Question2 (14marks)Associates

Harvey Ltd acquired 30% of the capital of Spector Ltd on 1 July 2020 for $240,000. As at the date of acquisition the share capital of Spector Ltd comprised the following:

Share capital $400,000

Retained earnings $300,000

General reserve $ 80,000

$780,000

At the date of acquisition all the assets of Spector Ltd were stated at fair value except for equipment. Equipment with a carrying value of $300,000 (cost: $390,000) was assessed to have a fair value of $350,000. The remaining useful life of the equipment was 20 years.

Information for the year ended 30 June 2021

Profit before tax for Spector Ltd is $95,000 and dividend paid is $40,000.

Information for the year ended 30 June 2022

Profit before tax for Spector Ltd is $75,000 and dividend paid is $30,000.

The revaluation surplus of Spector Ltd increased by $90,000 following the revaluation of land.

Spector Ltd sold inventory to Harvey Ltd for $75,000. The original cost of the inventory was $50,000. By 30 June 2022 80% of the inventory had been sold by Harvey Ltd.

Harvey Ltd sold inventory to Spector Ltd for $105,000. The original cost of the inventory was $90,000. By 30 June 2022 the entire amount of inventory has been sold by Spector Ltd.

On 1 June 2022 Spector Ltd sold land to Harvey Ltd for $300,000. The original cost of the land was $120,000.

Other information

There is no evidence that the investment account is impaired.

Harvey Ltd is a parent entity that prepares consolidated financial statements.

The tax rate is 30%.

Required

a) Prepare an acquisition analysis. 4 marks

b) Provide the equity accounting entries recorded by Harvey Ltd on consolidation for the investment in Spector Ltd for the 2021 and 2022 financial years.10 marks