Question

I still don't understand how we get 0.7 after adjustment, what is this adjustment, what numbers we calculated to get it ? ( clearlyful ...How we get 0.7 ? where'd how exactly it came from ?

Refrence

Deegan. (2016). Financial Accounting . McGraw-Hill Education, Australia

Prepare the journal entries under both the cost and the equity method of accounting for the investment in Pa Ltd for the year ending 30 June 2020 (that is, two years after acquisition). LO 32.7 20. On 1 July 2018 Stokes Ltd acquires 25 per cent of the issued capital of Cotter Ltd for a cash consideration of $120 000. At the date of acquisition, the shareholders' equity of Cotter Ltd is: Share capital $150 000 Retained earnings $100 000 Total shareholders' equity $250000 Additional information • On the date of acquisition, buildings have a carrying amount in the accounts of Cotter Ltd of $80 000 and a fair value of $100 000. The buildings have an estimated useful life of 10 years after 1 July 2018. • For the year ending 30 June 2019 Cotter Ltd records an after-tax profit of $30 000, from which it pays a dividend of $10 000. For the year ending 30 June 2020 Cotter Ltd records an after-tax profit of $100 000, from which it pays a dividend of $50 000. Stokes Ltd has a number of subsidiaries. The tax rate equals 30 per cent REQUIRED Calculate the amount of goodwill at the date of acquisition, and prepare the journal entries for the year ending 30 June 2019 and 30 June 2020, applying the equity method of accounting. LO 32.3 Identifiable net assets of the associate as at 1 July 2018 $250 000 Adjustment to fair value for buildings after related tax effect (20 000 x 0.7) $14 000 Fair value of Cotter Ltd's identifiable net assets as at 1 July 2018 $264 000 Stokes Ltd's equity interest x 25% Fair value of assets acquired by Stokes Ltd as at 1 July 2018 $66 000 Acquisition cost $120 000 Goodwill acquired $54 000 As there has been no impairment of goodwill, no adjustments will need to be made to reduce the value of the investment to account for goodwill impairment. Adjustments to recognise additional depreciation expenses Extra depreciation expense pertaining to buildings: ($20 000 = life of the buildings) x Stokes Ltd's ownership interest = ($20 000 - 10) x 25% = $500. The after-tax effect of this is $500 x (1 – 0.30) = $350.

Answer 1

Fair value of building	$ 100,000
Less: book value in Cotter ltd books	80,000
Upward adjustment to carrying value	$ 20,000

In given case, Stokes Ltd has acquired 25% of Cotter Ltd means for cash consideration giving Cotter Ltd the form of an associate company.

That means the books of Stokes and Cotter Ltd has to be consolidated.

When Stokes Ltd transfers the assets and liabilities of Cotter Ltd in consolidated balance sheet, they have to be made at fair value not carrying value in books of Cotter Ltd.

Hence, the adjustment of $20,000 needs to be provided for consolidation.

Furthermore, the notional tax adjustment has to be made.

Tax on adjustment = 20,000 X 30% = $ 6000

Adjustment net of tax = $ 20,000 – 6000 = $ 14,000.

Alternatively, this can be coined as $ 20,000 (1-tax) = 20,000 (1-0.3) = $ 14,000

This 1-0.3 = 0.7 where you get your answer for tax effect adjustment

This adjustment is to be added to identifiable net assets of associate for $ 14,000.

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