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 2012 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 2012 income as a result of this investment?

Quizplus · Accepted Answer

Under IFRS, when a company has significant influence over another (which is often indicated by owning 20% or more of the voting shares), the investment is accounted for using the equity method. Since ABC Inc. owns 30% of DEF Inc. and has managerial involvement, it suggests significant influence, thus requiring the use of the equity method. Under this method, ABC would recognize its share of DEF's income, not dividends, in its income statement. For 2012, DEF earned $180,000, so ABC's share is 30% of that, which equals $54,000. This amount is recognized as investment income, not dividend income.

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)