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Solutions Manual

to accompany

Company Accounting 10e


prepared by

Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan

© John Wiley & Sons Australia, Ltd 2015


Solutions manual to accompany Company Accounting 10e

Chapter 23 – Associates and joint ventures

REVIEW QUESTIONS
1. What is an associate entity?

Paragraph 2 of AASB 128 defines an associate as:

An entity, including an unincorporated entity such as a partnership, over which the investor has
significant influence, and that is neither a subsidiary nor an interest in a joint venture.

The key criterion is the existence of significant influence, also defined in para. 2.

Note that an investor does not have to hold shares in an associate – yet the application of the equity
method depends on such a shareholding. However, see the presumptions in para 6 of AASB 128.

2. Why are associates distinguished from other investments held by the investor?

The suite of accounting standards provides different levels of disclosure dependent on the relationship
between the investor and the investee:
Subsidiaries: a control relationship
Joint ventures: a joint control relationship
Associates: a significant influence relationship
Other investments: no relationship

Where there is a relationship, it relates to the ability of the investor to influence the direction of the
investee, in comparison to a simple holding of shares as an investment. Where such a relationship
exists, it is argued that the investor is affected, from an accountability perspective as well as a
potential receipt of benefits perspective [why get involved if there are no benefits to doing so?]. These
effects result in the need for additional disclosure about the relationship.

3. Discuss the similarities and differences between the criteria used to identify subsidiaries and
that used to identify associates.

A subsidiary is identified where another entity controls that entity. Control is defined in para 2 of
AASB 128.

An associate is identified where another entity has significant influence over that entity.

Control Significant influence


Power over the investee Power to participate

Exposure or rights to variable returns To participate in the financial and


From involvement in investee operating policy decisions

Ability to affect returns through power -----------

No ownership interest is necessary No ownership interest is necessary

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Chapter 23: Associates and joint ventures

4. What is meant by “significant influence”?

Para 2 of AASB 128 states:

Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies

Note: power to participate


financial and operating policy decisions

5. What factors could be used to indicate the existence of significant influence?

Note paras 6 and 7 of AASB 128:

6. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly
or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
7. The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.

6. What is a joint venture?

A joint arrangement is an arrangement between two or more entities so that two or more entities have
joint control of another entity.

Where a joint arrangement exists, the arrangement must be classified as either a joint operation or
a joint venture. The classification depends on the rights and obligations of the parties to the
arrangement. Joint ventures are accounted for under AASB 128 while joint operations are accounted
for under AASB 11.

A joint venture is described as an arrangement where the investor has a right to an investment in
the investee. The investee will have the following features:
- the legal form of the investee and the contractual arrangements are such that the investor does
not have rights to the assets and obligations for the liabilities of the investee; and
- the investee has been designed to have a trade of its own and as such must directly face the
risks arising from the activities it undertakes, such as demand, credit or inventory risks.

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Chapter 23: Associates and joint ventures

7. What is meant by joint control?

Joint control is the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties sharing
control. The key element of joint control is the sharing of control. In other words, there must be at
least two investors who have shared control of the investee (AASB 128, para. 3)

8. How does joint control differ from control as applied on consolidation?

Under AASB 10:


An investor controls an investee when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee.

There are three investor-investee relationships which are based on different levels of control:

Relationship Level of control


Parent - subsidiary Dominant control
Investor-associate Significant influence
Joint arrangement - investee Joint control

With a subsidiary there can be only one parent. With joint control there needs to be at least 2 entities
that share control.

9. Discuss the relative merits of accounting for investments by the cost method, the fair value
method and the equity method.

Cost method:
Advantages: Simplicity
Reliable measure

Disadvantages: No indication of changes in value since acquisition


Revenue recognised only on dividend receipt

Fair value method:


Advantages: Up-to-date value, present information compared with past
Information
Revenue recognised as value changes rather than waiting for
dividends
Disadvantages: Reliability a function of how active the market is
Costs associated with regular updating, extra costs for audit and valuation
fees

Equity method:

Advantages: Carrying amount related to change in wealth of the investee


Revenue recognised prior to dividend receipt
Disadvantages: Carrying amount reliant on validity of investee information
Carrying amount not based on market value
Recognition of revenue prior to associate declaring dividend;
no transaction has yet occurred

© John Wiley and Sons Australia Ltd 2015 23.4


Chapter 23: Associates and joint ventures

10. Outline the accounting adjustments required in relation to transactions between the
investor and an associate/joint venture. Explain the rationale for these adjustments.

Note paragraph 22:


- adjust for profits and losses on upstream/downstream transactions
- adjust to the extent of investor’s interest i.e. proportionate adjustment
- adjust investor’s share in associate’s profits and losses

Rationale

AASB 128 provides no rationale.


A key question is whether the equity method is used as a measurement technique to
approximate fair value, or as a consolidation technique.
If it is a measurement technique, then why adjust for inter-entity transactions?
If it is a consolidation technique, then adjustments can be justified – however, does the method
of adjustment proposed in para 22 conform with consolidation techniques?

Debate:
- why should investor’s share of associate’s profits be adjusted if investor sells to associate
as associate’s profits are unaffected by this transaction?
- Should individual accounts such as “sales”, “cost of sales” and “inventories” be adjusted?
- Should downstream transactions affect different accounts than upstream transactions?

11. Compare the accounting for the effects of inter-entity transactions for transactions between
parent entities and subsidiaries and between investors and associates/joint ventures.

See para 22 of AASB 128

Consolidation Equity method


Adjust for upstream & downstream Adjust for upstream & downstream
Adjust for unrealised profits/losses Adjust for unrealised profits/losses
Adjust for inter-entity balances No adjustment for inter-entity balances
Adjust for 100% of effect Proportionate adjustment
Adjust individual accounts such as sales Adjust share of profits/losses &
investment account
Transactions are within group No economic entity/group structure

12. Discuss whether the equity method should be viewed as a form of consolidation or a
valuation technique.

AASB 128 does not give a clear indication whether the equity method is a consolidation technique or
a measurement technique similar to fair value.

Note para 20: “Many of the procedures appropriate for the application of the equity method are
similar to the consolidation procedures described in AASB 127.”

If a measurement method, the equity method is an extension of the accrual process within the
historical cost system. Revenue is recognised in relation to the investee as the investor records
profits/losses, instead of merely when the investor pays dividends. The balance sheet is a one-line
figure, being an alternative to fair value.

If it is a measurement technique, why adjust for the effects of inter-entity transactions?

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Chapter 23: Associates and joint ventures

Further, why not just use fair value if available, or reliably measurable, and equity method as a
default?

Why use a criterion such as significant influence to determine associates – why not apply to all
material investments?

If a consolidation technique, there is an expansion of the group to include the investor’s share of the
associate. The group then is more than just controlled entities.
Why not use proportionate consolidation?
Why not properly adjust for inter-entity transactions?
Why expand the group beyond controlled entities?

Unfortunately, it appears that equity accounting is a hybrid between a measurement technique and
consolidation. Standard-setters need to determine a conceptual basis for accounting for associates and
apply an appropriate method.

13. Explain why equity accounting is sometimes referred to as “one-line consolidation”.

Equity accounting is similar to consolidation in that:


- both recognise the investor’s share of post-acquisition equity in the income statement. The
consolidation method recognises the MI share as well, but divides equity into parent and MI
share.
- both adjust for the effects of inter-entity transactions
- in the income statement, the share of profits/losses of an associate is similar to the parent’s
share of the post-acquisition equity of a subsidiary – however, under the equity method this is
not taken against individual accounts but there is a one-line total.
- in the balance sheet, the investment in the associate is adjusted for the increase in the investor’s
share of the net assets of the associate – similar to the parent’s share of the net assets of a
subsidiary. However, under equity accounting, there is no recognition of the individual assets
and liabilities of the associate, rather, there is a one-line recognition.

14. Explain the differences in application of the equity method of accounting where the method
is applied in the records of the investor compared with the application in the consolidation
worksheet of the investor.

There are 2 major differences when equity accounting is applied in the consolidation worksheet rather
than in the accounts of the investor.

First, in relation to past periods:

If the adjustments are made in the records of the investor, then in any period, there is only a need
to recognise the effects of the current period changes in share of the profit/losses of the associate.

If the adjustments are made on consolidation, as the worksheet is only a temporary document and
has no affect on the actual accounts, in periods subsequent to the date of acquisition, there needs
to be a recognition, via retained earnings, of the investor’s share of prior period profits/losses of
associate.

Second, in relation to dividend revenue:

If the adjustments are made in the accounts of the investor, then on payment of a dividend by the
associate, the adjustment is:

© John Wiley and Sons Australia Ltd 2015 23.6


Chapter 23: Associates and joint ventures

Cash Dr x
Investment in associate Cr x

If the adjustments are made on consolidation, the worksheet adjustment is:

Dividend revenue Dr x
Investment in associate Cr x

15. Explain the treatment of dividends from the associate under the equity method of
accounting.

The treatment of dividends differs dependent on whether the equity method is applied in the accounts
of the investor or applied on consolidation in the consolidation worksheet.

Dividends paid

In the accounts of the investor:

On payment of the dividend by the associate, in the accounts of the investor, the following entry is
made:

Cash Dr x
Investment in associate Cr x

As the investor recognises its share of the profits/losses of the associate as income, and this profit/loss
is prior to the appropriation of dividends, then to recognise dividend revenue would double count the
income recognised by the investor. The dividend is simply a receipt of equity already recognised via
application of the equity method.

Consolidation worksheet:

In the year of payment of the dividend the consolidation adjustment entry is:

Dividend revenue Dr x
Investment in associate Cr x

When the dividend is paid the investor records the receipt of cash and recognises dividend revenue.
The effect of the above entry is to eliminate the dividend revenue previously recognised by the
investor. Because the investor recognises a share of the whole of the profit of the associate, the
dividend revenue cannot also be recognised as income by the investor.

Dividends declared

Where revenue is recognised on declaration of the dividend, the effect is the same as for dividends
paid.

Where the investor does not recognise dividend revenue, then there is no entry in the investor’s
accounts, nor is there any adjustment in the consolidation worksheet. In using the consolidation
worksheet method, care must be taken in calculating the investor’s share of post-acquisition retained
earnings where a dividend was declared at the end of the previous period. This must be added back to
the closing balance of retained earnings, as the investor has not yet recognised the appropriation of
profits.

© John Wiley and Sons Australia Ltd 2015 23.7


Chapter 23: Associates and joint ventures

CASE STUDIES

Case Study 1 Significant influence


The accountant of Cornett Chocolates Ltd, Ms Fraulein, has been advised by her auditors that
the entity’s investment in Concertina’s Milk Ltd should be accounted for using the equity
method of accounting. Cornett Chocolates Ltd holds only 20.2% of the voting shares currently
issued by Concertina’s Milk Ltd. Since the investment was undertaken purely for cash flow
reasons based on the potential dividend stream from the investment, Ms Fraulein does not
believe that Cornett Chocolates Ltd exerts significant influence over the investee.
Required
Discuss the factors that Ms Fraulein should investigate in determining whether an investor–
associate relationship exists, and what avenues are available so that the equity method of
accounting does not have to be applied.

The relevant paragraphs from AASB 128 are:

Paragraph 2:
Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies

Paragraphs 6 and 7:
6. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly
or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
7. The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.

Points to discuss:
1. Why the investment is undertaken by Swiss Chocolates is irrelevant. The definition of
significant influence is based on the capacity to participate, not the actual or intention to
participate.
2. Whether Swiss Chocolates actually exerts influence is irrelevant.
3. The 20% is a guideline only.
4. Factors will include those in paragraph 7. Further an analysis of the 80% holding by other
parties is very important. If it is closely held, then the ability for Swiss Chocolates to
participate is limited.

© John Wiley and Sons Australia Ltd 2015 23.8


Chapter 23: Associates and joint ventures

Case study 2 Nature of a joint venture


Billabong International Ltd acquired Nixon Inc in 2006 for approximately US$55 million and a
deferred payment of US$76 million in 2012. However, in 2012, along with many other retailers,
Billabong was having difficulty with its debt. In February 2012, it undertook a major
restructure shedding 400 jobs and selling off some of its accessories brands. On 17 February
2012, the following news was reported by AAP (Australian Associated Press Pty Ltd) on
http://news.smh.com.au:

Billabong said it had entered into an agreement with Trilantic Capital Partners (TCP) to establish a
joint venture for Nixon.
Under the joint venture, Billabong will retain 48.5 per cent of Nixon, while TCP will purchase 48.5
per cent and Nixon’s management will purchase 3.0 per cent,’ Billabong said in a statement.

Required
Discuss what arrangements would have to exist between Billabong, TCP and Nixon’s
management in order for a joint venture to exist.

There are three entities that have an interest in Nixon. In particular Billabong has 48.5% and TCP
holds 48.5% while Nixon’s management hold 3%.
In order for a joint venture to exist there must be an agreement between 2 or more parties to have joint
control. Joint control is the contractually agreed sharing of control of an arrangement, which exists
128:3
only when decisions about the relevant activities require the unanimous consent of the parties sharing
control. The key element of joint control is the sharing of control. In other words, there must be at
least two investors who have shared control of the investee.
It is most likely that Nixon’s management (holding 3%) will not be a party to the joint venture.
Instead Billabong and TCP will jointly control Nixon.
The key arrangement for a joint venture to exist between Billabong and TCP must be an agreement to
have joint control of Nixon.

Case study 3 Nature of a joint venture


On 8 November 2011, flight CZ319 of China Southern Airlines took off from Beijing to Perth,
the capital of Western Australia, symbolising the maiden voyage from China’s mainland to
Western Australia. China Southern Airlines flies to many countries in the world. On 21
September 2010, it was reported via www.csair.com that the Air France KLM Group and China
Southern Airways had signed a joint venture agreement based on sharing revenues on the
Paris–Guangzhou route. It was stated that:

Air France and China Southern will have joint governance of the joint venture. A management
committee will be implemented, with five working groups in charge of implementing the joint
venture agreements in the fields of network management, revenue management, sales, products and
finance.

Required
Discuss what would be necessary for there to be a joint venture between China Southern
Airlines and Air France, and whether the description given above signifies the existence of a
joint venture in accordance with AASB 128.

Associates
An associate is defined as an entity over which the investor has significant influence.

© John Wiley and Sons Australia Ltd 2015 23.9


Chapter 23: Associates and joint ventures

The key characteristic determining the existence of an associate is that of significant influence.
This is defined as the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control of those policies. The key features of this definition are:
 The investor has the power or the capacity to affect the decisions made in relation to the
investee. As with the concept of control used in determining the parent-subsidiary relationship,
an investor is not required to actually exercise the power to influence. It is only necessary that an
investor has the ability to do so.
 The specific power is that of being able to participate in the financial and operating policy
decisions of the investee. Note that the investor cannot control the investee, just significantly
influence the investee.
 There is no requirement that the investor holds any shares, or has any beneficial interest in the
associate. However as discussed later, the application of the equity method is only possible
where the investor holds shares in the associate. In other cases, the investor is required to make
specific disclosures in its financial statements.

Joint ventures
A joint arrangement is an arrangement between two or more entities so that two or more entities have
joint control of another entity.
Where a joint arrangement exists, the arrangement must be classified as either a joint operation or
a joint venture. The classification depends on the rights and obligations of the parties to the
arrangement. Joint ventures are accounted for under AASB 128 while joint operations are accounted
for under AASB 11.
A joint venture is described as an arrangement where the investor has a right to an investment in
the investee. The investee will have the following features:
- the legal form of the investee and the contractual arrangements are such that the investor does
not have rights to the assets and obligations for the liabilities of the investee; and
- the investee has been designed to have a trade of its own and as such must directly face the
risks arising from the activities it undertakes, such as demand, credit or inventory risks.

Differences
The major differences lie in the level of control that exists between the entities and the inter-
relationship between the investors.
With an associate, an investor only has significant influence. There may be only one investor that
has significant influence over an associate. However, there may be a number of investors that have
significant influence over an associate – but there will not be any agreement between these investors
in relation to control of the associate.
With a joint venture, each joint venturer has joint control over the joint venture. This will be
established by an agreement between the venturers themselves.

In the quotation it is noted that Air France and China Southern will have “joint governance” of the
project. Unless this term means joint control – requiring unanimous agreement of the two venturers –
then there is no joint venture as defined in AASB 128.

An agreement that just involves a sharing of revenues does not constitute a joint venture.

There does not seem to be a separate joint venture which has rights to assets and obligations of the
joint venture in which each venturer has an investment. If the joint arrangement is not structured
through a separate vehicle then the arrangement is a joint operation rather than a joint venture.

© John Wiley and Sons Australia Ltd 2015 23.10


Chapter 23: Associates and joint ventures

Case study 4 Equity accounting


Amalgamated Holdings Ltd (www.ahl.com.au) provided the following information in Note 1 of
its 2012 annual report (p. 44):

(iii) Associates and jointly controlled entities (‘equity accounted investees’)


Associates are those entities for which the Group has significant influence, but not control,
over the financial and operating policies. Significant influence is presumed to exist when
the Group holds between 20% and 50% of the voting power of another entity. Jointly
controlled entities are those entities over whose activities the Group has joint control,
established by contractual agreement and requiring unanimous consent for strategic
financial and operating decisions.
The consolidated financial statements include the Group’s share of the profit or loss and
other comprehensive income of associates and jointly controlled entities from the date that
significant influence or joint control commences until the date that significant influence or
joint control ceases. The Group’s share of movements in reserves is recognised directly in
consolidated equity. When the Group’s share of losses exceeds its interest in an equity
accounted investee, the Group’s carrying amount is reduced to nil and recognition of
further losses is discontinued except to the extent that the Group has legal or constructive
obligations to make payments on behalf of the investee.
(iv) Transactions eliminated on consolidation
Intra-Group balances and transactions, and any unrealised gains and losses or income and
expenses arising from intra-Group transactions, are eliminated in preparing the
consolidated financial report.
Unrealised gains arising from transactions with associates and jointly controlled entities
are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are
eliminated in the same way as unrealised gains but only to the extent there is no evidence of
impairment.

Required
Some investors in Amalgamated Holdings Ltd who have limited accounting knowledge,
particularly about equity accounting, have asked you to provide a report to them commenting
on:
• the differences between associates and partnerships
• the determination of the date of significant influence
• realisation of profits/losses on inter-entity transactions
• recognition of losses of an associate.

1. Differences between associates and partnerships

There are no differences. Paragraph 3 of AASB 128 defines an associate as follows:


An associate is an entity over which the investor has significant influence.
An associate therefore includes a partnership.

2. Determination of the date of significant influence

AASB 128 does not define the date of significant influence, unlike AASB 3 Business
Combinations which contains a definition of date of acquisition. However, in line with the latter
definition, the date of significant influence would be the date that the investor obtains significant
influence in relation to the associate. It is not necessarily the date the investor acquires its
investment in the associate.

3. Realisation of profits/losses on inter-entity transactions

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Chapter 23: Associates and joint ventures

The realisation of profits/losses is the same as that for gains/losses on intragroup transactions
within a consolidated group. Realisation occurs when a party external to the investor-associate is
involved in the transaction. Hence, profits made by an associate selling inventory to its investor
are realised when the investor on-sells the inventory to an external party.
With transfer of depreciable assets, realisation occurs as the asset is consumed or used up, with
the proportion of profit/loss realised being measured in proportion to the depreciation of the
transferred asset.

4. Recognition of losses of an associate

Note the following paragraphs from AASB 128:


38. If an entity's share of losses of an associate or a joint venture equals or exceeds its interest in the
associate or joint venture, the entity discontinues recognising its share of further losses. The interest in
an associate or a joint venture is the carrying amount of the investment in the associate or joint venture
determined using the equity method together with any long-term interests that, in substance, form part of
the entity's net investment in the associate or joint venture. For example, an item for which settlement is
neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity's
investment in that associate or joint venture. Such items may include preference shares and long-term
receivables or loans, but do not include trade receivables, trade payables or any long-term receivables for
which adequate collateral exists, such as secured loans. Losses recognised using the equity method in
excess of the entity's investment in ordinary shares are applied to the other components of the entity's
interest in an associate or a joint venture in the reverse order of their seniority (ie priority in liquidation).
39. After the entity's interest is reduced to zero, additional losses are provided for, and a liability is
recognised, only to the extent that the entity has incurred legal or constructive obligations or made
payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports
profits, the entity resumes recognising its share of those profits only after its share of the profits equals
the share of losses not recognised.

© John Wiley and Sons Australia Ltd 2015 23.12


Chapter 23: Associates and joint ventures

PRACTICE QUESTIONS

Question 23.1 Adjustments where investor prepares and does not


prepare consolidated financial statements

Piano Ltd has a 30% interest in a joint venture, Mandolin Ltd, in which it invested $50 000 on 1
July 2014. The equity of Mandolin Ltd at the acquisition date was:

Share capital $ 30 000


Retained earnings 120 000

All the identifiable assets and liabilities of Mandolin Ltd were recorded at amounts equal to
their fair values. Profits and dividends for the years ended 30 June 2015 to 2017 were as follows:

Profit before tax Income tax expense Dividends paid


2015 $80 000 $30 000 $80 000 *
2016 70 000 25 000 15 000
2017 60 000 20 000 10 000

Required
A. Prepare journal entries in the records of Piano Ltd for each of the years ended 30 June 2015
to 2017 in relation to its investment in the joint venture, Mandolin Ltd. (Assume Piano Ltd
does not prepare consolidated financial statements.)
B. Prepare the consolidation worksheet entries to account for Piano Ltd’s interest in the joint
venture, Mandolin Ltd. (Assume Piano Ltd does prepare consolidated financial statements.)

30%
Piano Ltd Mandolin Ltd

At 1 July 2014:
Net fair value of identifiable assets
and liabilities of Mandolin Ltd = $150 000
Net fair value acquired = 30% x $150 000
= $45 000
Cost of investment = $50 000
Goodwill = $5 000

1. Journal entries in the accounts of Piano Ltd

1 July 2014 Investment in Mandolin Ltd Dr 50 000


Cash/Payable Cr 50 000
(Acquisition of shares in Mandolin Ltd)

2014 – 2015 Cash Dr 24 000


Investment in Mandolin Ltd Cr 24 000
(Dividend received from Mandolin Ltd: 30%
x $80 000)

30 June 2015 Investment in Mandolin Ltd Dr 15 000


Share of profit or loss of Cr 15 000
associates and joint ventures
(Recognition of profit in Mandolin Ltd:
30% x $50 000)

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Chapter 23: Associates and joint ventures

2015 – 2016 Cash Dr 4 500


Investment in Mandolin Ltd Cr 4 500
(Dividend received: 30% x $15 000)

30 June 2016 Investment in Mandolin Ltd Dr 13 500


Share of profit or loss of Cr 13 500
associates and joint ventures
(Recognition of profit in Mandolin Ltd:
30% x $45 000)

2016– 2017 Cash Dr 3 000


Investment in Mandolin Ltd Cr 3 000
(Dividend from joint venture:
30% x $10 000)

Investment in Mandolin Ltd * Dr 12 000


Share of profit or loss of Cr 12 000
associates and joint ventures
(Recognition of profit in Mandolin Ltd:
30% x $40 000)

2. Consolidation Worksheet Entries

30 June 2013:

Investment in Mandolin Ltd Dr 15 000


Share of profit or loss of associates and
joint ventures Cr 15 000
(30% x $50 000

Dividend revenue Dr 24 000


Investment in Mandolin Ltd Cr 24 000
(30% x $80 000

30 June 2014:

Retained earnings (1/7/15) Dr 9 000


Investment in Mandolin Ltd Cr 9 000
(30% x $(30 000))

Investment in Mandolin Ltd Dr 13 500


Share of profits or losses of associates and
joint ventures Cr 13 500
(30% x $45 000)

Dividend revenue Dr 4 500


Investment in Mandolin Ltd Cr 4 500
(30% x $15 000)

30 June 2015:

Investment in Mandolin Ltd Dr 0

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Chapter 23: Associates and joint ventures

Retained earnings (1/7/16) Cr 0


(30% [$30 000 + $(30 000)])

Investment in Mandolin Ltd Dr 12 000


Share of profit or loss of associates and
joint ventures Cr 12 000
(30% x $40 000)

Dividend revenue Dr 3 000


Investment in Mandolin Ltd Cr 3 000
(30% x $10 000)

© John Wiley and Sons Australia Ltd 2015 23.15


Chapter 23: Associates and joint ventures

Question 23.2 Accounting for associate/joint venture by an investor

Violin Ltd acquired a 40% interest in Drum Ltd in which it invested $170 000 on 1 July 2015.
Violin Ltd has signed a joint venture agreement with the other investors in Drum Ltd providing
joint control to all investors. The share capital, reserves and retained earnings of Drum Ltd at
the investment date and at 30 June 2016 were as follows:

1 July 2015 30 June 2016


Share capital $300 000 $300 000
Asset revaluation surplus — 100 000
General reserve — 15 000
Retained earnings 100 000 109 000

At 1 July 2015, all the identifiable assets and liabilities of Drum Ltd were recorded at amounts
equal to their fair values.
The following is applicable to Drum Ltd for the year to 30 June 2016:
(a) Profit (after income tax expense of $11 000): $39 000
(b) Increase in reserves
• General (transferred from retained earnings): $15 000
• Asset revaluation (revaluation of freehold land and buildings at 30 June 2016):
$100 000
(c) Dividends paid to shareholders: $15 000.
Violin Ltd does not prepare consolidated financial statements.
Required
Prepare the journal entries in the records of Violin Ltd for the year ended 30 June 2016 in
relation to its investment in the joint venture, Drum Ltd.

40%
Violin Ltd Drum Ltd

At 1 July 2015:

Net fair value of identifiable assets


and liabilities of Drum Ltd = $400 000
Net fair value acquired = 40% x $400 000
= $160 000
Cost of investment = $170 000
Goodwill = $10 000

Recorded profit – Drum Ltd $39 000


Investor’s Share – 40% 15 600

Increment in Asset Revaluation Surplus $40 000


(40% x $100 000)

Note: As the general reserve is created as an appropriation from Retained Earnings, then there is no
need to adjust for movements in general reserve.
The journal entries in the records of Violin Ltd for the year ended 30 June 2016 are:

© John Wiley and Sons Australia Ltd 2015 23.16


Chapter 23: Associates and joint ventures

1 July 2015 Investment in Drum Ltd D 170


r 0
0
0
Cash/Share capital C 170
r 00
0

2015– 2016 Cash D 6 000


r
Investment in Drum Ltd C 6 000
r
(Dividend from joint venture:
40% x $15 000)

30 June Investment in Drum Ltd D 15


2016 r 6
0
0
Share of profit or loss C 15
of associates and joint ventures r 60
0
(40% x $39 000)

Investment in Drum Ltd D 40


Share of other comprehensive r 0
income of associates and joint 0
ventures 0 40 000
Cr
(40% x $100 000)

Share of other comprehensive income Dr 40 000


of associates and joint ventures
Asset revaluation surplus Cr 40 000

© John Wiley and Sons Australia Ltd 2015 23.17


Chapter 23: Associates and joint ventures

Question 23.3 Inter-entity transactions where investor has no


subsidiaries

Lute Ltd acquired 20% of the ordinary shares of Sitar Ltd on 1 July 2014. At this date, all the
identifiable assets and liabilities of Lute Ltd were recorded at amounts equal to their fair values.
An analysis of the acquisition showed that $2000 of goodwill was acquired. Sitar Ltd was judged
to be an associate of Lute Ltd.
Lute Ltd has no subsidiaries, and records its investment in the associate, Sitar Ltd, in
accordance with AASB 128. In the 2015–16 period, Sitar Ltd recorded a profit of $100 000, paid
an interim dividend of $10 000 and, in June 2016, declared a further dividend of $15 000. In
June 2015, Sitar Ltd had declared a $20 000 dividend, which was paid in August 2015, at which
date it was recognised by Lute Ltd.
The following transactions have occurred between the two entities (all transactions are
independent unless specified).
(a) In January 2016, Sitar Ltd sold inventory to Lute Ltd for $15 000. This inventory had
previously cost Sitar Ltd $10 000, and remains unsold by Lute Ltd at the end of the
period.
(b) In February 2016, Lute Ltd sold inventory to Sitar Ltd at a before-tax profit of $5000.
Half of this was sold by Sitar Ltd before 30 June 2016.
(c) In June 2015, Sitar Ltd sold inventory to Lute Ltd for $18 000. This inventory had cost
Sitar Ltd $12 000. At 30 June 2015, this inventory remained unsold by Lute Ltd.
However, it was all sold by Lute Ltd before 30 June 2016.
The tax rate is 30%.

Required
Prepare the journal entries in the records of Lute Ltd in relation to its investment in Sitar Ltd
for the year ended 30 June 2016.

Profit for the period $100 000


Adjustments for inter-entity transactions:
Unrealised after tax profit in ending inventory (a)
[$5 000 (1 – 30%)] (3 500)
Unrealised after tax profit in ending inventory (b)
[$2 500 (1 – 30%)] (1 750)
Unrealised profit in opening inventory (c)
[$6 000 (1 – 30%) 4 200
98 950
Investor’s share – 20% $19 790

Journal entries in records of Lute Ltd:

1. Cash Dr 6 000
Investment in Sitar Ltd Cr 6 000
(20% ($10 000 + $20 000))

2. Investment in Sitar Ltd Dr 19 790


Share of profit or loss of associates and
joint ventures Cr 19 790

© John Wiley and Sons Australia Ltd 2015 23.18


Chapter 23: Associates and joint ventures

Question 23.4 Accounting for an associate across two years

On 1 July 2015, Key Ltd acquired 25% of the shares of Board Ltd for $400 000. The acquisition
of these shares gave Key Ltd significant influence over Board Ltd. At this date, the equity of
Board Ltd consisted of:
Share capital $660 000
General reserve 100 000
Retained earnings 440 000

At 1 July 2015, all the identifiable assets and liabilities of Board Ltd were recorded at
amounts equal to their fair values except for:

Carrying amount Fair value


Land $1 200 000 $1 600 000
Plant (cost $1 200 000) 1 000 000 1 100 000

The plant was considered to have a further useful life of 5 years. The land was revalued in the
records of Board Ltd and the revaluation model applied in the measurement of the land. The
tax rate is 30%.
At 30 June 2017, Board Ltd reported the following information:

Profit before tax $720 000


Income tax expense (300 000)
Profit after tax 420 000

Retained earnings at 1 July 2016 $820 000


1 240 000
Dividends paid (40 000)
Dividends declared (50 000)
Transfer to general reserve (30 000)
(120 000)
Retained earnings at 30 June 2017 $1 120 000
Share capital 640 000
General reserve 150 000
Asset revaluation surplus 310 000
Total equity $$2 220 000

Board Ltd also reported other comprehensive income relating to gains on revaluation of land
of $10 000.
Required
Prepare the journal entries for inclusion in the consolidation worksheet of Key Ltd at 30 June
2017 for the equity accounting of Board Ltd.

25%
Key Ltd Board Ltd
At 1 July 2015:

Net fair value of identifiable assets


and liabilities of Board Ltd = $1 200 000 (equity) + $400 000 (1 – 30%) (land)
+ $100 000 (1 –30%) (plant)
= $1 550 000
Net fair value acquired = 25% x $1 550 000
= $387 500
Cost of investment = $400 000

© John Wiley and Sons Australia Ltd 2015 23.19


Chapter 23: Associates and joint ventures

Goodwill = $12 500

Depreciation of plant p.a. after tax = 1/5 x $70 000


= $14 000
Consolidation Worksheet Entries

Retained earnings
Movement in retained earnings: $820 000 -$440 000 $380 000
Increase in general reserve ($120 000* - $100 000) 20 000
Pre-acquisition adjustments:
Depreciation of plant (14 000)
386 000
Investor’s share – 25% $96 500
*GR balance at 30/6/17 is $150 000. During that reporting period there was a Transfer to GR of $30
000. Therefore, at 30/6/16, the balance of GR was $120 000.

The consolidation worksheet entry at 30 June 2017 is:

Investment in Board Ltd Dr 96 500


Retained earnings (1/7/16) Cr 96 500

Asset revaluation surplus


Prior period:
Movement in asset revaluation surplus: $300 000 – $280 000 $20 000
Investor’s share – 25% $5 000
Current period
Movement in asset revaluation surplus: $310 000 – $300 000 $10 000
Investor’s share – 25% $2 500

The consolidation worksheet entries are:

Investment in Board Ltd Dr 5 000


Asset revaluation surplus Cr 5 000

Investment in Board Ltd Dr 2 500


Share of other comprehensive income of
associates and joint ventures Cr 2 500

Share of other comprehensive income of


associates and joint ventures Dr 2 500
Asset revaluation surplus Cr 2 500

Current period profit: 2016 – 2017

Profit for the period $420 000


Pre-acquisition adjustment:
Depreciation of plant (14 000)
$406 000
Investor’s share – 25% $101 500

The consolidation worksheet entries at 30 June 2017 are:

© John Wiley and Sons Australia Ltd 2015 23.20


Chapter 23: Associates and joint ventures

Investment in Board Ltd Dr 101 500


Share of profit or loss of associates and
joint ventures Cr 101 500

Dividend revenue Dr 22 500


Investment in Board Ltd Cr 22 500
(25% ($40 000 + $50 000))

© John Wiley and Sons Australia Ltd 2015 23.21


Chapter 23: Associates and joint ventures

Question 23.5 Accounting for an associate across two years with inter-
entity transactions

Use the information in question 23.4, and assume also that the following inter-entity
transactions occurred.
(a) On 1 July 2016, Key Ltd holds inventory sold to it by Board Ltd at an after-tax profit of
$20 000. This inventory was all sold to external entities by 30 June 2017.
(b) During the 2016–17 period, Board Ltd sold inventory to Key Ltd for $100 000 recording
an after-tax profit of $15 000. One-third of this inventory is still held by Key Ltd at 30
June 2017.
(c) On 1 January 2016, Board Ltd sold a vehicle to Key Ltd for $40 000. The vehicle was
recorded at a carrying amount of $38 000 by Board Ltd at the date of sale. The vehicle is
estimated to have a further 2-year life.
(d) From 1 July 2015, Key Ltd rented a warehouse from Board Ltd and paid rent of $15 000
p.a., the rent being paid in advance each year.
Required
Prepare the journal entries for inclusion in the consolidation worksheet of Key Ltd at 30 June
2017 for the equity accounting of Board Ltd.

25%
Key Ltd Board Ltd

At 1 July 2015:

Net fair value of identifiable assets


and liabilities of Board Ltd = $1 200 000 (equity) + $400 000 (1 – 30%) (land)
+ $100 000 (1 –30%) (plant)
= $1 550 000
Net fair value acquired = 25% x $1 550 000
= $387 500
Cost of investment = $400 000
Goodwill = $12 500

Depreciation of plant p.a. after tax = 1/5 x $70 000


= $14 000

Consolidation Worksheet Entries

Retained earnings (prior period: 1/7/15 to 30/6/16)


Movement in retained earnings: $820 000 -$440 000 $380 000
Increase in general reserve ($120 000 - $100 000) 20 000
Pre-acquisition adjustments:
Depreciation of plant (14 000)
$386 000
Adjustments for inter-entity transactions:
Inventory on hand at 1July 2016: $20 000(1 – 30%) (14 000)
Unrealised profit on sale of vehicle:
Gain $2000(1 -30%) less depreciation ($1 400/2 x ½ year) (350)
$371 650
Investor’s share – 25% $92 913
(rounded)

The consolidation worksheet entry at 30 June 2017 is:

© John Wiley and Sons Australia Ltd 2015 23.22


Chapter 23: Associates and joint ventures

Investment in Board Ltd Dr 92 913


Retained earnings (1/7/16) Cr 92 913

Asset revaluation surplus


Prior period:
Movement in asset revaluation surplus: $300 000 – $280 000 $20 000
Investor’s share – 25% $5 000
Current period
Movement in asset revaluation surplus: $310 000 – $300 000 $10 000
Investor’s share – 25% $2 500

The consolidation worksheet entries are:

Investment in Board Ltd Dr 5 000


Asset revaluation surplus Cr 5 000

Investment in Board Ltd Dr 2 500


Share of other comprehensive income of
associates and joint ventures Cr 2 500

Share of other comprehensive income of


associates and joint ventures Dr 2 500
Asset revaluation surplus Cr 2 500

Current period profit: 2016 – 2017

Profit for the period $420 000


Pre-acquisition adjustment:
Depreciation of plant (14 000)
$406 000
Adjustments for inter-entity transactions:
Realised profit in opening inventory 14 000
Unrealised profit in ending inventory: 1/3 x $15 000 (5 000)
Realised profit on vehicle: $1 400/2 700
$415 700
Investor’s share – 25% $103 925

The consolidation worksheet entries at 30 June 2017 are:

Investment in Board Ltd Dr 103 925


Share of profit or loss of associates and
joint ventures Cr 103 925

Dividend revenue Dr 22 500


Investment in Board Ltd Cr 22 500
(25% ($40 000 + $50 000))

© John Wiley and Sons Australia Ltd 2015 23.23


Chapter 23: Associates and joint ventures

Question 23.6 Inter-entity transactions where investor does not prepare


consolidated financial statements

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 2015–16, Bass Ltd recorded a profit of $100 000. During this period, Bass Ltd paid a
$10 000 dividend, declared in June 2015, 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 2014, Bass Ltd sold a non-current asset costing $10 000 to Acoustic Ltd for
$12 000. Acoustic Ltd applies a 10% p.a. on cost straight-line method of depreciation.
(b) On 1 January 2016, Bass Ltd sold an item of plant to Acoustic Ltd for $15 000. The
carrying amount of the asset to Bass Ltd at time of sale was $12 000. Acoustic Ltd applies
a 15% p.a. straight-line method of depreciation.
(c) A non-current asset with a carrying amount of $20 000 was sold by Bass Ltd to Acoustic
Ltd for $28 000 on 1 June 2016. Acoustic Ltd regarded the item as inventory and still had
the item on hand at 30 June 2016.
(d) On 1 July 2014, 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 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 2016 in relation to its investment in Bass
Ltd.

Profit for the period $100 000


Adjustments for inter-entity transactions:
Realised profit on equipment sold on 1/7/16 (a)
10% x $2 000 (1 - 30%) 140
Unrealised profit on sale of plant on 1/1/16 (b)
original profit $3 000 (1 – 30%) less
depreciation of 15% x ½ x $2 100 (1 942)
Unrealised profit in ending inventory (c)
$8 000 (1 – 30%) (5 600)
Realised profit on inventory to non-current asset sale:
10% x $2 000 (1 – 30%) 140
92 738

Investor’s share – 25% (approx.) $23 185

Journal entries in Acoustic Ltd:

Cash Dr 2 500
Investment in Bass Ltd Cr 2 500
(Dividend received from joint venture:
25% x $10 000)

Cash Dr 2 000
Investment in Bass Ltd Cr 2 000

© John Wiley and Sons Australia Ltd 2015 23.24


Chapter 23: Associates and joint ventures

(25% x $8 000)

Investment in Bass Ltd Dr 23 185


Share of profit or loss of associates and joint
ventures Cr 23 185

© John Wiley and Sons Australia Ltd 2015 23.25


Chapter 23: Associates and joint ventures

Question 23.7 Associate incurs losses

On 1 July 2014, Ukulele Ltd acquired 40% of the shares of Bongo Ltd for $100 000. At this date,
all the identifiable assets and liabilities of Bongo Ltd were recorded at amounts equal to fair
value except for inventory which had a fair value $10 000 greater than the carrying amount. All
inventory was sold by 30 June 2015. The tax rate is 30%. Bongo Ltd was classified as an
associate of Ukulele Ltd.
The profits and losses recorded by Bongo Ltd from the next 6 years were as follows:

2014–15 $30 000


2015–16 5 000
2016– (250 000)
1
7
2017– (50 000)
1
8
2018– 15 000
1
9
2019– 20 000
2
0
Required
Prepare the journal entries for the consolidation worksheet of Ukulele Ltd for the equity
accounting of Bongo Ltd in each of the years from 2014–20.

Table of workings
Year Post-acquisition Share of Cumulative Equity-
Profit/(Loss) Profit/(Loss) share accounted
40% balance of
investment
2014-15 * $23 000 $9 200 $9 200 $109 200
2015-16 5 000 2 000 11 200 111 200
2016-17 (250 000) (100 000) (88 800) 11 200
2017-18 (50 000) (20 000) (108 800) 0
2018-19 15 000 6 000 (102 800) 0
2019-20 20 000 8 000 (94 800 5 200

*In the 2014-15 year it is necessary to calculate the share of post-acquisition profits of Bongo Ltd:
Recorded profits of Bongo Ltd = $30 000
Pre-acquisition profits = $10 000 (1 - 30%) (inventory sale)
= $7 000
Post-acquisition profits = $23 000
40% share = $9 200

The journal entries are:

30/6/15 Investment in associates and joint ventures Dr 9 200


Share of profit or loss of associates and
joint ventures Cr 9 200

30/6/16 Investment in associates and joint ventures Dr 11 200

© John Wiley and Sons Australia Ltd 2015 23.26


Chapter 23: Associates and joint ventures

Retained earnings (1/7/15) Cr 9 200


Share of profit or loss of associates and
joint ventures Cr 2 000

30/6/17 Share of profit or loss of associates and joint ventures Dr 100 000
Retained earnings (1/7/16) Cr 11 200
Investment in associates and joint ventures Cr 88 800

30/6/18 Share of profit or loss of associates and joint ventures Dr 11 200


Retained earnings (1/7/17) Dr 88 800
Investment in associates and joint ventures Cr 100 000

30/6/19 Retained earnings (1/7/18) Dr 100 000


Investment in associates and joint ventures Cr 100 000

30/6/20 Retained earnings (1/7/19) Dr 100 000


Investment in associates and joint ventures Cr 94 800
Share of profit or loss of associates and joint
ventures Cr 5 200

© John Wiley and Sons Australia Ltd 2015 23.27


Chapter 23: Associates and joint ventures

Question 23.8 Disclosure of movements in asset revaluation surplus in


associate
Maracas Ltd entered into a joint venture agreement with another company to each buy 50% of
Tuba Ltd on 1 July 2015 and to operate Tuba Ltd on a joint control basis. Maracas Ltd
acquired its shares in Tuba Ltd for $110 000. The equity of Tuba Ltd consisted of $100 000
share capital and $80 000 retained earnings.
At 1 July 2015, all the identifiable assets and liabilities of Tuba Ltd were recorded at amounts
equal to their fair values except for:
 Land: this had a fair value of $110 000 which was $20 000 greater than the carrying amount
in Tuba Ltd. After 1 July 2015, Tuba Ltd revalued the land to fair value in its own records
and continued to measure it using the revaluation model. The fair value of the land at 30 June
2016 was $140 000 and at 30 June 2017 was $160 000.
 Plant: At 1 July 2015, the plant had a fair value of $240 000 which was $10 000 greater than
the carrying amount in Tuba Ltd. The plant was estimated to have a further 5-year life.
 Inventory: At 1 July 2015, the inventory held by Tuba Ltd had a fair value of $85 000 which
was $15 000 greater than its cost to Tuba Ltd. The inventory was all sold by 30 June 2017.
Transactions between Maracas Ltd and Tuba Ltd consisted of:
 During the 2015–16 period, Tuba Ltd sold inventory to Maracas Ltd at a before-tax profit of
$6000. Half of this inventory was still on hand at 30 June 2016.
 During the 2016–17 period, Tuba Ltd sold inventory to Maracas Ltd for $70 000 at a before-
tax profit of $8000. Of this inventory, 10% was still on hand in Maracas Ltd at 30 June 2017.
 On 1 January 2016, Maracas Ltd sold a vehicle to Tuba Ltd at a before-tax profit of $3000.
The vehicle had a further 3-year life;
The retained earnings balance of Tuba Ltd at 30 June 2016 was $170 000. The tax rate is
30%.
The consolidated statements of profit or loss and other comprehensive income of Maracas Ltd
at 30 June 2017 — not including the equity-accounted results of Tuba Ltd — and of Tuba Ltd
were as follows:

Maracas Ltd Tuba Ltd


(Consolidated)
Revenues $500 000 240 00
0
Expenses 280 000 80 000
Profit before income tax 220 000 160 00
0
Income tax expense (80 000) (50 000
)
Profit for the year $140 000 110 00
0
Other comprehensive income:
Gains on revaluation of non-current 30 000 14 000
assets
Comprehensive income $170 000 $124 0
00
Required
A. Prepare the journal entries for inclusion in the consolidation worksheet of Maracas Ltd for
the application of the equity method to Tuba Ltd at 30 June 2017.
B. Prepare the consolidated statement of profit or loss and other comprehensive income of
Maracas Ltd at 30 June 2017 including the equity-accounted results of Tuba Ltd.

At 1 July 2015:

© John Wiley and Sons Australia Ltd 2015 23.28


Chapter 23: Associates and joint ventures

Net fair value of identifiable assets


and liabilities of Tuba Ltd = $100 000 + $80 000
+ $20 000 (1 – 30%) (land)
+ $10 000 (1 –30%) (plant)
+ $15 000 (1 – 30%) (inventory)
= $211 500
Net fair value acquired = 50% x $211 500
= $105 750
Cost of investment = $110 000
Goodwill = $4 250

A. Consolidation Worksheet Entries


Retained earnings
Movement in retained earnings: $170 000 -$80 000 $90 000
Pre-acquisition adjustments:
Inventory: $15 000 (1 – 30%) (10 500)
Depreciation of plant: 1/5 x $10 000 (1 – 30%) (1 400)
$78 100
Adjustments for inter-entity transactions:
Inventory on hand at 30 June 2016: ½ x $6 000(1 – 30%) (2 100)
Unrealised profit on sale of vehicle:
Gain $3000(1 -30%) less depreciation (1/3 x ½ x$2 100) (1 750)
$74 250
Investor’s share – 50% $37 125

The consolidation worksheet entry at 30 June 2017 is:

Investment in Tuba Ltd Dr 37 125


Retained earnings (1/7/16) Cr 37 125

Asset revaluation surplus (re: Land revaluations)


Prior period
Movement in asset revaluation surplus: $35 000 - $14 000 $21 000
Investor’s share – 50% $10 500
Current period
Movement in asset revaluation surplus: $49 000 - $35 000 $14 000
Investor’s share – 50% $7 000

The consolidation worksheet entries are:

Investment in Tuba Ltd Dr 21 000


Asset revaluation surplus Cr 21 000

Investment in Tuba Ltd Dr 7 000


Share of other comprehensive income of
associates and joint ventures Cr 7 000

Share of other comprehensive income of


associates and joint ventures Dr 7 000
Asset revaluation surplus Cr 7 000

© John Wiley and Sons Australia Ltd 2015 23.29


Chapter 23: Associates and joint ventures

Current period profit: 2016 – 2017

Profit for the period $110 000


Pre-acquisition adjustment:
Depreciation of plant (1 400)
$108 600
Adjustments for inter-entity transactions:
Realised profit in opening inventory 2 100
Unrealised profit in ending inventory: 10% x $8 000 (1 – 30%) (560)
Realised profit on vehicle: 1/3 x $2 100 700
$110 840
Investor’s share – 50% $55 420

The consolidation worksheet entries at 30 June 2017 are:

Investment in Tuba Ltd Dr 55 420


Share of profit or loss of associates and
joint ventures Cr 55 420

B. Consolidated Statement of Profit or Loss and Other Comprehensive Income

Maracas Ltd
Consolidated Statement of Profit or Loss and Other Comprehensive Income
at 30 June 2017

Revenues $500 000


Expenses 280 000
Trading profit 220 000
Share of profit or loss of associates and joint ventures
accounted for using the equity method 55 420
Profit before tax 275 420
Income tax expense 80 000
Profit for the year $195 420
Other comprehensive income:
Gains on revaluation of non-current assets 30 000
Share of other comprehensive income of associates and
joint ventures accounted for using the equity method 7 000
Other comprehensive income $37 000
Comprehensive income for the year $232 420

© John Wiley and Sons Australia Ltd 2015 23.30


Chapter 23: Associates and joint ventures

Question 23.9 Investor prepares consolidated financial statements,


multiple periods

On 1 July 2014, Harp Ltd purchased 30% of the shares of Lyre Ltd for $60 050. At this date,
the ledger balances of Lyre Ltd were:

Capital $150 000 Assets $225 000


Other reserves 30 000 Less: Liabilities (30 000)
Retained 15 000
earnings $195 000 $195 000

At 1 July 2014, all the identifiable assets and liabilities of Lyre Ltd were recorded at fair value
except for plant whose fair value was $5000 greater than carrying amount. This plant has an
expected future life of 5 years, the benefits being received evenly over this period. Dividend
revenue is recognised when dividends are declared. The tax rate is 30%.
The results of Lyre Ltd for the next 3 years were:

30 June 2015 30 June 2016 30 June 2017


Profit/(loss) before income $ 50 000 $ 40 000 $(5 000)
tax (20 000) (20 000) —
Income tax expense 30 000 20 000 (5 000)
Profit/(loss) 15 000 5 000 2 000
Dividend paid 10 000 5 000 1 000
Dividend declared
Required
Prepare, in journal entry format, for the years ending 30 June 2015, 2016 and 2017, the
consolidation worksheet adjustments to include the equity-accounted results for the associate,
Lyre Ltd, in the consolidated financial statements of Harp Ltd.

30%
Harp Ltd Lyre Ltd

At 1 July 2014:

Net fair value of identifiable assets


and liabilities of Lyre Ltd = $195 000 (equity) + $5 000 (1 –30%) (plant)
= $198 500
Net fair value acquired = 30% x $198 500
= $59 550
Cost of investment = $60 050
Goodwill = $500
Depreciation of plant p.a.
after tax = 1/5 x $3 500
= $700

1. Consolidation Worksheet Entries

2014 – 2015
Recorded profit for the period $30 000
Pre-acquisition adjustments:
Depreciation of plant 700
29 300
Investor’s share – 30% $8 790

© John Wiley and Sons Australia Ltd 2015 23.31


Chapter 23: Associates and joint ventures

The consolidation worksheet entries at 30 June 2015 are:

Investment in Lyre Ltd Dr 8 790


Share of profit or loss of associates and
joint ventures Cr 8 790

Dividend revenue Dr 7 500


Investment in Lyre Ltd Cr 7 500
(30% [$15 000 + $10 000])

2015 – 2016

Profit for the period $20 000


Pre-acquisition adjustment:
Depreciation of plant 700
$19 300
Investor’s share – 30% $5 790

The consolidation worksheet entries at 30 June 2016 are:

Investment in Lyre Ltd Dr 1 290


Retained earnings (1/7/15) Cr 1 290
(30%[$20 000 - $15 000 - $700])

Investment in Lyre Ltd Dr 5 790


Share of profit or loss of associates and
joint ventures Cr 5 790

Dividend revenue Dr 3 000


Investment in Lyre Ltd Cr 3 000
(30% ($5 000 + $5 000))

2016 – 2017

Profit (loss) for the period $ (5 000)


Pre-acquisition adjustment:
Depreciation of plant 700
$(5 700)
Investor’s share – 30% $(1 710)

The consolidation worksheet entries at 30 June 2017 are:

Investment in Lyre Ltd Dr 4 080


Retained earnings (1/7/16) Cr 4 080
(30%[$30 000 – $15 000 – (2 x $700)] )

Share of profit or loss of associates and joint


ventures Dr 1 710
Investment in Lyre Ltd Cr 1 710

Dividend revenue Dr 900


Investment in Lyre Ltd Cr 900
(30% [$2 000 + $1 000])

© John Wiley and Sons Australia Ltd 2015 23.32


Chapter 23: Associates and joint ventures

Question 23.10 Consolidated worksheet entries to include investment in


associate

On 1 July 2013, Bongo Ltd acquired 30% of the shares of Tom-Tom Ltd for $60 000. At this
date, the equity of Tom-Tom Ltd consisted of:

Share capital (100 000 shares) $100 000


Asset revaluation surplus 50 000
Retained earnings 20 000

On 1 July 2015, the ownership interest of 30%, together with board representation and a
diverse spread of remaining shareholders, was sufficient for the investor to demonstrate
significant influence, and accordingly to begin accounting for the investment as an associate.
The fair value of the 30% ownership interest in Tom-Tom Ltd at 1 July 2015 was $70 000. At
this date, the equity of Tom-Tom Ltd consisted of:

Share capital (100 000 shares) $100 000


Asset revaluation surplus 60 000
General reserve 10 000
Retained earnings 40 000

At this date, all the identifiable assets and liabilities of Tom-Tom Ltd were recorded at fair
value except for the following assets:

Carrying amount Fair value


Machinery $20 000 $25 000
Inventory 10 000 12 000

The machinery was expected to have a further 5-year life, benefits being received evenly over
this period. The inventory was all sold by 30 June 2016.
Dividends paid by Tom-Tom Ltd in the 2013–14 period were $10 000, and $12 000 was paid in
the 2014–15 period. In June 2015, Tom-Tom Ltd declared a dividend of $10 000. Dividend
revenue is recognised when dividends are declared.
During the period ending 30 June 2016, the following events occurred:
(a) Tom-Tom Ltd sold to Bongo Ltd some inventory, which had previously cost Tom-Tom
Ltd $8000, for $10 000. Bongo Ltd still had one-quarter of these items on hand at 30 June
2016.
(b) On 1 January 2016, Bongo Ltd sold a non-current asset to Tom-Tom Ltd for $50 000,
giving a profit before tax of $10 000 to Bongo Ltd. Tom-Tom Ltd applied a 12% p.a. on
cost straight-line depreciation method to this asset.
(c) On 31 December 2015, Tom-Tom Ltd paid an interim dividend of $5000.
(d) At 30 June 2016, Tom-Tom Ltd calculated that it had earned a profit of $32 000, after an
income tax expense of $8000. Tom-Tom Ltd then declared a $5000 dividend, to be paid in
September 2016, and transferred $3000 to the general reserve.
(e) The tax rate is 30%.
Required
Prepare the journal entries for the consolidation worksheet of Bongo Ltd at 30 June 2016 for
the inclusion of the equity-accounted results of Tom-Tom Ltd.

30%
Bongo Ltd Tom-Tom Ltd

© John Wiley and Sons Australia Ltd 2015 23.33


Chapter 23: Associates and joint ventures

At 1 July 2015:

Net fair value of identifiable assets


and liabilities of Tom-Tom Ltd = $100 000 + $60 000 + $10 000 + $40 000(equity)
+ $5 000 (1 – 30%)(machinery)
+ $2 000 (1 – 30%) (inventory))
= $214 900
Net fair value acquired = 30% x $214 900
= $64 470
Acquisition-date fair value of
investment = $70 000
Goodwill = $5 530

Depreciation of machinery p.a. = 1/5 x $3 500


= $700
Adjustment for inventory = $1 400

At 1 July 2015, Bongo Ltd would pass the following journal entry to r-measure the investment in
Tom-Tom Ltd to fair value:

Investment in Tom-Tom Ltd Dr 10 000


Gain on Investment Cr 10 000
(Re-measurement of investment to fair value:
$70 000 - $60 000)

1 July 2015 – 30 June 2016

Profit for the period $32 000


Adjustments for inter-entity transactions:
Unrealised profit on sale of inventory
(1/4 x $2 000) (1 – 30%) (350)
Unrealised profit on sale of non-current asset:
Profit on sale of $10 000 (1 - 30%) less depreciation
of (1/2 x 12% x $7 000) (6 580)
$25 070
Pre-acquisition adjustment:
Inventory (1 400)
Depreciation of machinery: 1/5 x $3500 (700)
$22 970
Investor’s share – 30% x $22 970 $6 891

The entries in the consolidation worksheet at 30 June 2016 are:

Dividend revenue Dr 3 000


Investment in Tom-Tom Ltd Cr 3 000
(30% [$5 000 + $5 000])

Investment in Tom-Tom Ltd Dr 6 891


Share of profit or loss of associates and
joint ventures Cr 6 891

© John Wiley and Sons Australia Ltd 2015 23.34


Chapter 23: Associates and joint ventures

Question 23.11 Adjustments where investor does and does not prepare
consolidated financial statements

On 1 July 2014, Bell Ltd signed a joint venture agreement with two other investors. They agreed
to acquire the shares of Chime Ltd and operate it as a joint venture with the investors having
joint control over the company. On 1 July 2014, Bell Ltd acquired a 30% interest in Chime Ltd
at a cost of $13 650.
The equity of Chime Ltd at acquisition date was:

Share capital (20 000 shares) $20 000


Retained earnings 10 000

All the identifiable assets and liabilities of Chime Ltd at 1 July 2014 were recorded at
amounts equal to their fair values except for some depreciable non-current assets with a fair
value of $15 000 greater than carrying amount. These depreciable assets are expected to have a
further 5-year life.

Additional information
(a) At 30 June 2016, Bell Ltd had inventory costing $100 000 (2015 — $60 000) on hand
which had been purchased from Chime Ltd. A profit before tax of $30 000 (2015 —
$10 000) had been made on the sale.
(b) All companies adopt the recommendations of AASB 112 regarding tax-effect accounting.
Assume a tax rate of 30% applies.
(c) Information about income and changes in equity of Chime Ltd as at 30 June 2016 is:

Profit before tax $ 360 000


Income tax expense (180 000)
Profit 180 000
Retained earnings at 1/7/15 50 000
230 000
Dividend paid $(50 000)
Dividend declared (50 000) (100 000)
Retained earnings at 30/6/16 $ 130 000

(d) All dividends may be assumed to be out of the profit for the current year. Dividend
revenue is recognised when declared by directors.
(e) The equity of Chime Ltd at 30 June 2016 was:

Share capital $ 20 000


Asset revaluation surplus 30 000
General reserve 5 000
Retained earnings 130 000

The asset revaluation surplus arose from a revaluation of freehold land made at 30 June 2016.
The general reserve arose from a transfer from retained earnings in June 2015.

Required
A. Assume Bell Ltd does not prepare consolidated financial statements. Prepare the journal
entries in the records of Bell Ltd for the year ended 30 June 2016 in relation to the
investment in Chime Ltd.
B. Assume Bell Ltd does prepare consolidated financial statements. Prepare the consolidated
worksheet entries for the year ended 30 June 2016 for inclusion of the equity-accounted
results of Chime Ltd.

© John Wiley and Sons Australia Ltd 2015 23.35


Chapter 23: Associates and joint ventures

30%
Bell Ltd Chime Ltd

At 1 July 2014:
Net fair value of identifiable assets
and liabilities of Chime Ltd = $20 000 + $10 000 (equity)
+ $15 000 (1 – 30%) (assets)
= $40 500
Net fair value acquired = 30% x $40 500
= $12 150
Cost of investment = $13 650
Goodwill = $1 500

Depreciation:
Non-current assets: – 20% x $15 000 (1 -30%) = $2 100

1. Bell Ltd does not prepare consolidated financial statements

Profit for 2015-2016 period $180 000


Pre-acquisition adjustments:
Depreciation 2 100
Post-acquisition profit 177 900
Adjustments for inter-entity transactions:
Unrealised after tax profit in ending inventory
$30 000 (1 – 30%) (21 000)
Realised profit on opening inventory
$10 000 (1 – 30%) 7 000
$163 900
Investor’s share – 30% $49 170

Increase in asset revaluation surplus $30 000


Investor’s share – 30% $9 000

The required entries in Bell Ltd’s accounts for the 2015-2016 year are:

Cash Dr 15 000
Investment in Chime Ltd Cr 15 000
(30% x $50 000 – dividend paid)

Dividend receivable Dr 15 000


Investment in Chime Ltd Cr 15 000
(30% x $50 000 – dividend provided)

Investment in Chime Ltd Dr 9 000


Share of other comprehensive income of
associates and joint ventures Cr 9 000
(30% x $30 000)

Share of other comprehensive income of associates


and joint ventures Dr 9 000
Asset revaluation surplus Cr 9 000
(30% x $30 000)

© John Wiley and Sons Australia Ltd 2015 23.36


Chapter 23: Associates and joint ventures

Investment in Chime Ltd Dr 49 170


Share of profits or losses of associates and
joint ventures Cr 49 170

2. Bell Ltd prepares consolidated financial statements

Change in retained earnings balance 2014 – 2015


($50 000 - $10 000) $40 000
Pre-acquisition adjustments:
Depreciation 2 100
Post-acquisition equity 37 900
Adjustments:
General reserve transfers 5 000
Unrealised profit in inventory at 30/6/16
($10 000 (1 - 30%) (7 000)
$35 900
Investor’s share – 30% $10 770

The consolidation worksheet entries at 30/6/16 are:

Investment in Chime Ltd Dr 10 770


Retained earnings (1/7/15) Cr 10 770

Investment in Chime Ltd Dr 9 000


Asset revaluation surplus Cr 9 000
(30% x $30 000)

Investment in Chime Ltd Dr 49 170


Share of profits or losses of associates and
joint ventures Cr 49 170

Dividend revenue Dr 15 000


Investment in Chime Ltd Cr 15 000
(30% x $50 000 – dividend paid)

Dividend revenue Dr 15 000


Investment in Chime Ltd Cr 15 000
(30% x $50 000 – dividend declared)

© John Wiley and Sons Australia Ltd 2015 23.37


Chapter 23: Associates and joint ventures

Question 23.12 Accounting for associate joint venture within — and


where there are no — consolidated financial statements
On 1 July 2013, Cymbal Ltd purchased 40% of the shares of Gong Ltd for $63 200 and signed a
joint venture agreement with the two other shareholders in Gong Ltd. At that date, equity of
Gong Ltd consisted of:
Share capital $125 000
Retained earnings 11 000

At 1 July 2013, the identifiable assets and liabilities of Gong Ltd were recorded at amounts
equal to their fair values.
Information about income and changes in equity for both companies for the year ended 30
June 2016 was as shown opposite.

Cymbal Ltd Gong Ltd


Profit before tax $ 26 000 $ 23 500
Income tax expense (10 600) (5 400)
Profit 15 400 18 100
Retained earnings (1/7/15) 18 000 16 000
33 400 34 100
Dividend paid (5 000) (4 000)
Dividend declared (10 000) (5 000)
(15 000) (9 000)
Retained earnings (30/6/16) $ 18 400 $ 25 100

Additional information
(a) Cymbal Ltd recognised the final dividend revenue from Gong Ltd before receipt of cash.
Gong Ltd declared a $6000 dividend in June 2015, this being paid in August 2015.
(b) On 31 December 2015, Gong Ltd sold Cymbal Ltd a motor vehicle for $12 000. The
vehicle had originally cost Gong Ltd $18 000 and was written down to $9000 for both tax
and accounting purposes at time of sale to Cymbal Ltd. Both companies depreciated
motor vehicles at the rate of 20% p.a. on cost.
(c) The beginning inventory of Gong Ltd included goods at $4000 bought from Cymbal Ltd;
their cost to Cymbal Ltd was $3200.
(d) The ending inventory of Cymbal Ltd included goods purchased from Gong Ltd at a profit
before tax of $1600.
(e) The tax rate is 30%.

Required
A. Prepare the journal entries in the records of Cymbal Ltd to account for the investment in
Gong Ltd in accordance with AASB 128 for the year ended 30 June 2016 assuming Cymbal
Ltd does not prepare consolidated financial statements.
B. Prepare the consolidated worksheet entries in relation to the investment in Gong Ltd,
assuming Cymbal Ltd does prepare consolidated financial statements at 30 June 2016.

40%
Cymbal Ltd Gong Ltd

At 1 July 2013:

Net fair value of identifiable assets


and liabilities of Gong Ltd = $125 000 + $11 000
= $136 000
Net fair value acquired = 40% x $136 000

© John Wiley and Sons Australia Ltd 2015 23.38


Chapter 23: Associates and joint ventures

= $54 400
Cost of investment = $63 200
Goodwill = $8 800

1. Cymbal Ltd does not prepare consolidated financial statements

Profit for the period 2015 – 2016 $18 100


Adjustments for inter-entity transactions:
Realised profit on motor vehicle
20% x $3 000 (1 – 30%) 420
Realised profit in opening inventory
$800 (1 – 30%) 560
Unrealised profit in ending inventory
$1 600 (1 – 30%) (1 120)
$ 17 960

Investor’s share – 40% $7 184

The entries in the books of Cymbal Ltd at 30 June 2016 are:

Cash Dr 1 600
Investment in Gong Ltd Cr 1 600
(40% x $4 000 – dividend paid)

Dividend receivable Dr 2 000


Investment in Gong Ltd Cr 2 000
(40% x $5 000 – dividend declared)

Investment in Gong Ltd Dr 7 184


Share of profits or losses of associates and
joint ventures Cr 7 184

2. Cymbal Ltd prepares consolidated financial statements

Change in retained earnings 2014 – 2015 $5 000


($16 000 – $11 000)
Adjustments for inter-entity transactions:
Unrealised profit on motor vehicle
Profit on sale $3 000 (1 – 30%) less
½ x 20% x $2 100 (1 890)
Unrealised profit in ending inventory
$800 (1 – 30%) (560)
$2 550

Investor’s share – 40% $1 020

The consolidation worksheet entries at 30 June 2016 are:

Investment in Gong Ltd Dr 1 020


Retained earnings (1/7/15) Cr 1 020

© John Wiley and Sons Australia Ltd 2015 23.39


Chapter 23: Associates and joint ventures

Investment in Gong Ltd Dr 7 184


Share of profits or losses of associates and
joint ventures Cr 7 184

Dividend revenue Dr 1 600


Investment in Gong Ltd Cr 1 600
(40% x $4 000 – dividend paid)

Dividend revenue Dr 2 000


Investment in Gong Ltd Cr 2 000
(40% x $5 000 – dividend provided)

© John Wiley and Sons Australia Ltd 2015 23.40


Chapter 23: Associates and joint ventures

Question 23.13 Consolidated financial statements including investments


in associates
Trombone Ltd acquired 90% of the ordinary shares of Tuba Ltd on 1 July 2012 at a cost of
$150 750. At that date the equity of Tuba Ltd was:

Share capital (100 000 shares) $100 000


Reserve 8 000
Retained earnings 12 000

At 1 July 2012, all the identifiable assets and liabilities of Tuba Ltd were at fair value except
for the following assets:

Carrying amount Fair value


Inventory $10 000 $15 000
Depreciable assets 25 000 35 000

The inventory was all sold by 30 June 2013. Depreciable assets have an expected further 5-
year life, with depreciation being calculated on a straight-line basis. Valuation adjustments are
made on consolidation.
Trombone Ltd uses the partial goodwill method.
On 1 July 2015, Trombone Ltd acquired 25% of the capital of Accordion Ltd for $3500. All
the identifiable assets and liabilities of Accordion Ltd were recorded at fair value except for the
following:

Carrying amount Fair value


Inventory $1 000 $1 500
Depreciable assets 6 000 7 000

All this inventory was sold in the 12 months after 1 July 2015. The depreciable assets were
considered to have a further 5-year life.
Information on Accordion Ltd’s equity position is as follows:

1 July 2015 30 June 2016


Share capital $10 000 $10 000
General reserve — 2 000
Retained earnings 2 150 4 000

For the year ended 30 June 2017, Accordion Ltd recorded a profit before tax of $2600 and an
income tax expense of $600. Accordion Ltd paid a dividend of $200 in January 2017. Trombone
Ltd regards Accordion Ltd as an associated company.
During the year ended 30 June 2017, Accordion Ltd sold inventory to Tuba Ltd for $6000.
The cost of this inventory to Accordion Ltd was $4000. Tuba Ltd has resold only 20% of these
items. However, Tuba Ltd made a profit before tax of $500 on the resale of these items.
On 1 January 2016, Trombone Ltd sold Accordion Ltd a motor vehicle for $4000, at a profit
before tax of $800 to Trombone Ltd. Both companies treat motor vehicles as non-current assets.
Both companies charge depreciation at 20% p.a. on the reducing balance. Assume a tax rate of
30%.
Information about income and changes in equity for Trombone Ltd and its subsidiary, Tuba
Ltd, for the year ended 30 June 2017 is as follows:

Trombone Tuba Ltd


Ltd
Sales revenue $200 000 $60 000

© John Wiley and Sons Australia Ltd 2015 23.41


Chapter 23: Associates and joint ventures

Less: Cost of sales 110 000 30 000


Gross profit 90 000 30 000
Less: Depreciation 16 000 4 000
Other expenses 22 000 3 000
38 000 7 000
52 000 23 000
Plus: Other revenue 30 000 5 000
Profit before income tax 82 000 28 000
Less: Income tax expense 20 000 10 000
Profit 62 000 18 000
Plus: Retained earnings 120 000 80 000
(1/7/16) 182 000 98 000
20 000 4 000
Less: Dividend paid $162 000 $94 000
Retained earnings (30/6/17)

Required
A. Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of Trombone Ltd and its subsidiary Tuba Ltd as at 30 June
2017.
B. In the consolidated statement of financial position, what would be the balance of the
investment account ‘Shares in Accordion Ltd’?

90%
Trombone Ltd Tuba Ltd

25%

Accordion Ltd

A: Consolidation worksheet entries – Trombone Ltd – Tuba Ltd

At 1 July 2012:

Net fair value of identifiable assets


and liabilities of Tuba Ltd = $100 000 + $8 000 + $12 000 (equity)
+ $5 000 (1 – 30%) (inventory)
+ $10 000 (1 – 30%)(depreciable assets)
= $130 500
(a) Consideration transferred = $150 750
(b) Non-controlling interest = 10% x $130 500
= $13 050
Aggregate of (a) and (b) = $163 800
Goodwill = $33 300

1. Business combination valuation entry

Depreciation expense Dr 2 000


Income tax expense Cr 600
Retained earnings (1/7/16) Dr 5 600
Transfer from business combination
valuation reserve Cr 7 000

© John Wiley and Sons Australia Ltd 2015 23.42


Chapter 23: Associates and joint ventures

2. Pre-acquisition entries

Retained earnings (1/7/16)* Dr 13 950


Share capital Dr 90 000
General reserve Dr 7 200
Business combination valuation reserve Dr 6 300
Goodwill Dr 33 300
Shares in Tuba Ltd Cr 150 750

* = (90% x $12 000) + 90% ($5 000 - $1 500) (BCVR - inventory)

Transfer from business combination


valuation reserve Dr 6 300
Business combination valuation reserve Cr 6 300

3. NCI in equity of Tuba Ltd at 1/7/12

Retained earnings (1/7/16) Dr 1 200


Share capital Dr 10 000
General reserve Dr 800
Business combination valuation reserve Dr 1 050
NCI Cr 13 050

4. NCI in equity of Tuba Ltd: 1/7/12 – 30/6/16

Retained earnings (1/7/16) Dr 6 240


Business combination valuation reserve Cr 350
NCI Cr 5 890
(RE: 10% ($80 000 - $12 000 – $5 600)
BCVR: 10% x $3 500 [inventory])

5. NCI in equity of Tuba Ltd: 1/7/16 – 30/6/017

NCI share of profit Dr 1 660


NCI Cr 1 660
(10% ($18 000 – [$2 000 - $600]))

Transfer from business combination


valuation reserve Dr 700
Business combination valuation reserve Cr 700

NCI Dr 400
Dividend paid Cr 400
(10% x $4 000)

6. Dividend paid

Other revenue Dr 3 600


Dividend paid Cr 3 600
(90% x $4 000)

© John Wiley and Sons Australia Ltd 2015 23.43


Chapter 23: Associates and joint ventures

Equity accounting entries: Trombone Ltd – Accordion Ltd

At 1 July 2015:

Net fair value of identifiable assets


and liabilities of Accordion Ltd = $10 000 + $2 150 (equity)
+ $500 (1 – 30%) (inventory)
+ $1 000 (1 – 30%) (depreciable assets)
= $13 200
Net fair value acquired = 25% x $13 200
= $3 300
Cost of investment = $3 500
Goodwill = $200

Inventory adjustment = $350


Depreciation p.a. = 1/5 x $1000(1 – 30%)
= $140

Change in Retained Earnings 2015 – 2016 $1 850


($4 000 - $2 150)
Pre-acquisition adjustments:
Inventory (350)
Depreciation (140)
Post-acquisition equity $1 360
Adjustments for inter-entity transactions:
Unrealised profit on sale of motor vehicle
Profit of $800 (1 – 30%) less depreciation
of ½ x 20% x $560 (504)
Increase in general reserve 2 000
$2 856

Investor’s share – 25% $714

Profit for the period 2016-17 $2 000


Pre-acquisition adjustments:
Depreciation (140)
Post-acquisition profit 1 860
Adjustments for inter-entity transactions:
Realised profit on motor vehicle
20% ($560 - $56) 101
Unrealised profit on ending inventory
(80% x $2 000) (1 – 30%) (1 120)
$841

Investor’s share – 25% $210

© John Wiley and Sons Australia Ltd 2015 23.44


Chapter 23: Associates and joint ventures

The equity accounting entries are:

7. Equity accounting – Accordion Ltd

Dividend revenue Dr 50
Investment in Accordion Ltd Cr 50
(25% x $200)

Investment in Accordion Ltd Dr 924


Retained earnings (1/7/16) Cr 714
Share of profits or losses of associates and
joint ventures Cr 210

Financial Trombo Tuba Adjustments Group NCI Parent


Statements ne Ltd Dr Cr Dr Cr
Ltd
Sales revenue 200 000 60 000 260 000
Other revenue 30 000 5 000 6 3 600 31 350
7 50
230 000 65 000 291 350
Cost of sales 110 000 30 000 140 000
Depreciation 16 000 4 000 1 2 000 22 000
Other expenses 22 000 3 000 25 000
148 000 37 000 187 000
82 000 28 000 104 350
Share of - - 210 7 210
profits/losses
from associates
and JVs
Profit before tax 82 000 28 000 104 560
Tax expense 20 000 10 000 600 1 29 400
Profit 62 000 18 000 75 160 5 1 660 73 500
Retained earnings 120 000 80 000 1 5 600 714 7 181 164 3 1 200 173 724
(1/7/16) 2 13 950 4 6 240
Transfer from - - 2 6 300 7 000 1 700 5 700 -
BCV reserve
182 000 98 000 257 024 247 224
Dividend paid 20 000 4 000 3 600 6 20 400 400 5 20 000
Retained earnings 162 000 94 000 236 624 227 224
(30/6/17)

© John Wiley and Sons Australia Ltd 2015 23.45


Chapter 23: Associates and joint ventures

Question 23.13 (cont’d)


TROMBONE LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the financial year ending 30 June 2017

Revenues:
Sales revenue $260 000
Other revenue 31 350
$291 350
Expenses:
Cost of sales 140 000
Depreciation 22 000
Other expenses 25 000 187 000
104 350
Share of profits/(losses) of associates and joint ventures ___210
Profit before income tax 104 560
Income tax expense 29 400
Profit for the period $75 160
Comprehensive Income for the period $75 160
Attributable to:
Parent interest $73 500
Non-controlling interest 1 660
$75 160

TROMBONE LTD
Consolidated Statement of Changes in Equity
for the financial year ending 30 June 2017
Group Parent
Comprehensive income for the period $75 160 $73 500

Retained earnings:
Balance at 1 July 2016 $181 164 $173 724
Profit for the period 75 160 73 500
Dividend paid (20 400) (20 000)
Transfer from business combinations valuation reserve ___700 ______
Balance at 30 June 2017 $236 624 $227 224

Business combination valuation reserve:


Balance at 1 July 2016 $700 -
Transfer to retained earnings (700) -
Balance at 30 June 2017 $0 -

Share capital:
Balance at 1 July 2016 unknown -
Balance at 30 June 2017 unknown -

General reserve:
Balance at 1 July 2016 unknown -
Balance at 30 June 2017 unknown -

2. Statement of Financial Position


Investment in Accordion Ltd ($3 500 + $924 - $50) $4 374

© John Wiley and Sons Australia Ltd 2015 23.46


Chapter 23: Associates and joint ventures

Question 23.14 Consolidation worksheet entries including investments in


associates
You are given the following details for the year ended 30 June 2016:

Trumpet Ltd Clarinet Ltd Cello Ltd


Profit before tax $100 000 $30 000 $25 000
Income tax expense (31 000) (10 000) (6 000)
Profit 69 000 20 000 19 000
Retained earnings at 1 July 20 000 12 000 11 000
2015 89 000 32 000 30 000
(14 000) (6 000) (2 000)
Dividend paid (15 000) (4 000) (8 000)
Dividend declared
Transfer to general reserve (10 000) (5 000) (6 000)
(from current period’s profit) (39 000) (15 000) (16 000)
$ 50 000 $17 000 $14 000
Retained earnings at 30 June
2016

Additional information
(a) Trumpet Ltd owns 80% of the shares in Clarinet Ltd and 20% of the shares in Cello Ltd.
Trumpet Ltd has entered into a contractual agreement with the four other investors in
Cello Ltd, and all five investors have a joint control arrangement in relation to Cello Ltd.
(b) On 1 July 2014, all identifiable assets and liabilities of Clarinet Ltd were recorded at
amounts equal to their fair values. Trumpet Ltd purchased 80% of Clarinet Ltd’s shares
on 1 July 2014, and paid $5000 for goodwill, none of which had been recorded on Clarinet
Ltd’s records. Trumpet Ltd uses the partial goodwill method.
(c) At the date Trumpet Ltd acquired its shares in Cello Ltd, Cello Ltd’s recorded equity
was:
Share capital $100 000
General reserve 15 000
Retained earnings 5 000

All the identifiable assets and liabilities of Cello Ltd were recorded at amounts equal to their
fair values.
Trumpet Ltd paid $25 000 for its shares in Cello Ltd on 1 July 2014. Cello Ltd transferred
$3000 to general reserve in the year ended 30 June 2015, out of equity earned since 1 July 2014.
(d) Included in the beginning inventory of Trumpet Ltd were profits before tax made by
Clarinet Ltd: $5000; Cello Ltd: $3000.
(e) Included in the ending inventory of Clarinet Ltd were profits before tax made by Cello
Ltd: $4000.
(f) Cello Ltd had recorded a profit (net of $500 tax) of $2000 in selling certain non-current
assets to Trumpet Ltd on 1 January 2016. Trumpet Ltd treats the items as non-current
assets and charges depreciation at the rate of 25% p.a. straight-line from that date.
(g) Trumpet Ltd purchased for $10 000 an item of plant from Clarinet Ltd on 1 September
2014. The carrying amount of the asset at that date was $7000. The asset was depreciated
at the rate of 20% p.a. straight-line from 1 September 2014.
(h) During the year ended 30 June 2016, Cello Ltd revalued upwards one of its non-current
assets by $8000. There had been no previous downward revaluations.
(i) Dividend revenue is recognised when dividends are declared.
(j) The tax rate is 30%.

© John Wiley and Sons Australia Ltd 2015 23.47


Chapter 23: Associates and joint ventures

Required
Prepare the consolidation worksheet entries (in general journal form) needed for the
consolidated statements for the year ended 30 June 2016 for Trumpet Ltd and its subsidiary
Clarinet Ltd. Include the equity-accounted results of Cello Ltd.

Trumpet Ltd

80% 20%

Clarinet Ltd Cello Ltd

NCI 20%

1. Consolidated worksheet entries


At 30 June 2014, in relation to Trumpet’s acquisition of Clarinet Ltd:

Goodwill acquired = $5 000

(1) Pre-acquisition entry

Retained earnings (1/7/15) Dr x


Goodwill Dr 5 000
Share capital Dr x
Shares in Clarinet Ltd Cr x

(2) NCI in equity: 1/7/14 – 30/6/15

Retained earnings (op. bal.) Dr 2 400


NCI Cr 2 400
(20% x $12 000)

(3) NCI in equity from 1/7/15 – 30/6/16

NCI share of profit Dr 4 000


NCI Cr 4 000
(20% x $20 000)

General reserve Dr 1 000


Transfer to general reserve Cr 1 000
(20% x $5 000)

NCI Dr 1 200
Interim dividend paid Cr 1 200
(20% x $6 000)

© John Wiley and Sons Australia Ltd 2015 23.48


Chapter 23: Associates and joint ventures

NCI Dr 800

Final dividend declared Cr 800


(20% x $4 000)

(4) Dividend paid

Dividend revenue Dr 4 800


Interim dividend paid Cr 4 800
(80% x $6 000)

(5) Dividend declared

Dividend payable Dr 3 200


Dividend declared Cr 3 200
(80% x $4 000)

Dividend revenue Dr 3 200


Dividend receivable Cr 3 200

(6) Unrealised profit in beginning inventory: Clarinet Ltd – Trumpet Ltd

Retained earnings (1/7/15) Dr 3 500


Income tax expense Dr 1 500
Cost of sales Cr 5 000

(7) NCI adjustment

NCI share of profit Dr 700


Retained earnings (1/7/15) Cr 700
(20% x $3 500)

(8) Sale of plant: Clarinet Ltd – Trumpet Ltd

Retained earnings (1/7/15) Dr 2 100


Deferred tax asset Dr 900
Plant Cr 3 000

(9) NCI adjustment

NCI Dr 420
Retained earnings (1/7/15) Cr 420
(20% x $2 100)

© John Wiley and Sons Australia Ltd 2015 23.49


Chapter 23: Associates and joint ventures

(10) Depreciation

Accumulated depreciation Dr 1 100


Retained earnings (1/7/15) Cr 500
Depreciation expense Cr 600
(20% x 10/12 x $3 000 in previous
period and 20% x $3 000 in current period)

Income tax expense Dr 180


Retained earnings (1/7/15) Dr 150
Deferred tax asset Cr 330

(11) NCI adjustment

NCI share of profit Dr 84


Retained earnings (1/7/15) Dr 70
NCI Cr 154

(12) Equity accounted results of Cello Ltd

Net fair value of identifiable assets


and liabilities of Cello Ltd = $100 000 + $15 000 + $5 000 (equity)
= $120 000
Net fair value acquired = 20% x $120 000
= $24 000
Cost of investment = $25 000
Goodwill = $1 000

Change in Retained Earnings 2014 –2015 $6 000


($11 000 - $5 000)
Adjustments:
Increase in general reserve 3 000
Unrealised profit in closing inventory
$3 000 (1 – 30%) (2 100)
6 900
Investor’s share – 20% $1 380

Recorded profit $19 000


Adjustments for inter-entity transactions:
Realised profit on opening inventory 2 100
Unrealised profit in ending inventory
$4 000 (1 – 30%) (2 800)
Unrealised profit on sale of non-current assets
$2 000 (1 – 30%) less depreciation of
½ x 25% x $1 400 (1 225)
$17 075
Investor’s share – 20% $3 415

Increase in asset revaluation surplus [$8 000 x (1 – 30%)] $5 600


Investor’s share – 20% 1 120

The worksheet entries are:

Investment in Cello Ltd Dr 4 795


Retained earnings (1/7/15) Cr 1 380

© John Wiley and Sons Australia Ltd 2015 23.50


Chapter 23: Associates and joint ventures

Share of profits or losses


of associates and joint ventures Cr 3 415

Investment in Cello Ltd Dr 1 120


Share of other comprehensive income
of associates and joint ventures Cr 1 120

Share of other comprehensive income of


associates and joint ventures Dr 1 120
Asset revaluation surplus Cr 1 120

Dividend revenue Dr 2 000


Investment in Cello Ltd Cr 2 000
(20% x[$2 000 + $8 000])

© John Wiley and Sons Australia Ltd 2015 23.51


Chapter 23: Associates and joint ventures

Question 23.15 Multiple associates, consolidated financial statements


Keyboard Ltd has one subsidiary, Synthesiser Ltd, and two associated companies, Xylophone
Ltd and Tambourine Ltd, and Synthesiser Ltd has one associated company, Triangle Ltd.

Synthesiser Triangle Xylophone Tambourine


Ltd Ltd Ltd Ltd
Share capital
Ordinary:
Held by group $1 200 $ 250 $200 $ 250
Held by other 800 750 600 750
interests $2 000 $1 000 $800 $1 000

Information about the companies for the year ended 30 June 2017 is as follows:

Keyboard Synthesiser Triangle Xylophone Tambourine


Ltd Ltd Ltd Ltd Ltd
Trading
profit (loss) $ 200 $1 000 $600 $2 400 $1 200
Dividend
revenue 600 400 100 — —
Profit
before tax 800 1 400 700 2 400 1 200
Income tax
expense 100 500 300 1 200 600
Profit 700 900 400 1 200 600
Dividend 500 500 200 1 000 200
paid 200 400 200 200 400

Retained
earnings 6 800 3 600 230 2 000 1 210
(1/7/16)
Retained
earnings $7 000 $4 000 $430 $2 200 $1 610
(30/6/17)

Keyboard Synthesis Triangle Xylophon Tambourin


Ltd er Ltd Ltd e Ltd e Ltd
Investments $ 4 008 $3 000 $ 80 — —
Other non- 0
current
assets 6 000 3 000 2 000 2 400
(net) 1 992 2 000 400 1 600 1 000
Current $12 000 $8 000 800 $3 60 $3 40
assets $ 1 000 $2 000 $2 00 0 0
Total assets 0 $ 80 $1 00
Share $1 00 0 0
capital 0
Asset 1 000 —
revaluation
surplus 7 000 4 000 — —
Retained 9 000 6 000 200
earnings 3 000 2 000 2 200 1 610
Total equity 430 3 000 2 610

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Chapter 23: Associates and joint ventures

Liabilities $12 000 $8 000 1 630 600 790


Total equity 370
and $3 60 $3 40
liabilities $2 00 0 0
0

Additional information
(a) Synthesiser Ltd: Keyboard Ltd acquired a 60% interest on 30 June 2009 for $3008.
Shareholders’ equity at 30 June 2009 was:

Share capital $2 000


Retained earnings 2 000
$4 000

At the acquisition date, Synthesiser Ltd had not recorded any goodwill. All the identifiable
assets and liabilities of Synthesiser Ltd were recorded at amounts equal to their fair values
except the following:

Carrying amount Fair value


Inventory $ 500 $ 600
Non-current assets (net) 1 200 1 500

By 30 June 2010, all the inventory had been sold by Synthesiser Ltd. The non-current assets
had a further expected life of 10 years, with benefits from use being received evenly over these
years. The partial goodwill method is used.
(b) Triangle Ltd: Synthesiser Ltd acquired, on 1 July 2016, 25% of the share capital for $400.
Equity at 30 June 2016 was:

Share capital $1 000


Retained earnings 230

At 30 June 2016, Triangle Ltd had not recorded any goodwill. All the identifiable assets and
liabilities were recorded at amounts equal to their fair values except for the following:

Carrying amount Fair value


Inventory $500 $600
Non-current assets (net) 200 400

By 30 June 2017, half the inventory had been sold to external parties. The non-current assets
were revalued in the records of Triangle Ltd on 1 July 2016.
(c) Keyboard Ltd: Included in current assets of Keyboard Ltd at 30 June 2017 is inventory
that was purchased from Synthesiser Ltd for $900. Synthesiser Ltd sells its goods at cost
plus 50% mark-up.
(d) Keyboard Ltd: Included in current assets of Keyboard Ltd at 30 June 2016 was inventory
that was purchased from Synthesiser Ltd for $600.
(e) Synthesiser Ltd: Included in the non-current assets of Synthesiser Ltd at 30 June 2017 is
an item of plant that was sold to Synthesiser Ltd by Triangle Ltd on 1 July 2016 for
$1200. At the date of sale, this asset had a carrying amount to Triangle Ltd of $1000. It
had an expected future useful life of 5 years, with benefits being received evenly over these
years.
(f) Xylophone Ltd: Keyboard Ltd acquired a 25% interest on 30 June 2014 for $400. Equity
at 30 June 2014 was:

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Chapter 23: Associates and joint ventures

Share capital $800


Retained earnings 600

At this date, Xylophone Ltd had not recorded any goodwill. All the identifiable assets and
liabilities of Xylophone Ltd were recorded at amounts equal to their fair values except for the
following assets:

Carrying amount Fair value


Inventory $100 $120
Non-current assets (net) 500 600

The inventory was all sold by 30 June 2015. The non-current assets had a further useful life
of 4 years.
(g) Tambourine Ltd: Keyboard Ltd acquired a 25% interest on 1 July 2016 for $600. A
comparison of carrying amounts and fair values at 30 June 2016 is shown below:

Carrying amount Fair value


Share capital $1 000
Retained earnings 1 210
Liabilities 790 $ 790
$3 000
Inventory $ 800 1 000
Non-current assets:
Plant 1 000 1 200
Equipment 1 200 1 500
$3 000

The plant had a further 5-year life and the equipment had a further 6-year life. By 30 June
2017, all the undervalued inventory had been sold.
(h) Xylophone Ltd: On 1 July 2015, Xylophone Ltd sold a non-current asset to Keyboard Ltd
for $500. At the time of sale, this asset had a carrying amount of $450. Keyboard Ltd
depreciated this asset evenly over a 5-year period.
(i) Tambourine Ltd: At 30 June 2017, Keyboard Ltd held inventory that was sold to it by
Tambourine Ltd at a profit before tax of $200 during the previous period.
(j) Keyboard Ltd: On 30 June 2017, Keyboard Ltd held inventory that had been sold to it
during the previous 6 months by Xylophone Ltd for $1000. Xylophone Ltd made $400
profit before tax on the sale.
(k) The tax rate is 30%.

Required
Prepare the consolidated financial statements of Keyboard Ltd for the year ended 30 June 2017.
Include all the associates accounted for under the equity method.

60% Keyboard Ltd 60%


Keyboard Ltd Synthesiser Ltd
NCI 40%

25% 25% 25%

Xylophone Ltd Tambourine Ltd Triangle Ltd

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Chapter 23: Associates and joint ventures

Pre-acquisition analysis: Keyboard Ltd – Synthesiser Ltd

NOTE: Cost of Keyboard Ltd’s interest in Synthesiser Ltd is $3 008.

At 30 June 2009:

Net fair value of identifiable assets


and liabilities of Synthesiser Ltd = $2 000 + $2 000 (equity)
+ $100 (1 – 30%) (BCVR - inventory)
+ $300 (1 – 30%) (BCVR -non-current assets)
= $4 280
(a) Consideration transferred = $3 008
(b) Non-controlling interest = 40% x $4 280
= $1 712
Aggregate of (a) and (b) = $4 720
Goodwill = $440

(1) Business combination valuation entries

Other non-current assets Dr 300


Deferred tax liability Cr 90
Business combination valuation reserve Cr 210

Depreciation expense Dr 30
Retained earnings (1/7/16) Dr 210
Accumulated depreciation Cr 240

Deferred tax liability Dr 72


Income tax expense Cr 9
Retained earnings (1/7/16) Cr 63

(2) Pre-acquisition entry

Retained earnings (1/7/16)* Dr 1 242


Share capital Dr 1 200
Business combination valuation reserve Dr 126
Goodwill Dr 440
Shares in Synthesiser Ltd Cr 3 008

* (60% x $2 000) + 60% x $70 [BCVR – inventory transfer])

(3) NCI share of equity of Synthesiser Ltd at 30 June 2009

Retained earnings (30/6/16) Dr 800


Share capital Dr 800
Business combination valuation reserve Dr 112
NCI Cr 1 712

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Chapter 23: Associates and joint ventures

(4) NCI share of equity from 1/7/09 – 30/6/16

Retained earnings (30/6/16) Dr 581


Business combination valuation reserve Cr 28
NCI Cr 553
(40% ($3 600 - $2 000 – [$210 - $63]))

(5) NCI share of equity from 1/7/16 – 30/6/17

NCI share of profit Dr 352


NCI Cr 352
(40% ($900 – [$30 - $9]))

NCI Dr 200
Dividend paid Cr 200
(40% x $500)

(6) Dividend paid

Dividend revenue Dr 300


Dividend paid Cr 300
(60% x $500)

(7) Profit in ending inventory: Synthesiser Ltd – Keyboard Ltd

Trading profit Dr 300


Current assets Cr 300

Deferred tax asset Dr 90


Income tax expense Cr 90

(8) NCI adjustment

NCI Dr 84
NCI share of profit Cr 84
(40% ($300 - $90))

(9) Profit in opening inventory: Synthesiser Ltd – Keyboard Ltd

Retained earnings (1/7/16) Dr 200


Trading profit Cr 200

Income tax expense Dr 60


Retained earnings (1/7/16) Cr 60

© John Wiley and Sons Australia Ltd 2015 23.56


Chapter 23: Associates and joint ventures

(10) NCI adjustment

NCI share of profit Dr 56


Retained earnings (1/7/16) Cr 56
(40% ($200 - $60))

Accounting for Associates

(11) Xylophone Ltd

At 30 June 2014:

Net fair value of identifiable assets


and liabilities of Xylophone Ltd = $800 + $600 (equity)
+ $20 (1 – 30%) (BCVR - inventory)
+ $100 (1 – 30%)(BCVR non-current assets)
= $1 484
Net fair value acquired = 25% x $1 484
= $371
Cost of investment = $400
Goodwill = $29

Change in Retained Earnings 2008-2010 $1 400


($2 000 - $600)
Adjustments for inter-entity transactions:
Unrealised profit on sale of non-current asset
$50 (1 – 30%) less depreciation of (20% x $35) (28)
$1 372
Pre-acquisition adjustments:
Inventory ($20 - $6) (14)
Depreciation – 2 years x ¼ x $70 (35)
$1323
Investor’s share: 25% x $1323 $331

Recorded profit $1 200


Adjustments for inter-entity transactions:
Unrealised profit on ending inventory
$400 (1 – 30%) (280)
Realised profit on non-current assets
(20% x $35) 7
$927
Pre-acquisition adjustments:
Depreciation: 25% x $70 (18)
$909
Investor’s share: 25% x $912 $227

The consolidated worksheet entries are:

Dividend revenue Dr 250


Investment in Xylophone Ltd Cr 250
(25% x $1000)

© John Wiley and Sons Australia Ltd 2015 23.57


Chapter 23: Associates and joint ventures

Investment in Xylophone Ltd Dr 558


Retained earnings (1/7/16) Cr 331
Share of profits (losses) in associates and
joint ventures Cr 227

(12) Tambourine Ltd

At 30 June 2016:

Net fair value of identifiable assets


and liabilities of Tambourine Ltd = $1 000 + $1 210 (equity)
+ $200 (1 – 30%)(BCVR - inventory)
+ $200 (1 – 30%) BCVR - plant)
+ $300 (1 – 30%) (BCVR - equipment)
= $2 700
Net fair value acquired = 25% x $2 700
= $675
Cost of investment = $600
Gain on bargain purchase = $75

Recorded profit $600


Adjustments for inter-entity transactions:
Unrealised profit on ending inventory
$200 (1 - 30%) (140)
$460
Pre-acquisition adjustments:
Inventory (140)
Depreciation on plant: 1/5 x $140 (28)
Depreciation on equipment: 1/6 x $210 (35)
$257
Investor’s share: 25% x $257 $64

The consolidated worksheet entries are:

Dividend revenue Dr 50
Investment in Tambourine Ltd Cr 50
(25% x $200)

Investment in Tambourine Ltd Dr 64


Share of profit (losses) of associates and
joint ventures Cr 64

(13) Triangle Ltd

At 1 July 2016:

Net fair value of identifiable assets


and liabilities of Triangle Ltd = ($1 000 + $230) (equity)
+ $100 (1 – 30%) (inventory)
+ $200 (1 – 30%) (non-current assets)
= $1 440

© John Wiley and Sons Australia Ltd 2015 23.58


Chapter 23: Associates and joint ventures

Net fair value acquired = 25% x $1 440


= $360
Cost of investment = $400
Goodwill = $40

Inventory adjustment = 50% x 25% x $70


= $9

Recorded profit $400


Adjustments for inter-entity transactions:
Unrealised profit on sale of plant
$200 (1 – 30%) less depreciation of (1/5 x $140) (112)
$288
Pre-acquisition adjustments:
Sale of inventory:50% x $70 (35)
$253
Investor’s share: 25% x $253 $63

As the balance of the asset revaluation surplus at 30 June 2011 is $200, and the balance at 1 July
2007 was $140 (i.e. 70% x $200), then further revaluations resulting in a $60 increase in the asset
revaluation surplus must have occurred in the current period. Hence:
Increase in asset revaluation surplus $60
Investor’s share - 25% $15

The consolidation worksheet entries are:

Dividend revenue Dr 50
Investment in Triangle Ltd Cr 50
(25% x $200)

Investment in Triangle Ltd Dr 78


Share of profits or losses of associates and
joint ventures Cr 63
Asset revaluation surplus Cr 15

As there is a 40% NCI in Synthesiser Ltd, the following entry in the NCI columns is necessary:

NCI share of profit* Dr 5


Asset revaluation surplus** Dr 6
NCI Cr 11
* (40% x ($63 - $50) – note that the NCI already has a share of the dividend revenue in
Synthesiser Ltd; hence the share of profit of the associate must be adjusted for the dividend
revenue recognised by Synthesiser Ltd to avoid double counting of the NCI share of profit.
** 40% x $15
** 40% x $15

© John Wiley and Sons Australia Ltd 2015 23.59


Chapter 23: Associates and joint ventures

Financial Key- Synth- Adjustments Group NCI Parent


Statements board esiser Dr Cr Dr Cr
Ltd Ltd
Trading profit 200 1 000 1 30 200 9 1 070
7 300
Dividend revenue 600 400 6 300 350
11 250
12 50
13 50
800 1 400 1 420
Share of - - 227 11 354
profits/(losses) of 64 12
associates & JVs 63 13
Profit before tax 800 1 400 1 774
Tax expense 100 500 9 60 9 1 561
90 7
Profit for period 700 900 1 213 5 352 84 8 884
10 56
13 5
Retained earnings 6 800 3 600 1 210 63 1 9 202 3 800 56 10 7 877
(1/7/16) 2 1 242 60 9 4 581
9 200 331 11
7 500 4 500 10 415 8 761
Dividend paid 500 500 300 6 700 200 5 500
Retained earnings 7 000 4 000 9 715 8 261
(30/6/17)
Share capital 1 000 2 000 2 1 200 1 800 3 800 1 000
Asset revaluation 1 000 - 15 13 1 015 13 6 1 009
surplus
BCVR - - 2 126 210 1 84 3 112 28 4 --
Total equity: 10 270
parent
Total equity: NCI 5 200 1 712 3 2 344
8 84 553 4
352 5
11 13
Total equity 9 000 6 000 12 614 2 996 2 996 12 614

Liabilities 3 000 2 000 1 72 90 1 5 018


Total equity and 12 000 8 000 17 632
liabilities

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Chapter 23: Associates and joint ventures

Current assets 1 992 2 000 300 7 3 692


Investments 4 008 3 000 11 558 3008 2 4 350
12 64 250 11
13 78 50 12
50 13
Other non-current 6 000 3 000 1 300 240 1 9 150
assets (net) 7 90
Goodwill -- -- 2 440 440
Total assets 12 000 8 000 5 620 5 620 17 632

KEYBOARD LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the financial year ended 30 June 2017

Revenues x
Expenses x
Trading profit $1 070
Dividend revenue 350
Share of profits (losses) of associates and joint ventures 354
Profit before income tax 1 774
Income tax expense 561
Profit for the period $1 213
Asset revaluation surplus: increments 15
Comprehensive income for the period $1 228

Profit for the period attributable to:


Parent interest $884
Non-controlling interest $329

Comprehensive income for the period attributable to:


Parent interest $893
Non-controlling interest $335

KEYBOARD LTD
Consolidated Statement of Changes in Equity
for the financial year ending 30 June 2017

Group Parent
Comprehensive income for the period $1 228 $893

Retained earnings:
Balance at 1 July 2016 $9 202 $7 877
Profit for the period 1 213 884
Dividend paid (700) (500)
Balance at 30 June 2017 $9 715 $8 261

Business combination valuation reserve:


Balance at 1 July 2016 $84 -
Balance at 30 June 2017 $84 -

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Chapter 23: Associates and joint ventures

Asset revaluation surplus:


Balance at 1 July 2016 $1 000 $1 000
Revaluation increment ___15 ____9
Balance at 30 June 2017 $1 015 $1 009

Share capital:
Balance at 1 July 2016 $1 800 $1 000
Balance at 30 June 2017 $1 800 $1 000

KEYBOARD LTD
Consolidated Statement of Financial Position
as at 30 June 2017
ASSETS
Current Assets $3 692
Non-Current Assets
Investments accounted for using the equity method 4 350
Goodwill (net) 440
Other non-current assets (net) 9 150
Total Non-current Assets 13 940
Total Assets $17 632

EQUITY AND LIABILITIES

Equity attributable to equity holders of the parent


Share capital $1 000
Asset revaluation surplus 1 009
Retained earnings 8 261
Parent Interest 10 270
Non-controlling Interest 2 344
Total Equity $12 614
Total Liabilities 5 018
Total Equity and Liabilities $17 632

Note: Investments in Associates

The group, consisting of Keyboard Ltd and its subsidiary, Synthesiser Ltd, has investments in the
following associates:
Xylophone Ltd ownership interest is 25%, principal activities are …
principal place of business is …
Tambourine Ltd ownership interest is 25%, principal activities are …
principal place of business is …
Triangle Ltd ownership interest is 25%, principal activities are …
principal place of business is …

The investments in associates are measured using the equity method.

The fair values of each of these investments are $.....

© John Wiley and Sons Australia Ltd 2015 23.62


Chapter 23: Associates and joint ventures

Information about the associates extracted from their financial statements at 30 June 2011 is as
follows:
Xylophone Ltd Tambourine Ltd Triangle Ltd
Dividends received $250 $50 $50

Current Assets 1 600 1 000 800


Non-current Assets 2 000 2 400 1 200
Current Liabilities 600 790 370
Non-current Liabilities x x x
Revenues x x x
Other Comprehensive Income x x x
Comprehensive Income 1 200 600 400

© John Wiley and Sons Australia Ltd 2015 23.63