On 1 January X MOTHER acquires 40% of the share capital of DAUGHTER. The cost of the
Question:
On 1 January X MOTHER acquires 40% of the share capital of DAUGHTER. The cost of the investment is 420 million cash. At acquisition, the book value of DAUGHTER’s owner’s equity is 900 million. The difference between the acquisition cost and the net book value is due to the following:
- PPE undervalued by 50 million (remaining useful life 5 years);
- Provisions undervalued by 20 million;
- Goodwill;
The companies apply a tax rate of 50%.
During period X, the following events occur:
1. DAUGHTER sells inventory to MOTHER, selling price 80 million, cost of sales 60 million. At the end of the period, 90% of this inventory is still unsold;
2. DAUGHTER applies the revaluation model to its buildings and records a revaluation surplus of 10 million;
3. DAUGHTER realises a net profit of 50 million.
Required:
a) Show what are the accounting entries made by MOTHER in relation to the different events that occurred during period X.
b) Calculate the value of the investment in DAUGHTER as of 31 December X using equity method.
Expert Answer:
