Assignment – investment in an associate
On 1 July 2014, Sam Ltd acquired 40% of the capital of Kayla Ltd for $4,500 and
recognized investment in an associate. Kayla has a retained earnings of $2,150 and a
share capital of $10,000 on 1 July 2014. All the identifiable assets and liabilities of
Kayla 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 2014. The depreciable assets
were considered to have a future 5-year life.
For the year ended 30 June 2015, Kayla Ltd recorded a profit after tax of $2,000.
Kayla Ltd paid a dividend of $200 in January 2015. Sam Ltd. Treats dividend receipts
as dividend revenue.
During the year ended 30 June 2015, Kayla Ltd sold inventory to Sam Ltd for $6,000.
The cost of this inventory to Kayla Ltd was $4,000. Sam Ltd has resold only 20% of
these items before the year end.
On 1 January 2015, Sam Ltd sold Kayla Ltd a motor vehicle at a profit of $800. Both
companies treat motor vehicles as non-current assets. Both companies charge
depreciation at 20% p.a. on the reducing balance.
The financial statements for Sam Ltd and Kayla Ltd for the financial year ended 30
June 2015 are shown below.
Sam Ltd Kayla
Sales revenue 200,000 25,000
COGS (110,000) (14,000)
Gross profit 90,000 11,000
Depreciation expense (16,000) (3,000)
Other expenses (22,000) (6,000)
Other revenue 30,000 600
Profit before tax 82,000 2,600
Income tax expense (20,000) (600)
Profit after tax 62,000 2,000
Retained earnings (1/7/2014) 120,000 2,150
Dividends appropriation (20,000) (200)
Retained earnings (30/6/2015) 162,000 3950
Reserve 10,000 -
Share capital 800,000 10,000
Total equity 972,000 13,950
Accounts payable 40,000 5,000
Notes payable 100,000
Total liability and equity 1,112,000 18,950
Depreciable assets 400,000 12,000
Accumulated depreciation (80,000) (1,500)
Investment in Paige Ltd, at cost 150,750 -
Investment in Kayla Ltd, at cost 4,500 -
Inventory 300,000 6,000
Accounts receivable 230,000 500
Cash 106,750 1,950
Total assets 1,112,000 18,950
Note: Other revenue include dividend revenue and gain on sale of non-current assets.
Required:
Prepare the journal entries in the records of Sam Ltd for the year ended 30 June 2015
in relation to its investments in Kayla Ltd.