Question

The Hanwell Company acquired a 30% equity interest in The Northfield Company for CU400,000 on 1 January 20X6. In the year to 31 December 20X6 Northfield earned profits of CU80,000 and paid no dividend. In the year to 31 December 20X7 Northfield incurred losses of CU32,000 and paid a dividend of CU10,000. In Hanwell's consolidated statement of financial position at 31 December 20X7, what should be the carrying amount of its interest in Northfield, according to IAS 28 Investments in associates?

Answer 1

To calculate the carrying amount of Hanwell's interest in Northfield according to IAS 28 Investments in Associates, we need to apply the equity method of accounting.

Under the equity method, the investment is initially recognized at cost and adjusted thereafter for the investor's share of the post-acquisition profits or losses and dividends of the investee.

Here's how we can calculate the carrying amount of Hanwell's interest in Northfield at 31 December 20X7:

1. Initial investment: CU400,000
2. Share of Northfield's profits in 20X6 (30% x CU80,000): CU24,000
3. Share of Northfield's losses in 20X7 (30% x CU32,000): CU(9,600)
4. Dividend received from Northfield in 20X7 (30% x CU10,000): CU(3,000)

The carrying amount of Hanwell's interest in Northfield at 31 December 20X7 is therefore:

CU400,000 + CU24,000 - CU9,600 - CU3,000 = CU411,400

Therefore, according to IAS 28 Investments in Associates, the carrying amount of Hanwell's interest in Northfield in its consolidated statement of financial position at 31 December 20X7 should be CU411,400.