Hip Hop Ltd acquired a 30 per cent interest in Rock Ltd on 1 July 2004 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: Additional information relating to the period ended 30 June 2006:
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 2003/2004 period.
Rock Ltd had an after-tax profit of $260,000 for the 2004/2005 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 2006 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 2004 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:  Additional information relating to the period ended 30 June 2006:
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 2003/2004 period.
Rock Ltd had an after-tax profit of $260,000 for the 2004/2005 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 2006 under (i)the cost method and (ii)the equity method?

Quizplus · Accepted Answer

Under the cost method, the investment in Rock Ltd would be recorded at its original cost of $984,000. Since no dividends were received, the income recorded would be $0.

Under the equity method, the investment in Rock Ltd would be recorded at its original cost plus the investor's share of post-acquisition retained earnings ($984,000 + $80,000 + $260,000 - $80,000 = $1,068,000). The income recorded would be the investor's share of Rock Ltd's net income for the 2004/2005 period and the proposed dividend for the 2005/2006 period ($260,000 x 30% + $80,000 x 30% = $78,000).

Hip Hop Ltd Acquired a 30 Per Cent Interest in Rock