In: Accounting
14. The Anderson Company acquired 100,000 shares of the Beck Company on January 1, 2016, at $25 per share. Beck’s stock price on December 31, 2016, was $35 per share. During 2016, Beck declared and paid dividends of $1.50 per share and had earnings of $2.50 per share. Anderson Company accounted for its investment in Beck Company shares as subsequently measured at fair value through OCI. What was the net effect of investment in Beck Company shares on Anderson’s income statement for 2016?
Answer is c, why
Accounting for investments in equity instruments
Classification
Investments in equity instruments (such as an investment in the ordinary shares of another entity) are measured at either:
• fair value through profit or loss, or
• fair value through other comprehensive income.
Fair value through profit or loss :- The normal expectation is that equity instruments will have the designation of fair value through profit or loss.
Fair value through other comprehensive income :- It is possible to designate an equity instrument as fair value through other comprehensive income, provided that the following conditions are complied with:
• the equity instrument must not be held for trading, and
• there must have been an irrevocable choice for this designation upon initial recognition of the asset.
Investments in equity instruments that are classified as fair value through other comprehensive income are initially recognized at fair value plus transaction costs. At the reporting date, the asset is revalued to fair value with the gain or loss recorded in other comprehensive income. This gain or loss will not be reclassified to profit or loss in future periods.
Journal Entries to be recorded in the present case:-
01.01.2016 | Investments in Shares | 2,500,000.00 | ||
To Bank | 2,500,000.00 | |||
(Being Investment in shares of Anderson Company recorded) | ||||
31.12.2016 | Investments in Shares | 1,000,000.00 | ||
To Other Comprehensive Income | 1,000,000.00 | |||
(Being revaluation of Investements in Equity Shares recorded) | ||||
31.12.2016 | Bank | 150,000.00 | ||
To Dividend Income | 150,000.00 | |||
(being dividend received on Investments recorded) |
The only impact to the PL would be of $ 150,000 which relates to dividend recieved from Investment in Beck.