On 1 July 2004 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000.At that date the equity of Spice Ltd was $800 000,with all identifiable assets and liabilities being measured at fair value.Profits/(losses)made since the date of acquisition are as follows.

There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2006 the equity accounted balance of the investment in Spice was:

Question

On 1 July 2004 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000.At that date the equity of Spice Ltd was $800 000,with all identifiable assets and liabilities being measured at fair value.Profits/(losses)made since the date of acquisition are as follows.

There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2006 the equity accounted balance of the investment in Spice was:

Quizplus · Accepted Answer

Equity accounted balance is the initial investment plus the proportionate share of post-acquisition profits/losses. 
Calculating the proportionate share of post-acquisition profits/losses: 
- First year (2004/05): (25% x $60,000) = $15,000 
- Second year (2005/06): (25% x $30,000) = $7,500 
Thus, the equity accounted balance at 30 June 2006 is $200,000 (initial investment) + $15,000 (first year profits) + $7,500 (second year profits) = $222,500. However, since there have been no dividends or movements in reserves, the equity accounted balance is equal to the carrying value of the investment, which is $110,000 (25% x $440,000). Therefore, the correct answer is B.

On 1 July 2004 Girls Ltd Acquired 25% of the Shares