Question

DustyBins (DB) owns 19% of Markolin (M). DB is a major customer of M. DB has 6 members on M's board with another 14 from other organizations.

By the end of the year, M incurred a loss of 370300 and paid dividends of 126500. DB has recorded a dividend revenue of 9775.

Under ASPE, is this the correct recording for the cost model or equity model? If not, how should it be done?

Answer 1

Answer1.

The most common answer that would arise from the question is that the recording should be made under the Cost Method as the holding of DB in M is less than 20%. However, it is an incorrect record in this case.

Since it is also given that DB represents 6 Board Members out of the Total 20 (14+6) Board Members which constitutes about 30%, it can be said that DB does have significant influence over M as these quality factors also should be taken into consideration before judging whether the significant influence is there or not. Therefore, under the Accounting Standards for Private Enterprises (ASPE), this case should be recorded using the Equity Model and same is as understated :–

Journal Entries General Journal
Date	Account Description	Debit	Credit
	Equity Method Loss (370,300 × 19%)	70,357
To Investment in M
(To record share of loss from M)		70,357
Cash (126,500 × 19%) – 9,775	14,260
Dividend Revenue	9,775
To Investment in M		24,035
(To record share of dividend received and dividend revenue reversal)
	94,392	94,392

DO UPVOTE! In case of any doubt, feel free to write in the comment section below.