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(Solution) Marketable Securities’ Total Contribution to Pretax Income

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)Correct
  • Firm B: Reported using the Equity MethodCorrect
  • Firm C: Reported at Fair Value Through Other Comprehensive Income (FVOCI)Correct

Step-by-Step Calculations

Firm A: Contribution to Pretax Income

  1. 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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