Question

Imagine you are investing in a company having more than 30% of investment and you feel the need to update the accounting books, what accounting approach would you use? Your investment is $1 million and the accounting year ends on December 31st 2019, the fair value of the investment goes up to $1.3 million on that date. How would you record in your books?

Answer 1

Accounting approach used to record investment:

It was given that the investment in a company is about 30%.

As per investment accounting rules,

One who holds more than 20% share of investment in any company has a significant influence over the company and equity method should be used for accounting of investment.

Here the investment is 30% (>20%), so the accounting approach used to record investment is

• Equity method

Recording the increase in fair value of investment

Given

Investment in a company = $1 million

At the year end, Dec 31, 2019,

the fair value of investment = $1.3 million

That implies,

Increase of $0.3 million ($300000) in fair value which is a other comprehensive income should be adjusted to investment account as a fair value adjustment since.

The entry is as follows

Date	General journal	Debit	Credit
Dec31, 2019	Fair value adjustment-OCI	$300000
	To Investment in company		$300000
	(To record increase in fair value of investment)

_______×________

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