Marketable Securities’ Total Contribution to Pretax Income
Clay Company owns the following marketable securities, all of which were purchased at the beginning of 2021:
Firm | # Shares Owned by Clay | Ownership Held by Clay | Clay’s Cost | Market Value (12/31/21) | Annual Dividend | Total 2021 Earnings |
---|---|---|---|---|---|---|
A | 50,000 | 15% | €40.00 | €46.00 | €0.75 | €50,000 |
B | 100,000 | 25% | €10.00 | €12.00 | €0.30 | €100,000 |
C | 75,000 | 10% | €25.00 | €24.00 | €0.60 | €80,000 |
Clay Company follows International Financial Reporting Standards (IFRS).
7. If the securities of Firm A were reported at fair value through profit and loss and the securities of Firm C were reported at fair value through other comprehensive income, the total contribution to Clay’s pretax income from all marketable securities in 2021 was:
a. €332,500
b. €407,500
c. €412,500
Related: (Solution) Carrying value of Clay Company’s marketable securities
Solution
To calculate the total contribution to Clay Company’s pretax income from all marketable securities in 2021, we will include the contributions from Firm A, Firm B, and Firm C, considering their respective accounting treatments under IFRS.
How each Securities will be reported
- Firm A: Reported at Fair Value Through Profit and Loss (FVPL)
- Firm B: Reported using the Equity Method
- Firm C: Reported at Fair Value Through Other Comprehensive Income (FVOCI)
Step-by-Step Calculations
Firm A: Contribution to Pretax Income
- Calculate Change in Fair Value:
- Market Value: €46.00
- Cost: €40.00
- Number of Shares Owned: 50,000
Change in Fair Value=(Market Value−Cost)×Number of Shares=(€46−€40)×50,000 = €6×50,000 = €300,000
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