1 answer

Lane Miller, who was recently appointed Chief Financial Officer of Midas Ltd, is considering utilising some...

Question:

Lane Miller, who was recently appointed Chief Financial Officer of Midas Ltd, is considering utilising some excess funds to invest in the shares of Queen Ltd. Between 2015 and 2019, Queen Ltd has been performing very well and is expected to increase profits over the next three to four years. Queen Ltd has regularly paid dividends and is expected to pay dividends for the foreseeable future. There have been, in recent years some sales of inventory and non-current assets between Midas Ltd and Queen Ltd. Midas Ltd is also considering a proposal to lend some cash to Queen Ltd. The funds available would allow Midas Ltd to purchase 40% of the issued shares of Queen Ltd. Each share carries one vote at the company’s general meeting. Queen Ltd has 8 directors. Midas Ltd believes that several assets in Queen Ltd’s balance sheet are carried well below their fair value. Lane Miller has said that he thinks that such an investment would be measured at fair value with gains or losses on changes in fair value being taken through other comprehensive income. However, he has admitted that he is unfamiliar with these types of investments which is why he has requested some information about the applicable accounting requirements from you.

Required

Draft a memorandum for Lane Miller that explains the accounting requirements for the proposed investment. In particular you should explain how the profit of Queen Ltd would be recognised in Midas Ltd’s financial statements.

Please provide references. Thank you.


Answers

Draft memorandum Letter

Subject:Accounting Requirment for Investment(AS-13)

Investments- Are the assets held by an enterprise for earning income by way of divident,Interest, and rental for capital appreciation or for other benefit to the investing enterprise

Fairvalue- Is the amount for which an assets could be exchanged between a knowledgeable willing buyer and a knowledgeable, willing seller in an arm's length transaction

Classification of Investment

  • Enterprises present financial ststement that classify fixed assets, Investment and current assets into seperate category
  • Investment are classified into longterm investment or current investment
  • Investment other than current investment are classified as longterm investment , even though they may be readily marketable

Carring Amount of Current Investment and Long Term Investment

  • Current investment to be measured by Cost or Fair value which ever is lower
  • Long term investment to be measured at cost
  • Where there is decline other than temporart in carrying amount of longterm investment the resultant reduction in carring amount is charged to profit and loss account   

Reclassification of Investment

  • Where long term investment are classified as current investment, transfer are made at the lower of cost and carring amount at the date of transfer
  • Where the investment are reclassified as current to long term transfer are made at the lower of the cost and

Above question

  • Queen Ltd has regularly paid dividends and is expected to pay dividends for the foreseeable future(Above Investment defifition is covered)
  • The funds available would allow Midas Ltd to purchase 40% of the issued shares of Queen Ltd
  • Midas Ltd believes that several assets in Queen Ltd’s balance sheet are carried well below their fair value( Please refer above ponits for i.e cost or fair value which ever is lower

Explain how the profit of Queen Ltd would be recognised in Midas Ltd’s financial statements

Carring Amount of Current Investment and Long Term Investment

  • Current investment to be measured by Cost or Fair value which ever is lower
  • Long term investment to be measured at cost
  • Where there is decline other than temporart in carrying amount of longterm investment the resultant reduction in carring amount is charged to profit and loss account   
  • Profit to be shown in Credit side of profit and loss account
  • Loss should be shown in Debit side of profit and loss account

Extract of Balance sheet

Profit and Loss Account

Particulars Amount Particulars Amount
Investment loss XXXXXX Investment Income XXXXXX

Balance sheet

Liabilities Amount Amount Amount
Investment I XXXXXX
Less:Interest(If any) XXXXX
XXXXX
.

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