On 1 July 2017 Fred Ltd acquired 30% of the shares of Barney Ltd for $240 000. At that date, the equity of Barney Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows:[table]
Year ended30 June | Profit/(Loss)$ 2018 | 40 000 2019 | (360 000) 2020 | (500 000) 2021 | 15 000 2022 | 44 000
[/table]There have been no dividends paid or movements in reserves since the date of acquisition. At 30 June 2019 the equity accounted balance of the investment in Barney was:

Question

BlackTom AI · Accepted Answer

We start by restating the scenario: Fred Ltd acquired a 30% stake in Barney Ltd on 1 July 2017 for $240,000. At acquisition, Barney’s equity was $800,000, and there were no dividends or movements in reserves after the acquisition. We are asked for the equity accounted balance of the investment in Barney as at 30 June 2019, given the profits/losses for each year since acquisition: 2018: $40,000; 2019: $(360,000).

Now, applying the equity method: the investor adjusts the carrying amount of the investment by its share of post-acquisition profits or losses, plus or minus any dividends received (there were no dividends here). The share of profits/losses is 30% of Barney’s post-acquisition profit or loss for each year.

Step by step:
- Start with the cost of the investment: $240,000.
- Year 2018 profits: Barney reports a $40,000 profit. Fred’s share = 30% × $40,000 = $12,000. This increases the carrying amount.
- Year 2019 profits: Barney reports a loss of $360,000. Fred’s share = 30% × $(360,000) = $(108,000). This decreases the carrying amount.

Compute the cumulative adjustment:
- Net adjustment = $12,000 (2018) + $(108,000) (2019) = $(96,000).

Now add the cumulative adjustment to the initial investment:
- Carrying amount at 30 June 2019 = $240,000 + $(96,000) = $144,000.

Considerations to rule out alternative choices:
- If you started with $240,000 and only added profits without subtracting losses, you’d overstate the balance; the large loss in 2019 dominates the result, pulling the figure down to $144,000.
- The option $108,000 would correspond to 30% of the 2019 loss only (which ignores the 2018 profit that partially offsets it), so it’s not the net carrying amount after both years.
- The option $252,000 would imply adding the 2018 profit and some other offset but not fully accounting for the 2019 loss, which is inconsistent with the 30% share of post-acquisition results.
- The option $240,000 would reflect no profit or loss recognized since acquisition, which contradicts the reported post-acquisition results.

In summary, the correct calculation involves starting from the cost, adding 30% of the 2018 profit, and subtracting 30% of the 2019 loss, yielding a net adjustment of $(96,000) to arrive at $144,000 as the equity accounted balance at 30 June 2019.

ACCT5942-Corporate Accounting and Regulation - Term 2, 2025

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