P limited acquires a 60% interest at 1 January 2015,
Debit P Limited (R) S Limited (R)
Land 150 000 125 000
Other non-current assets 205 000 120 000
Current assets 145 000 130 000
Investment in S Limited 180 000
680 000 375 000
Credits:
Share capital 240 000 120 000
Retained earnings 300 000 150 000
Revaluation Sulpus 25 000
Liabilities 140 000 80 000
680 000 375 000
1. Analyze the equity of S. LTD
2. When analysing the equity of the subsidiary at the acquisition date, the fair value adjustment for the land would be "replaced" by the revaluation surplus: draw up the proforma journal entries to record the elimination of the cost of the land
1. To analyze the equity of S Limited, we need to consider the components of shareholders' equity (or equity capital) which include share capital, retained earnings, and any other reserves.
From the given information, the equity of S Limited at 1 January 2015 can be calculated as follows:
Share capital: 120,000
Retained earnings: 150,000
Revaluation surplus: 25,000
Equity of S Limited = Share capital + Retained earnings + Revaluation surplus
= 120,000 + 150,000 + 25,000
= 295,000
Therefore, the equity of S Limited at the acquisition date is 295,000.
2. To eliminate the cost of the land and replace it with the revaluation surplus in P Limited's books, the following proforma journal entries can be recorded:
Debit: Investment in S Limited (180,000) - Remove the investment in S Limited
Debit: Revaluation Surplus (25,000) - Remove the revaluation surplus related to the land
Credit: Land (150,000) - Remove the land cost
The proforma journal entries are as follows:
Dr Investment in S Limited 180,000
Dr Revaluation Surplus 25,000
Cr Land 150,000
This journal entry eliminates the land cost and replaces it with the revaluation surplus in P Limited's books.