Eagle Ltd Is the Ultimate Parent Entity in a Group

question 33

Multiple Choice

Eagle Ltd is the ultimate parent entity in a group of companies.On 1 July 2013 Eagle Ltd acquired 30 per cent of the issued capital of Sparrow Ltd for a cash consideration of $366 000.At the date of acquisition the net assets of Sparrow Ltd are recorded at fair value and are represented by equity as follows: $$\begin{array} { | l | r | } \hline \text { Share capital } & 820000 \\\hline \text { Retained earnings } & \underline{400000} \\\hline \text { Total shareholders' equity } & \underline{1220000} \\\hline\end{array}$$ Additional information:
During the financial year ending 30 June 2014 Sparrow Ltd makes a profit before tax of $140 000 and an after-tax profit of $89 000.
Sparrow Ltd proposed a dividend of $20 000 for the 2013/2014 period that will be paid early in the next period.
Eagle Ltd does not recognise dividends proposed by associates until they are paid.
During the year ended 30 June 2014 Sparrow made inter-entity sales to members of Eagle's economic group.These include:
Sparrow sold inventory to Peregrin Ltd,an 80 per cent owned subsidiary of Eagle Ltd.The inventory cost Sparrow $8000 and was sold to Peregrin for $12 000.Half of that inventory is still on hand in Peregrin at the end of the period.
Sparrow sold inventory to Seagull Ltd,a 25 per cent owned associate of Eagle's.The inventory cost Sparrow $10 000 and was sold to Seagull for $15 000.Forty per cent of this inventory is still on hand in Seagull at the end of the period.
The tax rate is 30 per cent.
What consolidated journal entry(ies) is(are) required to equity account for Eagle's interest in Sparrow Ltd for the period ended 30 June 2014?

• A)
• \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Investment in Sparrow Ltd } & 25860 & \\
• \hline \mathrm { Cr } & \text { Share of associate's profit } & & 25860 \\
• \hline\\
• \hline \mathrm { Dr } & \text { Dividend revenue } & 6000 & \\
• \hline \mathrm { Cr } & \text { Investment in Sparrow Ltd } & &6000 \\
• \hline
• \end{array}\]
• B)
• \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Investment in Sparrow Ltd } & 25860 & \\
• \hline \mathrm { Cr } & \text { Share of associate's profit } & & 25860 \\
• \hline
• \end{array}\]
• C)
• \[\begin{array} { | c | l | r | r | }
• \hline \mathrm { Dr } & \text { Investment in Sparrow Ltd } & 26297 & \\
• \hline \mathrm { Cr } & \text { Share of associate's profit } & & 26297 \\
• \hline & & & \\
• \hline \mathrm { Dr } & \text { Dividend revenue } & 6000 & \\
• \hline \mathrm { Cr } & \text { Investment in Sparrow Ltd } & & 6000 \\
• \hline
• \end{array}\]
• D)
• \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Investment in Sparrow Ltd } & 366000 & \\
• \hline \mathrm { Cr } & \text { Share capital } & & 246000 \\
• \hline \mathrm { Cr } & \text { Retained earnings } & & 120000 \\
• \hline\\
• \hline \mathrm { Dr } & \text { Investment in Sparrow Ltd } & 26700 & \\
• \hline \mathrm { Cr } & \text { Share of associate's profit } & & 26700 \\
• \hline & & & \\
• \hline \mathrm { Dr } & \text { Dividend revenue } & 6000 & \\
• \hline \mathrm { Cr } & \text { Investment in Sparrow Ltd } & &6000 \\
• \hline
• \end{array}\]

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Definitions:

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