Question

As a long-term investment at the beginning of the 2024 fiscal year, Florists International purchased 208 of Nursery Supplies Incorporated's 4 million shares of capital stock for $40 milion. The fair value and book value of the shares were the same at that time The company realizes that this investment typically would be accounted for under the equity method, but instead chooses to measure the investment at fair value. During the year, Nursery Supplies reported net income of $20 million and distributed cash dividends of $125 per share. At the end of the year, the fair value of the shares is $38 million.

Required: 1. How would this investment be classified on Florists' balance sheet?

Answer 1

Florists International's investment in Nursery Supplies would be classified as available-for-sale or at fair value through other comprehensive income (FVTOCI), depending on their intent. Dividends received are recognized as income and an unrealized loss is reported due to the decline in fair value of the investment.

Step-by-step explanation:

At the beginning of the fiscal year, Florists International purchased 208 out of 4 million shares of Nursery Supplies Incorporated for $40 million. These shares would be recorded at fair value on the balance sheet as per the company's decision. Dividends and changes in fair value are recognized in earnings.

Since Florists International purchased the stock as a long-term investment and is measuring the investment at fair value instead of using the equity method, the investment would typically be classified as an available-for-sale financial asset.

However, due to recent accounting standard updates, the category could also fall under fair value through other comprehensive income (FVTOCI) if the company intends to both collect dividends and sell the shares. During the year, Nursery Supplies reported net income of $20 million and distributed cash dividends of $125 per share.

At the end of the year, the fair value of the Florists International's shares is $38 million. The change in fair value would result in an unrealized loss since the fair value is now less than the purchase price, and the dividends received would be recognized as income.