ExpertHard2 marksMultiple Choice
ACCA · Question 15 · IAS 28 Investments in Associates and Joint Ventures
Section A
AeroSpace acquired 30% of the equity shares of OrbitTech on 1 January 20X5 for $4 million, giving it significant influence. For the year ended 31 December 20X5, OrbitTech reported a profit after tax of $1.5 million and paid a total dividend of $500,000. During the year, AeroSpace sold goods to OrbitTech for $800,000, making a markup of 25%. Half of these goods remained in OrbitTech's inventory at year-end.
What is the carrying amount of the investment in associate in AeroSpace's Consolidated Statement of Financial Position as at 31 December 20X5?
Section A
AeroSpace acquired 30% of the equity shares of OrbitTech on 1 January 20X5 for $4 million, giving it significant influence. For the year ended 31 December 20X5, OrbitTech reported a profit after tax of $1.5 million and paid a total dividend of $500,000. During the year, AeroSpace sold goods to OrbitTech for $800,000, making a markup of 25%. Half of these goods remained in OrbitTech's inventory at year-end.
What is the carrying amount of the investment in associate in AeroSpace's Consolidated Statement of Financial Position as at 31 December 20X5?
Answer options:
A.
$4,300,000
B.
$4,276,000
C.
$4,426,000
D.
$4,220,000
How to approach this question
Use the equity method formula: Initial Cost + Share of Post-Acquisition Profit - Share of Dividends - Share of PUP. Be careful with markup vs margin when calculating the unrealized profit.
Full Answer
B.$4,276,000✓ Correct
1. Initial Cost = $4,000,000.
2. Share of Profit = 30% x $1,500,000 = $450,000.
3. Share of Dividend = 30% x $500,000 = ($150,000).
4. PUP calculation: Sales = $800k. Markup = 25%. Profit = $800k x (25/125) = $160k. Unsold = 50%, so unrealized profit = $80k. AeroSpace's share of PUP = 30% x $80k = ($24,000).
5. Carrying Amount = $4,000,000 + $450,000 - $150,000 - $24,000 = $4,276,000.
Common mistakes
Treating markup as margin (multiplying by 25% instead of 25/125), forgetting to deduct dividends, or deducting 100% of the PUP instead of the investor's share.
Practice the full ACCA FR — Financial Reporting Practice Exam 5
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