Case study 1

On 1 July 2013, Piccolo Ltd acquired 40% of shares of Organ Ltd for $122 400. The equity of Organ
Ltd at acquisition date consisted of:
Share capital $200 000
General reserve 80 000
At 1 July 2013, all the identifiable assets and liabilities of Organ Ltd were recorded at fair value
except for the following
Carrying amount Fair value
Machinery $140 000 $160 000
Inventory 60 000 70 000

By 30 June 2014, the inventory on hand at 1 July 2014 had been sold by Organ Ltd. The machinery
was expected to provide future benefits evenly over the next 2 years and then scrapped. The tax rate is
30%.
Dividends declared at 30 June are paid within the following 3 monts, with liabilities being raised at
the date of declaration.
In January 2016, Organ Ltd revalued furniture upwards by $6000, affecting the asset revaluation
surplus by $4200.
The financial statements of Organ Ltd over three periods contained the following information
30 June 2014 30 June 2015 30 June 2016
Profit or loss $40 000 $60 000 $70 000
Retained earnings (opening balance) 80 000 _______ _______
120 000 _______ _______
Dividend paid - Interim (5 000) (10 000) (15 000)
Dividend declared (7 000) (15 000) (20 000)
Transfer to general reserve (10 000) (10 000) -
(22 000) _______ _______
Retained earnings (Closing balance) 98 000 _______ _______
Required
Prepare the entries in the consolidation worksheet of Piscolo Ltd to apply the equity method to its
investment in Organ Ltd for each of the 3 years ending 30 June 2014, 2015, 2016.
Case study 2
On 1 July 2015, Flute Ltd acquired 25% of the shares of Fife Ltd for $42 500. At this date, all the
identifiable assets and liabilities of Fife Ltd were recorded at amount equal to fair value, and the
equity of Fife Ltd consisted of:
Share capital $100 000
General reserve 30 000
Asset revaluation surplus 20 000
Retained earnings 20 000
During 2015 – 2016, Fife Ltd reported a profit of $25 00. The asset revaluation surplus increase by
$5000, this being reported in other comprehensive income. Fife Ltd paid a $4 000 dividend and
transferred $3000 to genereal reserve.
Required
Account for investment of Flute Ltd in Fife Ltd, in the case Flute has to and does not have to prepare
consolidated financial statements.
Case study 3
On 1 July 2015, Pipe Ltd acquired 25% of the shares of Recorder Ltd for $49 375. At this date, the
equity of Recorder Ltd consisted of:
Share capital $100 000
General reserve 50 000
Retained earnings 20 000
At the acquisition date, all the identifiable assets and liabilities of Recorder Ltd were recorded at fair
value, except for plant for which the fair value was $10 000 greater than its carrying amount, and
inventory whose fair value was $5000 greater than its cost. The tax rate is 30%. The plant has a
further 5-year life. The inventory was all sold by 30 June 2016.
In the reporting period ending 30 June 2016, Recorder Ltd reported a profit of $15 000.
Required
a. Account for investment of Pipe Ltd in Recorder Ltd in 2016.
b. Supposing that Pipe Ltd purchased 25% of the shares of Recoder Ltd for $45 000, Account
for investment of Pipe Ltd in Recorder Ltd in 2016.

Case study 4
On 1 July 2014, Guitar Ltd paid $2 696 000 for 40% of the shares of Banjo Ltd, a company involved
in the manufacture of garden equipment. At that date, the equity of Banjo Ltd consisted of:
Share capital (3 000 000 shares) $3 000 000
Retained earnings 3 000 000

At 1 July 2014, all identifiable net assets of Banjo were recorded at fair value except for:
Carrying amount Fair value
Machinery $2 500 000 $3 000 000
Inventory 1 000 000 1 200 000
The inventory was all sold by 30 June 2015. The plant had a further expected useful life of 5 years.
Additional information
a. On 1 July 2015, Guitar Ltd held inventory sold to it by Banjo Ltd at a profit before income
tax of $200 000. This was all sold by 30 June 2016.
b. In Febuary 2016, Banjo Ltd sold inventory to Guitar Ltd at a profit before income tax of $600
000. Half of this was still held by Guitar Ltd at 30 June 2016.
c. On 30 June 2016, Banjo Ltd held inventory sold to it by Guitar Ltd at a profit before income
tax of $200 000. This had been sold to Banjo Ltd for $2 000 000.
d. On 2 July 2014, Banjo Ltd sold some equipment to Guitar Ltd for $1 500 000, with Banjo Ltd
recording a profit before income tax of $400 000. The equipment had a further 4-year life,
with benefits expected to occur evenly in these years.
e. In June 2015, Banjo Ltd provided for a dividend of $1 000 000. This dividend was paid in
August 2015. Dividend revenue is recognised when the dividend is provided for.
f. The balances in the general reserve have resulted from transfers from retained earnings.
g. The tax rate is 30%.
h. The consolidated financial statements of Guitar Ltd and the financial statement of Banjo Ltd
at 30 June 2016, not including the equity-accounted figures, are as in the next page
Required
Prepare the consolidated financial statements of Guitar Ltd at 30 June 2016, applying the equity
method of accounting to the investment in Banjo Ltd.
 Statements of Profit or Loss and Other comprehensive income
For the year ended 30 June 2016
Guitar Ltd Banjo Ltd
‘000 ‘000
Renenue $25 000 $18 600
Expenses 19 200 13 600
Profit before tax 5 800 5 000
Income tax expense 2 200 1 100
Profit for the period 3 600 3 900
Other comprehensive income: revaluation gains - 400
Total comprehensive income 3 600 4 300

Statements of changes in equity

For the year ended 30 June 2016
Guitar Ltd Banjo Ltd
‘000 ‘000
Total comprehensive income $3 600 $4 300
Retained earnings as at 1/7/15 4 000 4 000
Profit 3 600 3 900
7 600 7 900
Transfer to general reserve - (1 000)
Dividend paid – Interim (3 000) (1 500)
Dividend declared (1 500) (1 000)
(4 500) (3 500)
Retained earnings as at 30/6/16 3 100 4 400
Asset revaluation surplus as at 1/7/15 - 200
Increase in 2015 – 2016 - 400
Asset revaluation surplus as at 30/6/16 - 600
General reserve as at 1/7/15 1 000 1 500
Increase in 2015 – 2016 - 1 000
General reserve as at 30/6/16 1 000 2 500

Statements of financial position

As at 30 June 2016
Guitar Ltd Banjo Ltd
‘000 ‘000
EQUITY AND LIABILITIES
Equity
Share capital 8 000 3 000
Asset revaluation surplus - 600
General reserve 1 000 2 500
Retained earnings 3 100 4 400
Total equity 12 100 10 500
Total liabilities 1 500 1 400
Total equity and liabilities 13 600 11 900

ASSETS
Non-current assets
Properties, plant and equipment 5 904 9 000
Investment in Banjo Ltd 2 696
Total non-current assets 8 600 9 000
Current assets
Inventory 4 000 2 000
Receivables 1 000 900
Total current assets 5 000 2 900
Total assets 13 600 11 900