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.

Answer 1

Answert Draft memorandum letter Subject: Accounting Requirement for Investment(45-13 Investments - Investments are the assets held by an enterprise for earning income by way of divident, Interest, and rental for capital appreciation or for other benfit to the Investing enterprise. Fairvaluce It is the amount for which an asset could be exchanged between a knowledge ble willing buyer and a knowledgeable, willing seller in an comis tength transasetion. classification of investment 4 Enterprises present financial statement that classty fried assets, investment and current assets separate category Investment are classified into longterm investment current investment. into or

Investment other than current investment are classified گه longtem investment, even though they may be recedily Marketable. Carring amount of Current Investment and long term Investment current Investment to be measured by Cost or far value which evex is lower long term investment to be measured at cost. where there is decline other than temporant in carrying amount of long term investment the resultant reduetion in coring amount is charged to profit and loss allant- Re classification of Tnvestment e where long term investments are classified as current investment, transfero are made at the lower cost and carining amount at the date of transfer. where the investment are reclassified as cerrrent to long term tromsfer care made out the lower of the cost.

Entract of Balance sheet profit and loss Account particularis Amount Particulares Amant XXXXXX Investment loss XXXXX Investment encome Balance sheet Amount Amount Amount Liabilities ХХХХХХ Pnvestment I XX X X X Less: Interest (zf any) X XXXX