Peyton owns 25 of the shares of its associate Merk #31

Peyton owns 25% of the shares of its associate, Merk. At the acquisition date, there were no
differences between the fair values and the carrying amounts of the identifiable assets and
liabilities of Merk. Peyton paid $40,000 for the investment.For 2013, Merk recorded net income
of $100,000. During this period, Merk paid a $10,000 dividend, declared in December 2013, and
an interim dividend of $8,000. The tax rate is 30%.The following transactions have occurred
between Peyton and Merk:1. On January 1, 2012, Merk sold a non-current asset costing
$10,000 to Peyton for $12,000. Peyton applies a 10% p.a. on cost using the straight-line
method of depreciation.2. On June 30, 2013, Merk sold an item of plant to Peyton for $15,000.
The asset's carrying amount to Merk at time of sale was $12,000. Peyton applies a 15% p.a. on
cost using the straight-line method of depreciation.3. Inventory that cost $20,000 was sold by
Merk to Peyton for $28,000 on December 1, 2013. Peyton still had the inventory on hand at
December 31, 2013.4. On January 1, 2012, Peyton sold an item of machinery to Merk for
$6,000. This item had a carrying value to Peyton of $4,000. Peyton depreciates straight line
over 10 years.5. The Balance in the Investment account under the equity method at Janaury 1,
2013 was $70,000.Required (a) Peyton applies IAS 28 in accounting for its investment in Merk.
Assuming Peyton does not prepare consolidated financial statements, prepare the journal
entries in the records of Peyton for the year ended December 31, 2013, in relation to its
investment in Merk.(b) Calculate the balance in the Investment in Merk on the statement of
financial position at December 31, 2013.View Solution:
Peyton owns 25 of the shares of its associate Merk

ANSWER
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