Evil Ltd Acquired 20% of and Significant Influence Over the Operations

question 32

Multiple Choice

Evil Ltd acquired 20% of and significant influence over the operations of Electric Ltd on 1 July 20X0.At that date the equity of Electric Ltd comprised retained profits of $800 000 and paid up capital of $3 000 000.During the financial year ended 30 June 20X1, Electric Ltd declared and paid a dividend of $200 000 out of profits earned to 30 June 20X0 and declared a final dividend of $300 000 out of profits earned in the year ended 30 June 20X1.Evil Ltd does not control any entities.What is the journal entry to record these dividends for Evil Ltd for the year ended 30 June 20X1 using the equity method?

• A)\(\begin{array} { l r c }
• \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\
• \text { Dividend receivable } & 200000 & \\
• \text { Dividend revenue } & & 200000 \\
• \begin{array} { l }
• \text { Bank } \\
• \text { Investment in Electric }
• \end{array} & 300000 & \\
• & & 300000
• \end{array}\)
• B)\(\begin{array} { l c c }
• \text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \\
• \text { Dividend receivable } & 200000 & \\
• \text { Bank } & 300000 & \\
• \text { Dividend revenue } & & 500000
• \end{array}\)
• C)\(\begin{array} { l r r }
• \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\
• \text { Dividend receivable } & 60000 & \\
• \text { Bank } & 40000 & \\
• \text { Investment in Electric } & & 100000
• \end{array}\)
• D)\(\begin{array} { l r r }
• \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\
• \text { Dividend receivable } & 40000 & \\
• \text { Bank } & 60000 & \\
• \text { Dividend revenue } & & 100000
• \end{array}\)

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Definitions:

Inflation Adjustment

A modification made to the value of money to account for changes in purchasing power due to inflation.

Stock Exchanges

Marketplaces where securities, such as stocks and bonds, are bought and sold.

Pure Interest Rate

The theoretical rate of return of an investment with no risk of financial loss, not influenced by demand for investments or market risks.

Earning Power

A company's ability to generate profit from its operations over time and maintain financial stability.