Reference no: EM132489239
Point 1: On 1 July 2018, Front Ltd acquired 60% of the shares of Back Ltd. On the same day it was decided that the CEO of Front Ltd would also become the CEO of Back Ltd and Front Ltd would charge Back Ltd a management fee for this service. The two companies began to undertake significant inter-company transactions including the regular sale of inventory and the granting of an interest free loan from Front Ltd to Back Ltd.
Point 2: One year later, on 1 July 2019, Front Ltd sold three-quarters of its shares in Back Ltd to another company, Side Ltd. All other arrangements between Front Ltd and Back Ltd remained unchanged. Front Ltd does not own shares in any other companies.
Question (a) i. For the year ending 30 June 2019, should Front Ltd classify Back Ltd as an associate, a subsidiary, or neither? Fully justify your decision with reference to the information given.
Question ii. What is the accounting implication (if any) for Front Ltd of your decision in part (a)(i)?
Question (b) i. For the year ending 30 June 2020, should Front Ltd classify Back Ltd as an associate, a subsidiary, or neither? Fully justify your decision with reference to the information given.
Question ii. What is the accounting implication (if any) for Front Ltd of your decision in part (b)(i)?
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