Dixie Ltd Acquired a 20 Per Cent Interest in Jazz

question 31

Multiple Choice

Dixie Ltd acquired a 20 per cent interest in Jazz Ltd on 1 July 2013 for a cash consideration of $366 000.It has a sufficient balance of voting rights in Jazz Ltd to give it significant influence in its operating and financing decisions.Jazz's assets and liabilities were recorded at fair value at the time of purchase and were represented by equity as follows: $$\begin{array} { | l | r | } \hline \text { Share capital } & 1000000 \\\hline \text { Retained earnings } & \underline { 830000 } \\\hline \text { Total shareholders' funds } & \underline {1830000} \\\hline\end{array}$$ During the period ended 30 June 2014 the following events occurred:
Jazz had an after-tax profit of $348 000.
Jazz proposed a dividend out of pre-acquisition profits of $25 000.
Later in the period Jazz paid the $25 000 dividend and declared a further $25 000 dividend out of post-acquisition profits.This dividend will not be paid until the following period.
Dixie Ltd accrues the dividends of associates as revenue when they are proposed.What is the amount of the investment in Jazz Ltd and income that will be recorded in the books of Dixie Ltd as at 30 June 2014 under (i) the cost method and (ii) the equity method?

• A) (i) Investment in Jazz Ltd $366 000; income $5000 (ii) Investment in Jazz Ltd $385 600; income $69 600
• B) (i) Investment in Jazz Ltd $366 000; income $10 000 (ii) Investment in Jazz Ltd $306 400; income $10 000
• C) (i) Investment in Jazz Ltd $366 000; income $10 000 (ii) Investment in Jazz Ltd $435 600; income $79 600
• D) (i) Investment in Jazz Ltd $361 000; income $5000 (ii) Investment in Jazz Ltd $425 600; income $69 600

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Definitions:

Dioxins

Highly toxic chemical compounds that are environmental pollutants and known for their ability to persist in the environment and accumulate in the food chain.

Parts Per Million

A unit of measurement used to denote the concentration of a substance in water or air, equal to 1 part of the substance in 1,000,000 parts of the solvent.

Scatterplot

A type of graph used in statistics to display values for typically two variables for a set of data, showing how much one variable is affected by another.

Reciprocal Square Root

The mathematical operation of taking the square root of a number and then finding the reciprocal of that quantity.