On 1 July 2020, Lada Ltd (LL) acquired a 20 per cent interest in Hupmobile Ltd (HL) for a cash consideration of $40,000. Despite its small shareholding in HL, LL is considered to have significant influence over HL, since LL is able to appoint a director to HL’s Board of Directors, and HL is a major customer of LL. LL also provides management personnel to HL, and the two companies share technical information. On the date of the acquisition, the assets of HL were reported at fair value. The share capital and reserves of HL at the date of acquisition were:

Share capital 50,000 Retained earnings 140,000 Total shareholders’ equity $190,000

Additional information For the year ending 30 June 2021, HL recorded an after-tax profit of $100,000, from which it paid a dividend of $50,000. For the year ending 30 June 2022, HL recorded an after-tax profit of $80,000, from which it paid a dividend of $60,000. On 30 June 2022, HL revalued its Land upwards by $10,000. Before this revaluation, the Land had a carrying amount of $20,000. Any profit on a future sale of the land will not be taxable. LL also has a subsidiary, Studebaker Ltd, which it purchased in 2017 for $240,000, and of which it owns 100 per cent of the shares on issue.

REQUIRED: 

a) Prepare all the necessary journal entries in respect of LL’s investment in HL using the equity method of accounting for the year ended 30 June 2022. 

Provide explanations for each journal in each journal’s narration. b) Briefly explain where you would post these entries.

Answer rating: 100% (QA)

Step 1 Lada Ltd 20 investment in Hupmobile Ltd amounting 40000 on 172020 Fair value of identifiable ... View the full answer