Harrison Sanko Student ID: 300418823

Accy 308 Tutorial 2

Question 1: Associates and Equity Accounting

On 1 July 2017 Yin Limited acquires a 30% interest in Yang Limited for a cash consideration
of $450,000. On the date of acquisition, the assets of Yang Limited are reported at fair value.
The equity of Yang Limited at the date of acquisition is:

$
Contributed equity 1,500,000
Retained earnings 750,000
Total equity 2,250,000

Additional information:

a) For the reporting period ending 30 June 2018, Yang Limited records a profit for the
year of $95,000, from which it pays a dividend of $40,000.
b) For the reporting period ending 30 June 2019, Yang Limited records a profit for the
year of $125,000, from which it pays a dividend of $65,000.
c) On 30 June 2018, Yang Limited revalues its land upwards by $60,000.
d) The tax rate is 30%.

Required:

Prepare the journal entries under the equity method of accounting for the investment in Yang
Limited for the reporting periods ending 30 June 2018 and 30 June 2019.

Equity Method – 30 June 2018

Recognition of investment in Yang Limited

Dr Investment in Yang Limited 450,000
Cr Cash 450,000

Recognition of share in Yang Limited’s profit

Dr Investment in Yang Limited 28,500
Cr Cash 28,500

Recognition of dividend received

Dr Cash 12,000
Cr Investment in Yang Limited 12,000
 Harrison Sanko Student ID: 300418823

Equity Method – 30 June 2019

Recognition of share in Yang Limited’s profit

Dr Investment in Yang Limited 37,500
Cr Share in Yang Limited’s Profit 37,500

Recognition of dividend received

Dr Cash 12,500
Cr Investment in Yang Limited 12,500

Recognition of share in Yang Limited’s upward revaluation of land

Dr Investment in Yang Limited 12,600
Cr Revaluation Surplus 12,600

Question 2: Classifying Joint Arrangements

Falls Ltd and Creek Ltd decided to jointly undertake the manufacture of an electric car. They
formed Silver Ltd, which will manufacture the car. Falls Ltd and Creek Ltd provide the
various parts for the manufacture of the car, which is assembled by Silver Ltd.

Falls Ltd and Creek Ltd each hold 50% of the voting rights in Silver Ltd and receive 50% of
the cars produced by Silver Ltd. Falls Ltd and Creek Ltd then sell the cars in their own
geographic region. The constitution of Silver Ltd requires that the operations of the company
must be in accordance with a business plan prepared annually, and to which both Falls Ltd
and Creek Ltd both agree. Silver Ltd has six directors, with three being appointed by Falls
Ltd and three by Creek Ltd.

Required:

Evaluate whether a joint arrangement exists and how it should be classified.

A joint arrangement is an arrangement of which two or more parties have joint control (NZ
IFRS, paragraph 4-5). A joint arrangement has two main characteristics:
 The parties are bound by a contractual arrangement
 The contractual arrangement gives two or more of those parties joint control
of the arrangement.

Evidence of a joint arrangement:

 Falls Ltd and Creek Ltd each hold 50% of the voting rights in Silver Ltd. This indicates
that when a decision needs to be made, regarding business operations, both parties
would need to agree on the decision being made.
 Harrison Sanko Student ID: 300418823

 Both Falls Ltd and Creek Ltd would need to agree on the annual business plan and so
represents a joint arrangement.
 Due to Silver Ltd having six directors, 3 from Creek Ltd and 3 from Falls Ltd, shows
fair structure to the board which again shows there is a joint arrangement between
Falls and Creek Ltd.

Silver Ltd produces the electric cars and are then distributed to Falls and Creek Ltd, where
the two companies sell the cars in their own separate geographic regions. The owners of
Silver Ltd generates the profit but due to the joint arrangement, Silver Ltd makers neither a
profit nor loss, it just produces output. Therefore, Falls and Creek Ltd have rights to all
profits, assets and economic benefits of Silver Ltd due to the joint arrangement.

Question 3: Applying NZ IFRS 10

Lethbridge Ltd owns 40% of the shares in Manawatu Ltd and holds the only substantial block
of shares in that entity; no other party owns more than 3% of the shares. The annual general
meeting of Manawatu Ltd is to be held in one month’s time. Two scenarios may arise at this
meeting:
1. Lethbridge Ltd will be able to elect a majority of Manawatu Ltd’s board of directors as
a result of exercising its votes as the largest holder of shares. As only 75% of the
shareholders voted in the previous year’s annual meeting. Lethbridge Ltd may have the
majority of votes that are cast at the meeting.
2. After meeting with other shareholders who normally attend general meetings of
Manawatu Ltd and convincing these shareholders to vote with it, Lethbridge Ltd may
obtain the necessary votes to have its nominees elected as directors of the board of
Manawatu Ltd, regardless of the attendance at the general meeting.

Required:

a) Consider the factors that should be taken into account in determining whether or not
an entity is a subsidiary. In addition, explain briefly how the subsidiary will be
reported in the General Purpose Financial Reports.

b) In respect of each of the individual scenarios, discuss the potential for Manawatu Ltd
being classified as a subsidiary of Lethbridge Ltd.

(a) NZ IFRS 10 defines a subsidiary as an entity that is controlled by another entity (a

parent). Control of that entity occurs when “it is exposed, or has rights, to variable
returns from its involvements with the investee and has the ability to affect those
returns through its power over the investee” (NZ IFRS 10, paragraph 6). Power over
an investee, is when the investor has existing rights that give it the current ability to
direct the relevant activities (NZ IFRS 10, paragraph 10). Because Lethbridge Ltd only
owns 40% of the shares in Manawatu Ltd (below 50% interest), it is not the
controlling interest of Manawatu Ltd as judgement on the existence of control is
required by an accountant.
 Harrison Sanko Student ID: 300418823

If the entity is a subsidiary, then its financial reports must be consolidated into the
parents General Purpose Financial Reports. This is to show the shareholders of the
parent the combined performance of each company.

(b)
Scenario 1:
 Specific factors that determine Lethbridge Ltd existence of control:
o No other investor has a greater controlling interest above 3% in
Manawatu Ltd
o There was only 75% attendance of investors at Manawatu Ltd AGM
o Non-controlling interest of Manawatu Ltd = 60%

Referring to NZ IFRS 10 B43 Example 4, it is probable that Lethbridge Ltd is the parent of
Manawatu Ltd.

Scenario 2:

 If investors attended the AGM and held the significant voting shares, then
investors could outvote Lethbridge Ltd. If Lethbridge Ltd has a better business
model and has more productive and efficient managerial skills, then investors
may allow Lethbridge Ltd to manage Manawatu Ltd. This would indicate
Lethbridge Ltd not being the parent entity of Manawatu Ltd.
 Just because Lethbridge Ltd nominees are elected as board members does
not make Lethbridge Ltd the parent of Manawatu Ltd. There can be a
difference between the board members controlling the entity, while they
may not have the capacity of control.