Black Ltd acquired 75 % of White Ltd on 1 January 20X1 by paying $5 000 000 cash.At that date, the equity section of White Ltd's balance sheet was as follows:
$\begin{array}{llcc}
&\$\
\text {Share capital } &1000000 \
\text { Retained profits} &3000000\
\text { Asset revaluation reserve } &500000\

\end{array}$

All assets and liabilities were recorded at their fair values.During May 20X1 White Ltd paid a total dividend of $1 000 000 out of profits earned before 1 January 20X1.AASB 127.38A was not operational.
What would be the balance of the account 'Investment in White Ltd' at 30 June 20X1?

Question

Black Ltd acquired 75 % of White Ltd on 1 January 20X1 by paying $5 000 000 cash.At that date, the equity section of White Ltd's balance sheet was as follows:
$\begin{array}{llcc}
&\$\
  \text {Share capital  } &1000000  \
 \text {  Retained profits} &3000000\
 \text { Asset revaluation reserve } &500000\

\end{array}$

All assets and liabilities were recorded at their fair values.During May 20X1 White Ltd paid a total dividend of $1 000 000 out of profits earned before 1 January 20X1.AASB 127.38A was not operational.
What would be the balance of the account 'Investment in White Ltd' at 30 June 20X1?

Quizplus · Accepted Answer

The initial investment cost was $5 000 000 for 75% of the shares, so the total value of White Ltd was $6 666 667 ($5 000 000/0.75). 
After the dividend payment of $1 000 000, the retained earnings of White Ltd would be $2 000 000 (starting balance of $3 000 000 minus $1 000 000 dividend). 
Therefore, the value of Black Ltd's investment in White Ltd at 30 June 20X1 would be $4 750 000 ($6 666 667 x 0.75 minus $2 000 000) which is closest to option C ($4 250 000).

Black Ltd Acquired 75 % of White Ltd on 1