Question 2

On 1 July 2013 Mega Limited acquires 25 per cent of the issued capital of Little Limited for a cash consideration of $110,000. At the date of acquisition, the shareholders equity of Little Limited is:

Contributed equity $150,000

Retained earnings $130,000

Total Equity $280,000

Additional information

On the date of acquisition, buildings have a carrying amount in the accounts of Little Limited of $80,000 and a market value of $100,000. The buildings have an estimated useful life of 10 years after 1 July 2013

For the year ending 30 June 2014 Little Limited records an after tax profit of $60,000, from which it pays a dividend of $20,000 For the year ending 30 June 2015 Little Limited records an after- tax profit of $80,000, from which it pays a dividend of $40,000

Mega Limited has a number of subsidiaries

Assume that the tax rate is 30%

Required:

(a) Calculate the amount of goodwill at the date of acquisition

(b) Prepare journal entries for the year ending 30 June 2014, applying the equity method of accounting

(c) Prepare journal entries for the year ending 30 June 2015, applying the equity method of accounting