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As a long-term investment at the beginning of the 2021 fiscal year, Florists International purchased 25%...

As a long-term investment at the beginning of the 2021 fiscal year, Florists International purchased 25% of Nursery Supplies Inc.’s 8 million shares of capital stock for $40 million. The fair value and book value of the shares were the same at that time. The company realizes that this investment typically would be accounted for under the equity method, but instead chooses to measure the investment at fair value. During the year, Nursery Supplies reported net income of $40 million and distributed cash dividends of $2.00 per share. At the end of the year, the fair value of the shares is $35 million.


Required:
1. How would this investment be classified on Florists' balance sheet?
2. Prepare all appropriate journal entries related to the investment during 2021, under the fair value option, and in a manner similar to what Florists would use for investments in equity securities for which it does not have significant influence.

Record the purchase.

Record the dividends.

Record any adjusting entry needed at year-end for the change in fair value.

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Answer #1

Q.1 1. How would this investment be classified on Florists' balance sheet?

The Investment in financial asset is classified on the basis of whether there is any influence of investor in investee organisation and also the intention of investment.

It is informed that we have to assume that there is no "infulence" hence the accounting would not attract accountins as per investment in associates but it will be accounted as "investment"

There is no intention to sale the investment in short term hence it will not be classified as invest held for sale but it will be classified as investment for trading.

Following are accounting treatment for investment held for trading :

- Initial investment is recongnised at fair value

- All subsequant realised change to fair value is treated as income while unrealised change is disclosed as Shareholder's component under equity

- Dividend / interest will be recognised under income statement

Q.2 Journal Entries :

Record Purchase :

Investment in Nursery Supplies Inc A/c DR 40,00,000

Bank A/c credit 40,00,000

(Being investment held for trading in 25% stake being 8 Million shares of Nursery Supplies Inc )

Record the dividends

Bank A/c Dr 1,600,000

Dividend from Investment A/c 1,600,000

(Being Dividend received for 8 Million Shares of Nursery Supplies Inc at $2 per share)

Record the journal entry for change in fair value

Loss on held for Investment in Nursery Supplies Inc A/c Debit 5,000,000

Investment in Nursery Supplies Inc A/c Credit 5,000,000

(Being change in fair value from $40M to $35M to be shown as a part of equity)

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