ACCA Applied Knowledge · Financial Accounting · Associates
Kemp acquired 30% of Lowe on 1 October 20X4 and Lowe's year end is 31 December 20X4. Lowe's profit after tax for the year ended 31 December 20X4 was $360,000, earned evenly. Lowe paid a dividend of $40,000 on 1 December 20X4. Kemp's own profit before the associate is $800,000. What is Kemp's group profit for the year after including the associate, ignoring all other adjustments and impairment?
Group profit is $827,000. Kemp includes 30% of Lowe's post-acquisition profit only: $360,000 x 3/12 = $90,000, and 30% of that is $27,000. This is added to $800,000. The dividend is not income under the equity method, and using the full year overstates profit.
- A$827,000Correct
- B$908,000
- C$812,000
- D$839,000
Explanation
Only the post-acquisition period of three months counts: 360,000 x 3/12 = 90,000. 30% x 90,000 = 27,000. Adding to 800,000 gives 827,000. The dividend is not included in the share of profit. $908,000 uses the full year.
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