Question

As a long-term investment at the beginning of the 2021 fiscal year, Florists International purchased 30% of Nursery Supplies Inc.'s 20 million shares for $60 million. The fair value and book value of the shares were the same at that time. During the year, Nursery Supplies earned net income of $70 million and distributed cash dividends of $2.00 per share. At the end of the year, the fair value of the shares is $56 million.

Required:
a. How would this investment be classified on Florists' balance sheet?
b. Prepare all appropriate journal entries related to the investment during 2021, under the fair value option, and in a manner similar to what Florists would use for investments in equity securities for which it does not have significant influence.

Answer 1

a. How would this investment be classified on Florists' balance sheet?

Florists International must use the equity method since it exercises significant influence over Nursery Supplies. This investment must be reported under non-current assets as Investment in Nursery Supplies.

Dr Investment in Nursery Supplies 60,000,000

Cr Cash 60,000,000

Dr Cash 12,000,000

Cr Investment in Nursery Supplies 12,000,000

Dr Investment in Nursery Supplies 21,000,000

Cr investment revenue 21,000,000

b. Prepare all appropriate journal entries related to the investment during 2021, under the fair value option, and in a manner similar to what Florists would use for investments in equity securities for which it does not have significant influence.

Dr Investment in Nursery Supplies 60,000,000

Cr Cash 60,000,000

Dr Cash 12,000,000

Cr Dividend revenue 12,000,000

Dr Loss on held for trading securities 4,000,000

Cr Investment in Nursery Supplies 4,000,000