Question
Westham Ltd is an Australian manufacturing company listed on both the ASX and Nse. Its senior management is currently evaluating various investment options related to
Westham Ltd is an Australian manufacturing company listed on both the ASX and Nse. Its senior management is currently evaluating various investment options related to Oreo Ltd.
Westham Ltd made a $20,000 loan to Oreo Ltd during the fiscal year ending 30 June 2018. The loan term is five years, with a 4% interest rate.
Essex Ltd's senior management hired a financial analyst to evaluate Oreo Ltd. The following projections have been made by the financial analyst:
- On July 1, 2019, Oreo Ltd is expected to have $5 million in assets and $3 million in liabilities. Many of Oreo Ltd.'s assets, according to the financial analyst, are carried at far below their fair value.
- For the year ending June 2020, the total comprehensive income is projected to be $300,000. This amount includes $250,000 in net profit and $50,000 in other comprehensive income.
- Westham Ltd is planning to acquire the remaining inventory from Oreo Ltd and sell it to Orion Ltd. This transaction is expected to be completed during the year ending June 2022.
The investment options are as follows:
- Option 1: Buy 40% of the issued share of Oreo Ltd at a price of $15 each.
- Option 2: Buy 80 per cent of the issued shares of Oreo Ltd for $15 each.
You have been asked to prepare a memorandum that explains the accounting rules for the two investment options that Westham Ltd has. As part of your answer, you should explain how the profit of Oreo Ltd would be recognised by Westham Ltd.
(Do not be misled by numbers rather explain how this transaction is accounted for in accounting)
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