Ted Ltd, an ultimate parent reporting entity, holds a 24% interest in the voting shares of Lasso
Question:
Ted Ltd, an ultimate parent reporting entity, holds a 24% interest in the voting shares of Lasso Ltd. Equity accounting is applied to the interest held in Lasso Ltd. Additional information: Lasso Ltd paid a dividend of $20,000 during the year. At the date of acquisition of the shares in Lasso Ltd, Lasso Ltd owned an item of plant which was recorded at $60,000 less than its fair value. The remaining useful life of the asset at the date of Ted Ltd’s acquisition of the interest in Lasso Ltd was 4 years. During the second year of operation Lasso Ltd sold some inventory to Ted Ltd at a selling price of $40,000. The cost of the inventory to Lasso Ltd was $30,000. Ted Ltd held 60% of the inventory on hand at the end of the second year.
Required:
a) Prepare the appropriate consolidation adjusting journal in respect of Lasso Ltd’s dividend.
b) Prepare the appropriate consolidation adjusting journal, 2 years after the acquisition of Lasso Ltd shares by Ted Ltd, in respect of Lasso Ltd’s undervalued item of plant.
c) Prepare the appropriate consolidation adjusting journal in respect of Lasso Ltd’s sale of inventory. In no more than two sentences, briefly explain why this journal entry is necessary and what effect this journal entry has on the value of the investment.
