Carrying Amount Calculation Using Equity Method

What will be Warriors Limited's carrying amount for the investment in Tomkins Limited after applying the equity method of accounting?

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After applying the equity method of accounting, Warriors Limited will have a carrying amount of $33,600 for the investment in Tomkins Limited.

The equity method is used to account for investments in associates, where the investor has significant influence over the investee. In this case, Warriors Limited acquired a 20% share in Tomkins Limited for $36,000, indicating that it has significant influence over Tomkins Limited.

According to the equity method, the initial investment is recorded at cost. Therefore, Warriors Limited's initial carrying amount for the investment in Tomkins Limited would be $36,000.

Subsequently, the investor adjusts its carrying amount for its share of the associate's post-acquisition profit or loss and post-acquisition changes in equity. Tomkins Limited generated a profit after tax of $12,000 during the financial year following the investment. Since Warriors Limited holds a 20% share, it will recognize 20% of the profit, which is $2,400.

To calculate the carrying amount of the investment, we deduct the share of post-acquisition profit from the initial carrying amount:

$36,000 - $2,400 = $33,600

Therefore, after applying the equity method of accounting, Warriors Limited will have a carrying amount of $33,600 for the investment in Tomkins Limited.