Angels Ltd acquired 100% of ACDC Ltd on 1 July 20X0 for $2 000 000, when the equity of ACDC Ltd comprised paid up capital of $1 400 000 and retained profits of $300 000.All ACDC Ltd's balance sheet was reported at fair value at acquisition date.During the year ended 30 June 20X1 ACDC Ltd declared and paid a total dividend of $100 000 out of pre-acquisition profits.What is the elimination entry for these transactions for the year ended 30 June 20X1? Assume AASB 127.38A was not operational during this period.
A)$\begin{array}{lrr}
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Goodwill } & 300000 & \
\text { Paid up capital } & 1400000 & \
\text { Retained profits } & 300000 & \
\text { Investment in ACDC Ltd } & & 2000000
\end{array}$

B)$\begin{array}{lrr}
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Goodwill } & 300000 & \
\text { Paid up capital } & 1400000 & \
\text { Retained profits } & 200000 & \
\text { Investment in ACDC Ltd } & & 1900000
\end{array}$

C)$\begin{array}{lrr}
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Goodwill } & 200000 & \
\text { Paid up capital } & 1400000 & \
\text { Retained profits } & 300000 & \
\text { Investment in ACDC Ltd } & & 1900000
\end{array}$

D)$\begin{array} { l r c }
\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \
\text { Goodwill } & 300000 & \
\text { Paid up capital } & 400000 \
\text { Retained profits } & 100000 & \
\text { Dividend revenue } & 200000 & \
\text { Investment in ACDC Ltd } & & 2000000
\end{array}$

Question

Angels Ltd acquired 100% of ACDC Ltd on 1 July 20X0 for $2 000 000, when the equity of ACDC Ltd comprised paid up capital of $1 400 000 and retained profits of $300 000.All ACDC Ltd's balance sheet was reported at fair value at acquisition date.During the year ended 30 June 20X1 ACDC Ltd declared and paid a total dividend of $100 000 out of pre-acquisition profits.What is the elimination entry for these transactions for the year ended 30 June 20X1? Assume AASB 127.38A was not operational during this period.
A)$\begin{array}{lrr}
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Goodwill } & 300000 & \
\text { Paid up capital } & 1400000 & \
\text { Retained profits } & 300000 & \
\text { Investment in ACDC Ltd } & & 2000000
\end{array}$

B)$\begin{array}{lrr}
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Goodwill } & 300000 & \
\text { Paid up capital } & 1400000 & \
\text { Retained profits } & 200000 & \
\text { Investment in ACDC Ltd } & & 1900000
\end{array}$

C)$\begin{array}{lrr}
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Goodwill } & 200000 & \
\text { Paid up capital } & 1400000 & \
\text { Retained profits } & 300000 & \
\text { Investment in ACDC Ltd } & & 1900000
\end{array}$

D)$\begin{array} { l r c } 
\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \
\text { Goodwill } & 300000 & \
\text { Paid up capital } & 400000 \
\text { Retained profits } & 100000 & \
\text { Dividend revenue } & 200000 & \
\text { Investment in ACDC Ltd } & & 2000000
\end{array}$

Quizplus · Accepted Answer

Under the acquisition method, dividends declared by the subsidiary subsequent to the acquisition are not eliminated because they do not relate to pre-acquisition equity. Therefore, the only adjustment necessary in this scenario is to reduce the retained profits balance by the amount of the dividend, resulting in a credit to Retained Profits of $100,000. Since there is no change to the capital balances or goodwill, options A, C, and D can be eliminated. Option B correctly adjusts the retained profits balance and the investment in ACDC Ltd balance to reflect the dividend payment.

Angels Ltd Acquired 100% of ACDC Ltd on 1 July