On 1 July 2017, P Ltd acquires 25% of the ordinary issued capital of K Ltd for $1 125 000. Upon acquisition of this financial interest in K Ltd, P Ltd appoints three directors to the twelve-seat board of directors of K Ltd. The share capital and reserves of K Ltd at 1 July 2017 are:

Share Capital

$1 200 000

Retained earnings

$825 000

General reserve

$225 000

$2 250 000

On 1 July 2017 all identifiable net assets of K Ltd are stated at fair value except for the following:

Land - the fair value was above the carrying value by $750 000.

Depreciable assets - the fair value was above the carrying value by $180 000, which considered to have a further 10 years useful life.

Reconciliation of Retained Earnings (opening and closing) for the year ending 30 June 2018

P Ltd

($)

K Ltd

($)

Profit before tax

Income tax expense

Profit after tax

Retained earnings – opening

Transfer to reserves

Dividend paid

Dividend proposed

Retaining earnings - closing

1 500 000

585 000

915 000

780 000

1 695 000

-

90 000

210 000

1 395 000

1 365 000

555 000

810 000

825 000

1 635 000

75 000

270 000

90 000

1 200 000

Balance Sheets as at 30 June 2018

P Ltd

($)

K Ltd

($)

Current assets

Inventory

Cash

Non-current assets

Investments in associates

Property, plant and equipment

Total assets

Liabilities

Net assets

Shareholders’ funds

Share capital

Retained earnings

Revaluation reserve

General reserve

4 275 000

2 610 000

6 885 000

1 125 000

6 750 000

7 875 000

1 4760 000

(7 152 000)

7 608 000

3 000 000

1 395 000

963 000

2 250 000

7 608 000

2 025 000

360 000

2 385 000

-

3 786 000

3 786 000

6 171 000

(3 471 000)

2 700 000

1 200 000

1 200 000

-

300 000

2 700 000

Additional Information:

On 30 June 2018, P Ltd holds inventory sold to it by K Ltd at a profit of $22 500. This inventory is sold to P Ltd for $30 000.

On 30 June 2018, K Ltd holds inventory sold to it by P Ltd at a profit of $7 500. This inventory is sold to K Ltd for $15 000.

The tax rate is 39%.

P Ltd has a number of subsidiaries.

P Ltd recognises dividends only when received.

K Ltd has a policy of paying dividends out of current year profits before utilising previous years’ profit.

Required:

(i) Determine goodwill and record relevant journal entries of acquisition using the ‘cost method’ of accounting for P Ltd for the year ending 30 June 2018.

(ii) Record relevant journal entries using ‘equity method’ of accounting for P Ltd and its associates K Ltd for the year ending 30 June 2018, in accordance with AASB128.

(iii) Calculate the final amount at which the investment in the associate; K Ltd. would be shown in the consolidated worksheet prepared by P Ltd as at 30 June 2018.