Question 1 (from 14.6 Leo et. al):

Acoustic Ltd owns 25% of the shares of its joint venture, Bass Ltd. At the acquisition date, there were no differences between the fair values and the carrying amounts of the identifiable assets and liabilities of Bass Ltd.

For 2018-19, Bass Ltd recorded a profit of $100000. During this period, Bass Ltd paid a $10000 dividend, declared in June 2018, and an interim dividend of $8000. The tax rate is 30%.

The following transactions have occurred between Acoustic Ltd and Bass Ltd:

(a)On 1 July 2017, Bass Ltd sold a non-current asset costing $10000 to Acoustic Ltd for $12000. Acoustic Ltd applies a 10% p.a. on cost straight-line method of depreciation.

(b)On 1 January 2019, Bass Ltd sold an item of plant to Acoustic Ltd for $15000. The carrying amount of the asset to Bass Ltd at time of sale was $12000. Acoustic Ltd applies a 15% p.a. straight-line method of depreciation.

(c)A non-current asset with a carrying amount of $20000 was sold by Bass Ltd to Acoustic Ltd for $28000 on 1 June 2019. Acoustic Ltd regarded the item as inventory and still had the item on hand at 30 June 2019.

(d)On 1 July 2017, Acoustic Ltd sold an item of machinery to Bass Ltd for $6000. This item had cost Acoustic Ltd $4000. Acoustic Ltd regarded this item as inventory whereas Bass Ltd intended to use the item as a non-current asset. Bass Ltd applied a 10% p.a. on cost straight-line depreciation method.

Required

Acoustic Ltd applies AASB 128/IAS 28 in accounting for its investment in Bass Ltd. Assuming Acoustic Ltd does not prepare consolidated financial statements, prepare the journal entries in the records of Acoustic Ltd for the year ended 30 June 2019 in relation to its investment in Bass Ltd.

Can you explain why when adjusting the profit by pre-acquisition entries, some of the values are adding depreciation - tax and others and taking the profit - depreciation and tax?