On 1 July 20x1, Ren Ltd acquired a 30% interest in Wei Ltd at a cost of $120,000. The shareholders' equity of Wei Ltd at the above date was:
$ Share capital - 160,000 ordinary shares of $1 fully paid 160,000 Retained earnings 80,000
All the identifiable net assets of Wei Ltd were recorded at fair value. Summarised information on profit and loss and appropriations of Wei Ltd as at 30 June 20x3 appears below: $ Operating profit before income tax 2,840,000 Income tax expense (1,360,000) Operating profit after income tax 1,480,000 Retained earnings at 1 July 20x2 128,000 1,608,000 Dividends paid (400,000) Retained earnings at 30 June 20x3 1,208,000
The directors have applied the impairment test and determined that a write down of $4,800 is required as at 30 June 20x3.
Additional information:
(a) The shareholders' equity of Wei Ltd at 30 June 20x3 was:
$ Share capital 160,000 Revaluation surplus 240,000 Retained earnings 1,208,000
(b) At 30 June 20x3, Wei Ltd held inventory costing $200,000, which has been purchased from Ren Ltd. A profit of $80,000 before tax has been made on the sale.
(c) The tax rate is 30%.
Required: Assuming Ren Ltd does not prepare consolidated financial statements, prepare the journal entry in the books of Ren Ltd for the year ended 30 June 20x3 to equity account its investment in Wei Ltd.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson Australia]