: I.No dividends have been paid by Rimfire Ltd out of pre-acquisition profits. II.At June 30 20X6,Delta Ltd held inventories,which had been supplied by Rimfire Ltd at a mark-up of $100,000. III.During the year ended June 30 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 June 30 20X7 of the group controlled by Delta Ltd,the investment in Rimfire Ltd would be reported at an amount of:

The equity accounting method must be applied by all applicable reporting entities

Even though an investee may be an associate of an investor,if the shares of that associate are traded in an active market,AASB 139 Financial Instruments: requires investments in that investee to be reported at:

Investors that are not parent entities must record all equity entries in their own records

On January 1 20X7,a parent entity Emborough Ltd acquired 20% of the share capital of Bernborough Ltd and the power to significantly influence the operating and financial policies of that company for $4,500,000 cash.In the period from the date of acquisition to June 30 20X7,Bernborough Ltd earned a profit for the period of $400,000 (after tax of $200,000),recognised a post-acquisition asset revaluation increment of $500,000 (deferred tax liability $100,000)and declared a dividend of $200,000.At June 30 20X7,Emborough Ltd recognised its equity in the dividend. In the consolidated balance sheet as at June 30 20X7 of the group controlled by Emborough Ltd,the investment in the associate would be reported at an amount of:

Indicia of the position that an investor does not have the power to significantly influence the operating,investment and financial policies of an investee include:

It is possible that different entities can respectively exert control and significant influence over an investee entity

Assume the same data as in Question 4-27.In July 20X8,Calpurnia Ltd acquired an additional 20% of the share capital of Portia Ltd and the power to control that company.In preparing the consolidated financial statements of the group controlled by Portia Ltd for the year ended June 30 20X8: