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

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

An investee is considered to be an associate of an investor if:

On 1 January 20X7,a parent entity,Emborough Ltd,acquired 20% of the share capital of Bernborough Ltd and the power to participate in the operating and financial policies of that company for $4 500 000 cash.In the period from the date of acquisition to 30 June 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 30 June 20X7,Emborough Ltd recognised its equity in the dividend. In respect of the increase in the investment recognised in the consolidated balance sheet at 30 June 20X7 of the group controlled by Emborough Ltd,a deferred tax liability would be recognised of:

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): 20x3 20x7 20x8 Shareholders' equity Share capital \ 2000 \ 2000 \ 2000 Revaluation surplus 1000 Retained earnings 4000 6000 6500 Total shareholders' equity \6 000 \8 000 \9 500 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: