Question

"IFRS for intercorporate investments:

At the beginning of 2014, Nokia enters a joint venture with another company to develop a communications network. Each company invests €6,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €1,000,000 and pays dividends of €100,000. Following IFRS effective in 2014, what is the effect of the joint venture on Nokia's 2014 net income?"

Answer 1

Under IFRS, Nokia would recognize 50% of the joint venture's income, resulting in an increase of €500,000 in Nokia's 2014 net income.

Step-by-step explanation:

Under IFRS effective in 2014, the joint venture's net income is recognized by Nokia using the equity method. According to the equity method, Nokia should recognize its share of the joint venture's income. In this case, since Nokia has a 50% interest in the joint venture, it would recognize 50% of the joint venture's income.

The joint venture reported income of €1,000,000, so Nokia would recognize 50% of €1,000,000 as its share of the income, which is €500,000.

The effect of the joint venture on Nokia's 2014 net income would be an increase of €500,000.