June 2014 associate equity accounting

Hey Biggles! Long time no see! Yes, just remember the mantra for working W5A Investment in Associate. That's cost of investment + our share of post-acquisition retained earnings - any impairment since acquisition However, in the exam, the question was about a consolidated Profit or Loss statement so we're looking at working W5B Share of Associate's this year's profits and the mantra there is :- Our share of this year's associate adjusted time-apportioned profit after tax. Now, in the exam, there was an annual profit of $10,000 after tax from which a dividend of $6,000 had been paid. Look at the lines above! "Our share of the associate's profit after tax" - ie before the dividend deduction. That's the figure for the statement of profit or loss. For the balance sheet, yes, we need to account for the dividend PAID / PROPOSED by the associate and deduct it in arriving at retained earnings and add it to the parent's retained earnings for the calculation of working W3 Consolidated Retained Earnings But for the consolidated statement of Profit or Loss, we take our share of the pre-dividend profit after tax Does that answer it?

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thanks mike that finally clears it. thanks Biggles for this thread. i mistakenly deducted 6000 from 10,000 and then time apportioned it to get (30% of 2000) = 600. mike referring to the exam question, are there 2 ways of showing pup when parent sells to associate? the rule is to include this pup in cost of sales when consolidating but is it ok if we deduct this pup from share of profits of associates? it will eventually have the same impact on the profit for the year in exam i deducted it from share of profit, hope they give me marks at least for calculating that pup anyway

Sorry for the interrupting, Sir, The 5millions in the statement of profit and loss provided in question for Penketh was OTHERS investment incomes right? And the share of associate's profit is 1.5 millions (10millions/2x30%) including in the investment incomes? So consolidated statement of profit and loss investment income is 7.3millions(5million + 0.8 million+ 1.5 millions), correct?

Anas, yes, there are two ways. The pup could be deducted from the associate in full and then we just take Penketh's share of that adjusted profits (so 10,000 less 3,000 = 7,000). Then include within the consolidated statement of income just our share of that adjusted profit (so 30% x 7,000 = 2,100) Or, take our share of the associate profit after tax (so 30% x 10,000 = 3,000) and then, within cost of sales, adjust for our share of the pup (so 30% x 3,000 = 900) and add that 900 to cost of sales. The net effect is, as you point out, an increase in the profit for the year of either 2,100 method 1 or (3,000 - 900) = 2,100 method 2 All clear?

Hong I'm sorry to say this, but I think that you are incorrect :-( 5,000 investment income in Penketh included the dividend received by Penketh from the associate (30% x 6,000 = 1,800) That needs to be taken out of the 5,000 because we are going to include within the Profit or Loss statement the Penketh 30% of the associate's this year's profits out of which that dividend has been paid and properly accounted for But we do have an element of subsidiary investment income (1,600 per the question) and that needs to be time-apportioned and included within the consolidated statement of profit or loss (but only the post acquisition element) So, in the final statement of profit or loss, we have the line:- "Investment income (5,000 - 1,800 + 800) 4,000" OK?

hi mike thanks for this clarification. much clearer now

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Sir, Thank for the replied! I got it.

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