Question

. On Jan, 1, 2021, entity A and entity B incorporated entity C which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities provides that the decisions on relevant activities of entity C will require the unanimous consent of both entities. Entity A and B will have right to the net assets of entity C. Entity A and B invested Br.1,000,000 and Br.1,500,000, respectively. Equivalent to 40:60 capital interest of entity C. The financial statements of entity C provide the following data for its three year operation: Year-2021
Year-2022 Net income (loss) Dividends declared Br.200, 000 100,000 (Br.3, 000,000) Year-2023 Br.5, 000,000 1,000,000
Require: compute; 1. The balance of investment in entity C to be reported by entity A in its statement of financial position on Dec, 31, 2021.
2. The investment loss to be reported by entity B concerning its interest in entity C for the year ended Dec, 31, 2022
3. The investment to be reported by entity A concerning it interest in entity C for the year ended Dec 31, 2023

Answer 1

Summary answer (currency = Br.)

1) A’s carrying amount at 31‑Dec‑2021 = Br.1,040,000.

2) B’s investment loss to be reported for year ended 31‑Dec‑2022 = Br.1,560,000 (see note).

3) A’s carrying amount at 31‑Dec‑2023 = Br.1,440,000.

Working (equity‑method; A = 40%, B = 60%):

Year 2021
- A: initial 1,000,000
share of profit = 40% × 200,000 = 80,000
dividends = 40% × 100,000 = 40,000
carrying = 1,000,000 + 80,000 − 40,000 = 1,040,000

- B (for completeness): 1,500,000 + 60%×200,000 − 60%×100,000 = 1,560,000

Year 2022 (loss Br.3,000,000; no dividends)
- A’s share of loss = 40% × 3,000,000 = 1,200,000
but A’s carrying at start 2022 = 1,040,000 → can only recognize losses up to that carrying;
A recognizes 1,040,000 (reducing carrying to zero). Unrecognised loss = 1,200,000 − 1,040,000 = 160,000.

- B’s share of loss = 60% × 3,000,000 = 1,800,000
B’s carrying at start 2022 = 1,560,000 → can only recognize losses up to that carrying;
B recognizes 1,560,000 (reducing carrying to zero). Unrecognised loss = 1,800,000 − 1,560,000 = 240,000.

Therefore B’s reported investment loss for 2022 = Br.1,560,000 (full share would be Br.1,800,000 but recognition is limited to the carrying amount under the equity method unless B had a constructive/legal obligation to fund further losses).

Year 2023 (profit Br.5,000,000; dividends Br.1,000,000)
- A’s share of profit = 40% × 5,000,000 = 2,000,000.
A has prior unrecognised losses of 160,000, so A may only recognise profit in excess of that. Recognised profit = 2,000,000 − 160,000 = 1,840,000.
Dividends received = 40% × 1,000,000 = 400,000
Carrying at 31‑Dec‑2023 = 0 + 1,840,000 − 400,000 = Br.1,440,000.

(If you want, I can also show B’s 2023 movement.)