What will be the journal entries when the share of associate's profit is negative? can you...

What will be the journal entries when the share of associate's profit is negative?

can you give me an example?

Expert Solution

As per IAS28 for accounting of associate and joint venture investment,

The journal entry at the time of investment is at cost.

If cost is higher than the fair value, it is good will. It should not be separately recognized or amortized. It is part of the cost of investment asset.

If the cost is less than the fair value, then the difference can be recognized in the period of acquisition as profit in investment

Subsequently after acquisition, if there is profit, the carrying amount of investment is increased by the share of profit.

If there is loss, the carrying amount is decreased by the share of loss.

Example:

Your company acquires 50% shares in XYZ limited for $1,000,000

XYZ limited becomes an associate company.

After one year XYZ company makes a loss of $40,000

Share of loss=50% of $40,000=$20,000

Journal Entries are given below:

On Acquisition:
Account	Debit	Credit
Investment in XYZ	$1,000,000
Cash		$1,000,000

When the associate (XYZ limited) declares losses
Loss on investment	$20,000
Investment in XYZ		$20,000

The Loss on investment will be shown in Profit or loss account in financial statement .

The carrying value of investment in XYZ will be decreased by $20,000 in Balance Sheet

ekkarill92 answered 1 year ago

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