Hip Hop Ltd acquired a 30 per cent interest in Rock Ltd on 1 July 2014 for a cash consideration of $984 000.Rock Ltd's assets and liabilities were recorded at fair value at the time of purchase and were represented by equity as follows: $$\begin{array} { | l | r | }
\hline
\text { Share capital } & 2360000 \
\hline \text { Retained earnings } & \underline { 920000 } \
\hline \text { Total shareholders' funds } & \underline { 3280000 } \
\hline
\end{array}$$ Additional information relating to the period ended 30 June 2016:
The opening balance of Rock's retained earnings was $1 100 000.Rock Ltd had paid a dividend out of pre-acquisition profits of $80 000 during the 2013/2014 period.
Rock Ltd had an after-tax profit of $260 000 for the 2014/2015 period.
Rock Ltd declared an $80 000 dividend out of post-acquisition profits.This dividend will not be paid until the following period.
Hip Hop Ltd accrues the dividends of associates as revenue when they are proposed.What is the amount of the investment in Rock Ltd and the income that will be recorded in the books of Hip Hop Ltd as at 30 June 2016 under (i)the cost method and (ii)the equity method?

Question

Hip Hop Ltd acquired a 30 per cent interest in Rock Ltd on 1 July 2014 for a cash consideration of $984 000.Rock Ltd's assets and liabilities were recorded at fair value at the time of purchase and were represented by equity as follows: $$\begin{array} { | l | r | } 
\hline
\text { Share capital } & 2360000 \
\hline \text { Retained earnings } & \underline { 920000 } \
\hline \text { Total shareholders' funds } & \underline { 3280000 } \
\hline
\end{array}$$ Additional information relating to the period ended 30 June 2016:
The opening balance of Rock's retained earnings was $1 100 000.Rock Ltd had paid a dividend out of pre-acquisition profits of $80 000 during the 2013/2014 period.
Rock Ltd had an after-tax profit of $260 000 for the 2014/2015 period.
Rock Ltd declared an $80 000 dividend out of post-acquisition profits.This dividend will not be paid until the following period.
Hip Hop Ltd accrues the dividends of associates as revenue when they are proposed.What is the amount of the investment in Rock Ltd and the income that will be recorded in the books of Hip Hop Ltd as at 30 June 2016 under (i)the cost method and (ii)the equity method?

Quizplus · Accepted Answer

Under the cost method, the investment remains at the original cost of $984,000 minus the pre-acquisition dividend of $24,000 (30% of $80,000), resulting in $960,000. Income is the accrued dividend of $24,000 (30% of $80,000). Under the equity method, the investment is adjusted for Hip Hop's share of Rock's post-acquisition profits: $78,000 (30% of $260,000) added to the original investment, resulting in $1,068,000. Income is the share of post-acquisition profits, $78,000.

Hip Hop Ltd Acquired a 30 Per Cent Interest in Rock