On 1 November 20X6,a parent entity,Midstream Ltd,acquired 25% of the share capital of Delta Ltd and the power to significantly influence the operating and financial policies of that company for $5 000 000 cash.In the period from the date of acquisition to 30 June 20X7,Delta Ltd earned a profit for the period of $400 000 (after tax of $200 000) and declared a dividend of $200 000.At 30 June 20X7,Midstream Ltd recognised its equity in the dividend.For the year ended 30 June 20X7,in the separate income statement of Midstream Ltd and in the consolidated income statement of the group controlled by Midstream Ltd,the equity in the profit before tax of Delta Ltd would be reported as:

A) $200 000 and $100 000 respectively.
B) $50 000 and $150 000 respectively.
C) $50 000 and $120 000 respectively.
D) none of the above.

Question

Rahul Krsingh · Accepted Answer

Final Answer : B, Explanation :  Midstream Ltd acquired 25% of the share capital of Delta Ltd and has the power to significantly influence the operating and financial policies of the company, hence, it should account for its investment using the equity method. Under the equity method, Midstream Ltd recognizes its share of Delta Ltd's profit or loss in its separate financial statements and its consolidated financial statements.In the period from the date of acquisition to 30 June 20X7, Delta Ltd earned a profit for the period of $400 000 (after tax of $200 000), and declared a dividend of $200 000. Midstream Ltd would recognize its equity share of the profit before tax of Delta Ltd as:Profit before tax of Delta Ltd = $400,000 / 75% (Delta Ltd shares not owned by Midstream) x 25% (Midstream's share of Delta Ltd) = $50,000Therefore, Midstream Ltd would report equity in the profit before tax of Delta Ltd of $50,000 in its separate income statement and $150,000 in the consolidated income statement of the group controlled by Midstream Ltd ($50,000 for Midstream and $100,000 for the non-controlling interest).Hence, the best choice is B: $50,000 and $150,000 respectively.

Definitions

Learning Objectives

Learning Objectives

Related questions