SOLUTION PRACTICE 9: EQUITY ACCOUNTING

Exercise 31.7

Inter-entity transactions where investor does not prepare consolidated financial

statements

Dolphin Ltd owns 25% of the shares of its associate, Shark Ltd. At the acquisition date,
there were no differences between the fair values and the carrying amounts of the
identifiable assets and liabilities of Shark Ltd.

For 2022–23, Shark Ltd recorded a profit of $200  000. During this period, Shark Ltd
paid a $20  000 dividend, declared in June 2022, and an interim dividend of $16 000. The
tax rate is 30%.

The following transactions have occurred between Dolphin Ltd and Shark Ltd.

On 1 July 2021, Shark Ltd sold a non-current asset costing $20  000 to Dolphin Ltd
for $24  000. Dolphin Ltd applies a 10% p.a. on cost straight-line method of
depreciation.
On 1 January 2023, Shark Ltd sold an item of plant to Dolphin Ltd for $30  000. The
carrying amount of the asset to Shark Ltd at time of sale was $22  The. Dolphin Ltd
applies a 15% p.a. straight-line method of depreciation.
A non-current asset with a carrying amount of $40  000 was sold by Shark Ltd to
Dolphin Ltd for $56  000 on 1 June 2023. Dolphin Ltd regarded the item as
inventories and still had the item on hand at 30 June 2023.
On 1 July 2021, Dolphin Ltd sold an item of machinery to Shark Ltd for $14 000.
This item had cost Dolphin Ltd $8000. Dolphin Ltd regarded this item as inventories
whereas Shark Ltd intended to use the item as a non-current asset. Shark Ltd
applied a 10% p.a. on cost straight-line depreciation method.
Dolphin Ltd applies the equity method in accounting for its investment in Shark Ltd.

Dolphin Ltd does not prepare consolidated financial statements.

Required
Prepare the journal entries of Dolphin Ltd for the year ended 30 June 2023 in relation
to its investment in Shark Ltd. (LO6)

Profit for the period (assume after-tax) $200 000

Adjustments:
Realised profit on equipment sold on 1/7/21 (a)
10% x $4 000 (1 - 30%) 280
Unrealised profit on sale of plant on 1/1/23 (b)
original profit $8 000 (1 – 30%) less
depreciation of 15% x ½ x $5 600 (5 180)
Unrealised profit in ending inventory (c)
$16 000 (1 – 30%) (11 200)
Realised profit on inventory to non-current asset sale (d)
10% x $6 000 (1 – 30%) 420
184 320
 Investor’s share – 25% (approx.) $46 080

Note: amounts rounded to the nearest whole number.

Cash Dr 5 000
Investment in Shark Ltd Cr 5 000
(Dividend received from associate: 25% x $20 000)

Cash Dr 4 000
Investment in Shark Ltd Cr 4 000
(Interim dividend received from associate: 25% x $16 000)

Investment in Shark Ltd Dr 46 080

Share of profit or loss of associates Cr 46 080