Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r }
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $500 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following is the correct substitution elimination entry as at 30 June 20X4?

Question

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } 
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $500 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following is the correct substitution elimination entry as at 30 June 20X4?

Quizplus · Accepted Answer

The correct entry eliminates the equity of Jeannie Ltd at acquisition and recognizes the investment and any bargain purchase gain. The total equity of Jeannie at acquisition was $750,000 ($500,000 Capital + $100,000 Reserves + $150,000 Retained profits), and Rose paid $500,000 for the shares, resulting in a bargain purchase gain of $250,000 ($750,000 - $500,000). The profits made after acquisition are not considered in this entry.

Rose Ltd Acquired All the Equity of Jeannie Ltd on 1