Question

Required: Please consider the three independent scenarios provided below. You are required to: 1. Provide the relevant accounting journal entries in the books of the investors to record the investment. 2. Justify each of your journal entries including references to specific paragraphs of relevant accounting standards. Part (A) On the 1st August 2017 Adelaide Ltd purchased 3% of the issued ordinary share capital of Byron Ltd for $235,000 in cash. In addition, Adelaide Ltd incurred brokerage costs of $3,055 which it paid on the same date. Adelaide Ltd's management estimated that the cost of the time spent by Adelaide Ltd's employees in evaluating and transacting the purchase was approximately $750, which was paid as part of the normal salary transactions. As a general accounting policy, the management of Adelaide Ltd have, in accordance with AASB 9, taken changes in the fair value of investments in equity instruments through profit or loss. By 31st December 2017 (Adelaide Ltd's half yearly reporting date) the fair value of the investment in Byron Ltd was determined to be $261,500 based on the current market price of the shares.

Answer 1

Explanation

1. As per para 5.1.1 of IFRS 09 At initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

Thus in the given case the said investment is recognised in fair value through Profit and loss a/c, hence it cannot be adjusted with the initial recognition it should be charged to P&L A/C.

2. As per the above provision Brokerage charges & Salary expenses charged off to P&L A/c.

3. Since it is fair value through P&L the difference in fair value and carrying value to be charged off to P&L A/c

Sno	Date	Particulars	Dr	Cr
1	01-08-2017	Investment in Byron Ltd	$      2,35,000
		To Cash		$      2,35,000
		(Being investment made in Byron Ltd)
2	01-08-2017	Brokerage cost (P&L)	$           3,055
		To Cash		$           3,055
		(Being Brokerage cost incurred)
3		No entry to be made for the salary which has been paid already
4	31-12-2017	Investment in Byron Ltd	$         26,500
		To P&L A/C   (261500-235000)		$         26,500
		(Being Investment in Byron ltd fair valued)