Question

ABC Corporation does have a significant influence over its long term 30% investment in Yazd Corporation....

ABC Corporation does have a significant influence over its long term 30% investment in Yazd Corporation. If Yazd completed a fiscal year profitably but paid no dividends, how these affect the ABC's accounting books?

a.

Has absolutely no effect on ABC's books
b.

Decrease book value per share.
c.

Result in an increased current ratio
d.

Result in increased earnings per share
Business   Accounting   
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Answer #1

Answer:

d.

Result in increased earnings per share

Since ABC corporation have a significant influence over Yazd Corporation and is a long term investment.

Therefore, the accounting treatment will be as follows:

When profit is earned by the associate company but dividend is not paid, the share of profit (30% in this case) accruing to the company (ABC Corp) will be recorded in the books by increassing the book value of the investment and there will be a corresponding increase in income of the company.

The journal entry in the books of ABC Corporation will be as follows:

Investment in Yazd Corp A/c Dr [30% of profits]

To share in income of associate a/c  

This will increase the profit of ABC corp and inturn increase the Earning per Share.

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