Baker Ltd Acquired 22% of and Significant Influence Over the Operations

question 34

Multiple Choice

Baker Ltd acquired 22% of and significant influence over the operations of Street Ltd on 1 July 20X0.During the financial year ended 30 June 20X1, Street Ltd earned a profit of $140 000.Baker Ltd does not control any entities.What is the journal entry to record the share of Street Ltd's result in the accounts of Baker Ltd for the year ended 30 June 20X1 using the equity method?

• A)\(\begin{array} { l r r }
• \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\
• \text { Investment in Street Ltd } & 30800 & \\
• \text { Dividend revenue } & & 30800
• \end{array}\)
• B)\(\begin{array} { l r r }
• \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\
• \text { Investment in Street Ltd } & 30800 & \\
• \text { Share of associate's profit or loss } & & 30800
• \end{array}\)
• C)\(\begin{array} { l c c }
• \text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \\
• \text { Investment in Street Ltd } & 140000 & \\
• \text { Dividend revenue } & & 140000
• \end{array}\)
• D)No journal entry because Baker Ltd must use the cost method

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Definitions:

IRR Cross-over

A concept where two projects have the same initial investment but differing cash flows leading to points at which their internal rates of return intersect.

NPV

Net Present Value is a financial metric that calculates the present value of all net cash flows (positive and negative) from an investment, discounted back at the investor's required rate of return.

Required Return

The minimum expected return an investor demands for a particular investment, reflecting the investment's risk.

NPV

An alternative measure for Net Present Value, reflecting the difference in the present value of cash inflows and outflows over a period of time.