Harwood acquired a 40 interest in Lexor for 170 000 on
Harwood acquired a 40% interest in Lexor for $170,000 on January 1, 2013. The share capital, cumulative other comprehensive income, and retained earnings of Lexor at the acquisition date and at December 31, 2013, were as follows:
At January 1, 2013, all the identifiable assets and liabilities of Lexor were recorded at fair value. The following is applicable to Lexor for the year to December 31, 2013:
1. Net income (after income tax expense of $11,000): $39,000
2. Increase in cumulative other comprehensive income
• Asset revaluation (revaluation of land and buildings at December 31, 2013): $100,000
3. Dividends paid to shareholders: $15,000.
Additionally, depreciation is provided by Lexor on the diminishing-balance method, whereas Harwood uses the straight-line method. Had Lexor used the straight-line method, the accumulated depreciation on non-current assets would be increased by $20,000 (in 2012-$10,000 increase in accumulated depreciation). The tax rate is 40%. Harwood does not prepare consolidated financial statements.
(a) Prepare the journal adjustments in the books of Harwood for the year ended December 31, 2013, in relation to its investment in the associate, Lexor.
(b) Calculate the share of profit or loss in Lexor for the year ended December 31, 2013.
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