On January 1 st , 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC's managerial involvement, for $600,000. On that date, DEF's net assets had a fair value equivalent to their book values.
During 2011 and 2012, DEF Inc. earned income and paid dividends as follows:
$\begin{array}{|l|l|l|}
\hline & \text { Income } & \text { Dividends } \
\hline 2011 & \$ 120,000& \$ 20,000 \
\hline 2012 & \$ 180,000& \$ 30,000 \
\hline
\end{array}$

-Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABC's 2011 income as a result of this investment?

Question

On January 1 st , 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC's managerial involvement, for $600,000. On that date, DEF's net assets had a fair value equivalent to their book values.
During 2011 and 2012, DEF Inc. earned income and paid dividends as follows:
$\begin{array}{|l|l|l|}
\hline & \text { Income } & \text { Dividends } \
\hline 2011 & \$ 120,000& \$ 20,000 \
\hline 2012 & \$ 180,000& \$ 30,000 \
\hline
\end{array}$

-Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABC's 2011 income as a result of this investment?

Quizplus · Accepted Answer

Under IFRS, when a company owns 20-50% of another company's voting shares and has significant influence, it uses the equity method. ABC Inc. would recognize 30% of DEF Inc.'s income as investment income, which is 30% of $120,000, equaling $36,000.

On January 1st, 2011, ABC Inc -Assuming That ABC Adheres to IFRS, What Effect (If Any)

On January 1^st, 2011, ABC Inc -Assuming That ABC Adheres to IFRS, What Effect (If Any)