Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On 1 January 2020, Investor Ltd paid $1,100,000 for a 25% interest in Associate Ltd when the equity of Associate Ltd consisted of $3,000,000 share

On 1 January 2020, Investor Ltd paid $1,100,000 for a 25% interest in Associate Ltd when the equity of Associate Ltd consisted of $3,000,000 share capital and $1,200,000 retained earnings. There has been no change in share capital of Associate Ltd since then. Both firms' accounting period is from 1 January to 31 December and their income tax rate is 30%. On this date, all the identifiable net assets of Associate Ltd were recorded at fair value except for the following:

Fair value Carrying amount Status

Inventory $ 400,000 $ 600,000 Sold in 2020

Machinery (net) 900,000 500,000 5-year life

Equipment (net) 70,000 150,000 4-year life

Additional information:

  1. Associate Ltd has no dividend declared or paid during 2020.
  2. Associate Ltd's financial statements show that retained earnings were $1,500,000 as at 1
  3. January 2021, and profit and dividend were $190,000 and $10,000, respectively, for 2021.
  4. On 15 November 2021, Associate Ltd sold inventory to Investor Ltd at a profit before income tax of $20,000. Investor Ltd sold 60% of this inventory by 31 December 2021.
  5. On 1 January 2020, Associate Ltd sold some furniture to Investor Ltd for $300,000, with Associate Ltd recording a profit before income tax of $50,000. The furniture had a further 5-year life.
  6. On 10 December 2021, Investor Ltd sold inventory to Associate Ltd for $100,000 with a profit before income tax of $20,000. Associate Ltd still has this inventory on hand by 31 December 2021.


Required:

1) Calculate the amount of goodwill arising from investment in Associate Ltd.

2) Determine the amount of "Profit from investment in Associate" for 2020 and provide a journal

entry to record this amount on the books of Investor Ltd.

3) Determine the balance of "Investment in Associate" as at 31 December 2021.

Step by Step Solution

3.46 Rating (159 Votes )

There are 3 Steps involved in it

Step: 1

Solution Given that On 01012020 Investor Ltd Paid purchase co... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones

10th Edition

324300980, 978-0324300987

More Books

Students also viewed these Accounting questions

Question

How is the NDAA used to shape defense policies indirectly?

Answered: 1 week ago