Question

Q4. (25 marks) Imagine you are investing in a company having more than 30% of investment and you feel the need to update the accounting books, what accounting approach would you use? Your investment is $1 million and the accounting year ends on December 31st 2019, the fair value of the investment goes up to $1.3 million on that date. How would you record in your books?

Answer 1

Since the investment in the company is more than 30%, the investment will be deemed to provide the investor with significant influence over the investee company. The equity method would thus be used for recording the investment in the books of the investor.

On December 31, 2019, the fair value of the investment $1.3 million, is higher than its cost of $1 million. However, under the equity method the investment will not be reported at its fair value but continue to be reported at its cost adjusted for the investor’s share in the net income of the investee company and the amount of dividends received from the investee company during the year.