Problem 2 On 1 July 2014, Sam Ltd acquired 40% of the capital of Kayla Ltd for $4,500 and recognized investment in an associate. Kayla has a retained earnings of $2,150 and a share capital of $10,000 on 1 July 2014. All the identifiable assets and liabilities of Kayla Ltd were recorded at fair value except for the following: Inventory Carrying amount Fair value $1,000 $1,500 Depreciable assets 6,000 7,000 All this inventory was sold in the 12 months after 1 July 2014. The depreciable assets were considered to have a future 5-year life. For the year ended 30 June 2015, Kayla Ltd recorded a profit after tax of $2,000. Kayla Ltd paid a dividend of $200 in January 2015. Sam Ltd. Treats dividend receipts as dividend revenue. During the year ended 30 June 2015, Kayla Ltd sold inventory to Sam Ltd for $6,000. The cost of this inventory to Kayla Ltd was $4,000. Sam Ltd has resold only 20% of these items before the year end. On 1 January 2015, Sam Ltd sold Kayla Ltd a motor vehicle at a profit of $800. Both companies treat motor vehicles as non-current assets. Both companies charge depreciation at 20% p.a. on the reducing balance. The financial statements for Sam Ltd and Kayla Ltd for the financial year ended 30 June 2015 are shown below. Sales revenue COGS Sam Ltd Kayla 200,000 25,000 (110,000) (14,000) Depreciation expense Gross profit Other expenses Other revenue Profit before tax Income tax expense Profit after tax Retained earnings (1/7/2014) Dividends appropriation Retained earnings (30/6/2015) Reserve Share capital 90,000 11,000 (16,000) (3,000) (22,000) (6,000) 30,000 600 82,000 2,600 (20,000) (600) 62,000 2,000 120,000 2,150 (20,000) (200) 162,000 3950 10,000 800,000 10,000 Total equity 972,000 13,950 Accounts payable 40,000 5,000 Notes payable 100,000 Total liability and equity 1,112,000 18,950 Depreciable assets 400,000 12,000 Accumulated depreciation (80,000) (1,500) Investment in Paige Ltd, at cost 150,750 Investment in Kayla Ltd, at cost 4,500 Inventory 300,000 6,000 Accounts receivable 230,000 500 Cash 106,750 1,950 Total assets 1,112,000 18,950 Note: Other revenue include dividend revenue and gain on sale of non-current assets. Required: Prepare the journal entries in the records of Sam Ltd for the year ended 30 June 2015 in relation to its investments in Kayla Ltd.