Lola Ltd acquired 20% of and significant influence over the operations of World Ltd on 1 July 20X0.At that date the equity of World Ltd comprised retained profits of $900 000 and paid up capital of $5 000 000.During the financial year ended 30 June 20X1, World Ltd revalued its plant and equipment upwards by $400 000, crediting this amount to its asset revaluation reserve.Lola Ltd does not control any entities.What is the journal entry, if any, to record this revaluation in the financial statements of Lola Ltd for the year ended 30 June 20X1 using equity accounting?

Question

Quizplus · Accepted Answer

Under equity accounting, Lola Ltd records its share of World Ltd's post-acquisition profits or losses in its own financial statements. The revaluation of World Ltd's plant and equipment does not affect its profits, but rather increases its asset revaluation reserve. Therefore, Lola Ltd would record its share of the increase in the asset revaluation reserve as follows:

Debit Investment in World Ltd: $80,000
Credit Share of associate's reserves: $80,000

This reflects Lola Ltd's increased share of World Ltd's equity, which includes the asset revaluation reserve.

Lola Ltd Acquired 20% of and Significant Influence Over the Operations