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Satsuma Berhad bought 8 % of Natural Herb 's ordinary shares for RM210 million on 2January...

Satsuma Berhad bought 8 % of Natural Herb 's ordinary shares for RM210 million on 2January 2016. Under general conditions, the shares would be categorized by Satsuma as an Available for Sale. However, Satsuma elected the fair value option for the investment. On 31 December 2016, the fair value of the shares held by Satsuma was RM215 millior. Meanwhile, Natural Herb's net income for the year ended 31 December 2016 was RM320 million. Dividend declared by Natural Herb during 2016 was RM80 million. Required: (a) Explain how the investment would be classified in Satsuma's statement of financial position (i.e. as Available for Sale, Held to Maturity, trading or others). (b) Provide the journal entries during the year 2016 to account for the transactions. (c) Discuss the effect of this investment on 2016 income before taxes.

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Dear Students

Please refer below is the answer to your questions.

Ans to Q1 Explain how the investment would be classified in Satsuma statement of financial position.
Investments in Natural Herb's Ordinary Shares by Satsuma Berhad is a genric investments which is not very short term purpose to be classified as" held for Trade" and not a strategic buy to be classified as "Held to Maturity".
Its an Investment to be classified as "Available for sale " and intially to be recorded at cost.
Available for sale investments are carried on balance sheet at their fair value
Any change in fair value between two reporting dates is taken to the shareholders' equity as a separate component which is normal called "changes in fair value of available for sale investments".
Ans to Q2 Provide the journal entries during the year 2016 to account for the transactions.
1 On Purchase of Investments in Natural Herb 's (ordinary shares) RM in Million
Dr Cr
02/01/2016 Available for Sale Securities A/c………….Dr 250
To, Cash/Bank 250
(Being Ordinary shares in Natural Herbs purchased of 250 Million )
2 Accounting for Dividend Declared by Natural Herb's
31/12/2016 Cash/ Bank A/c……………………….Dr 6.4
To Dividend Income 6.4
(Being Dividend Income earned on Investment )
Dividend Working
Dividend Declared by natural Herb's   =   80 Million
Dividend earned by Satsuma   -- 80 Million * 8% = 6.4 Million
3 Transfer of Dividend into Income Statement
31/12/2016 Dividend Income A/c………………………….Dr 6.4
To INCOME Statement 6.4
(Being Dividend Income transferred to income Statement )
4 Restatement of Investments @ Fair Value
31/12/2016 Available for Sale Securities A/c………….Dr 5
To, Change in Fair Value of Available for Sale Investments 5
(Being Investment carried at fair value upon restatement)
5 Unrealised Gain to be transferred into Other Comprehensive Income
31/12/2016 Change in Fair Value of Available for Sale Investments A/c……….Dr 5
To ,Other Comprehensive Income 5
(Being Unrealised Gain on Restatement transferred to Other Comprehensive Income)
Ans to Q3 Discuss the effect of this investment on 2016 income before taxes.
Investment Effects on Income statement would be (ncome Before taxes would increased by Dividend Income i.e. 6.4 Million RM )

ekkarill92 answered 1 year ago
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