On November 1 20X6,a parent entity Midstream Ltd acquired 25% of the share capital of Delta Ltd and the power to significantly influence the operating and financial policies of that company for $5,000,000 cash.In the period from the date of acquisition to June 30 20X7,Delta Ltd earned a profit for the period of $400,000 (after tax of $200,000)and declared a dividend of $200,000.At June 30 20X7,Midstream Ltd recognised its equity in the dividend.For the year ended June 30 20X7,in the separate income statement of Midstream Ltd and in the consolidated income statement of the group controlled by Midstream Ltd,the equity in the profit before tax of Delta Ltd would be reported as:
A) $200,000 and $100,000 respectively
B) $50,000 and $150,000 respectively
C) $50,000 and $120,000 respectively
D) None of the above.

Question

Quizplus · Accepted Answer

Midstream Ltd acquired 25% of the share capital of Delta Ltd and has significant influence over its operating and financial policies. Therefore, Midstream Ltd should account for its investment under the equity method. 
The equity in the profit before tax of Delta Ltd for the period from November 1 20X6 to June 30 20X7 would be calculated as follows:
Profit before tax of Delta Ltd: $400,000
Less: tax expense of Delta Ltd: $200,000
Profit after tax of Delta Ltd: $200,000
Less: Midstream Ltd's share of profit after tax (25% of $200,000): $50,000
Equity in profit before tax: $150,000
Therefore, the equity in the profit before tax of Delta Ltd for the year ended June 30 20X7 would be reported as $50,000 in the separate income statement of Midstream Ltd, and $150,000 in the consolidated income statement of the group controlled by Midstream Ltd, which includes the results of Delta Ltd.

On November 1 20X6,a Parent Entity Midstream Ltd Acquired 25