Sunshine Ltd purchased 25% of the shares of Relight Ltd on 1 January 20X2 for cash of $400 000. This purchase resulted in Sunshine Ltd having significant influence over Relight Ltd. Additional information is provided below: For the year ended 31 December 20X2, Relight Ltd reported profit of $160 000 and revalued its assets upwards by $100 000. Relight Ltd’s total dividends paid out to all shareholders during 20X2 amounted to $72 000. This was paid from profits made in 20X2. Jordi Ltd is 70% owned by Sunshine Ltd and is Sunshine’s subsidiary. During 20X2, Relight sold $320 000 of inventories to Jordi Ltd and made profit of $120 000. As at 31 December 20X2, 40% of the inventories were still held by Jordi Ltd.
Required:
a) Prepare journal entries for Sunshine Ltd in 20X2 to account for the above event using the Equity Method. Use the Reclassification Method to account for the profit and dividends that Sunshine shares from Relight.
b) What items of the associate are recognised under the Equity Method as compared to the Cost Method?
