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Mitchell Ltd acquired 20% of the voting shares of Ralph Ltd on 1 July 2021 for $135 000. This acquisition resulted in Mitchell Ltd having

Mitchell Ltd acquired 20% of the voting shares of Ralph Ltd on 1 July 2021 for $135 000. This acquisition resulted in Mitchell Ltd having significant influence over Ralph Ltd. At the date of acquisition, the shareholders equity of Ralph is as follows:

Share capital

185 000

Retained profits

53 000

238 000

The following information relates to Ralph Ltd as at 30 June 2022, the end of financial year FY2022:

Profit for FY2022

95 000

Dividend paid out of the profit of FY2022

35 000

Asset revaluation reserve

44 000

Additional information:

Blue Ltd is 90% owned by Mitchell Ltd and is Mitchells subsidiary.

During FY2022, Ralph sold $360 000 of inventories to Blue Ltd and made profit of $150 000. As at 30 June 2022, 10% of the inventories were still held by Blue Ltd.

Required:

a) Prepare journal entries for Mitchell Ltd in FY2022 to account for its investment in Ralph Ltd using the Equity Method. Use the Reclassification Method to account for the profit and dividends that Mitchell shares from Ralph.

Note 1) Use the provided journal entry template to enter your answer. 2) Workings/calculations or narrations are NOT required. 3) The template should provide enough space. However, if you find the space is insufficient in the template or encounter a table formatting issue, write your journal entries below the template and ensure labelling DR or CR.

b) Which financial statement does the investment in associates account appear? What does the investment in associates account indicate?

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