Question # 3

On 1 July 2021, Dandy Ltd acquires a 60 per cent interest in Geelong Ltd for a cash consideration of $2,100,000.

On the date of the acquisition, the assets of Geelong Ltd are reported at their fair value. The total share capital and reserves of Geelong Ltd as at the date of the acquisition are:

Share capital $3,500,000

Retained earnings $500,000

Total shareholders equity $4,000,000

Additional information:

• For the year ending 30 June 2022, Geelong Ltd records an after-tax profit of $250,000. A dividend of $50,000 is declared and ratified by Geelong Ltd on 30 June 2022, with the dividend coming from profits earned in the 20212022 financial year.
• In October 2022, Geelong Ltd pays the $50,000 dividend declared on 30 June 2022.
• For the year ending 30 June 2022, Geelong Ltd records an after-tax loss of $125,000. On 30 June 2022, Geelong Ltd declares dividends of $25,000, to be paid out of the profits earned in the 2021-2022 financial year.
• On 30 June 2022, Geelong Ltd revalued its land upwards by an amount of $450,000.
• Dandy Ltd recognises dividends as revenue when the investee declares the dividends (i.e. Dandy Ltd also recognises a dividend receivable).
• The corporate tax rate of Dandy Ltd is 30 per cent.

Required:

1. Do you think that there was a goodwill recognised at the initial acquisition of Geelong Ltd by Dandy Ltd? If you think so, how much was the goodwill? You need to show the calculation with supporting arguments. [05 Marks]
2. Prepare the journal entries for the years ending 30 June 2021 and 30 June 2022 to account for the investment in Geelong Ltd using the equity method of accounting and assuming that Dandy Ltd is a parent entity (and therefore prepares consolidated financial statements). [20 Marks]