Question: On 1st July 2009 C Ltd acquires a 30% shares in J Ltd for an exchange of cash of $270 000. On acquisition date, the assets of J Ltd are reported at fair value and the total equity is:
Contributing equity $660 000
Retained earnings $240 000
A dividend of $5 000 is paid by J Ltd on 31st October 2009 from profits earned in 2008-09 period (pre-acquisition). For the year ended 30th June 2010, J Ltd records an after tax profit of $50 000 for the year. A further dividend of $20 000 is declared by J Ltd on 30th June 2010 from profits earned in 2009-10 period. On 31st October 2010, J Ltd pays the $20 000 dividend declared on 30th June 2010.
For the year end 30th June 2011, J Ltd records an after-tax loss of $25 000. On 30th June 2011, J Ltd declares dividends of $10 000 to be paid out of the profits earned in the 2010 financial year. On 30th June 2011 J Ltd re-values its land upwards by an amount of $200 000. Tax rate is 33%.
Required: Prepare the journal entries under the equity method of accounting for C Ltd for the years ending 30th June 2010 and 30th June 2011 to account for its investment in J Ltd assuming that C Ltd is a parent entity which prepares consolidated financial statements.