The equity section of East Ltd$$s on $1$ April $2015$ was extracted as follows:

Ordinary shares Revaluation Reserves Retained Loss

$ $10,0005,000(260)$

On $1$ April $2015,$ HK Ltd purchased $25\%$ of the ordinary shares of East Ltd at the cost of $$4,080.$

In January $2016,$ HK Ltd transferred one of its senior staff to take up the position of the Managing Director of East Ltd$.$ After this personnel appointment, HK Ltd has been substantially involved in new product innovation with East Ltd by the provision of technical information.

In February $2016,$ East Ltd sold inventory to HK Ltd for $$3,000$ at a profit of $$600$ to East Ltd$.$ One third of this inventory remained in HK Ltd$$s warehouse at the year$-$end. On $31$ March $2016,$ East Ltd$$s ending inventory included goods purchased from HK Ltd at a loss of $$80$ to HK Ltd$.$ These goods had good quality, so they were popular and fully sold out shortly in April.

In March $2016,$ East Ltd paid dividends of $$400$ to all eligible ordinary shareholders out of the profit earned in the financial year $2015/16.$ HK Ltd accounted for the receipt as investment income.

After taking into account the dividends paid in the current financial year, East Ltd$$s retained earnings has a credit balance of $$340$ on $31$ March $2016.$ The recoverable amount of East Ltd and the revaluation reserves$$ balance on $31$ March $2016$ were $$12,000$ and $$4,000,$ respectively.

Required:

a$)$ From HK Ltd$$s point of view, determine whether East Ltd is an associate and the method of accounting. Justify your answer $($note: identify THREE factors for the determination of associate$).(4$ marks$)$

b$)$ Prepare the journal entries in the book of HK Ltd regarding the dividend received for the year ended $31$ March $2016.(2$ marks$)$

c$)$ Prepare all journals needed for the consolidated financial statements of HK Ltd at $31$ March $2016,$ assuming East Ltd is an associate of HK Ltd$.(14$ marks$)$

d$)$ Based on the answer from c$)$ above, provide notes of disclosure for the investment in East Ltd on HK Ltd$$s consolidated financial statements for the year ended $31$ March $2016.$

$(3$ marks$)$

Answer rating: 100% (QA)

a From HK Ltds point of view to determine whether East Ltd is an associate we need to consider the following factors 1 Ownership HK Ltd purchased 25 o... View the full answer