Mark Ltd has an investment in Lee Ltd acquired on 1 July 2021 and no other subsidiary investments.

Consideration paid by Mark Ltd for a 30% interest in Lee Ltd was $50 000, entering into a joint venture with three other venturers. The directors believe they have significant influence over Lee Ltd.

Information on Lee Ltd’s equity position is as follows.

1 July 2021				30 June 2022
Share capital	$	60 000	$	60  000
General reserve	—	10  000
Retained earnings	20 000	110  000

At acquisition, all identifiable assets and liabilities of Lee Ltd were recorded at fair value except for the Equipment that had a fair value of $20 000 greater than carrying amount. The Equipment was considered to have a further useful life of 5 years at acquisition.

On 1 January 2022, Mark Ltd sold Lee Ltd a vehicle for $40 000, at a profit before tax of $5 000. Both companies treat vehicles as non-current assets and charge depreciation at 20% p.a. straight line basis.

At 30 June 2023, Mark Ltd had inventories on hand purchased from Lee Ltd for a cost of $35 000. Lee Ltd had made a profit before tax of $10 000 on the sale to Mark Ltd.

Assume a tax rate of 30%.

Dividends can be assumed to be out of current year profits. Dividend revenue is recognised when declared by investors.

Information about income and changes in equity for the year ended 30 June 2023 is as follows:

Mark Ltd	Lee Ltd
Profit before income tax	125  000	50 000
Less: Income tax expense	37  500	15 000
Profit	87  500	35 000
Plus: Retained earnings (1/7/22)	250  000	110 000
337  500	145 000
Less: Dividend paid	20  000	7 500
Less: Dividend declared	7 500
Retained earnings (30/6/23)	317  500	130 000

Required

a. In relation to the investment in Lee Ltd, calculate Mark Ltd’s share of profit and post-acquisition equity for 30 June 2022 and 2023 according to the requirements of AASB 128 Investments in Associates and Joint Ventures.

b. If Lee Ltd incurred a loss in the year ended 30 June 2023, what impact would this have on Mark Ltd’s investment? If this loss resulted in the investment being less than $0, explain the treatment in their books in 2023 and future years? Include an example to support your answer.

c. If Mark Ltd was also the parent of a wholly owned subsidiary and required to prepare consolidated accounts in accordance with AASB 10 Consolidated Financial Statements, describe how the journal entries would differ. Use an example from your workings to demonstrate the difference.

Answer rating: 100% (QA)

a The Below is Based on the Equity Method as Per AASB 128 on 3162022 The Share of Mark Ltd in the Lee Ltd 30 Consideration Paid is 50000 All Assets are Acquired at Fair Value One asset is shown 20000 ... View the full answer