Question

Q1. 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 Year-2023

Net income (loss) Br.200, 000 (Br.3, 000,000) Br.5, 000,000
Dividends declared 100,000 - 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

Principle used: C is a joint venture (joint control and rights to net assets) — accounted for by the equity method. Each investor recognizes its share of C’s profit or loss and reduces the investment for dividends received. If an investor’s share of losses exceeds the carrying amount, recognition is limited to the carrying amount (investment is reduced to zero) unless the investor has a legal or constructive obligation to cover further losses.

Calculations:

A and B ownership: A = 40%, B = 60%.
Initial investments: A = 1,000,000; B = 1,500,000.

Year 2021
- C net income 200,000: A’s share = 0.4×200,000 = 80,000
- Dividends 100,000: A’s share = 0.4×100,000 = 40,000
1) A’s investment at 31 Dec 2021 = 1,000,000 + 80,000 − 40,000 = 1,040,000

Year 2022
- C net loss 3,000,000: B’s share = 0.6×3,000,000 = 1,800,000
- B’s opening carrying amount at 1 Jan 2022 = 1,500,000 + (0.6×200,000) − (0.6×100,000)
= 1,500,000 + 120,000 − 60,000 = 1,560,000
Because B’s share of loss (1,800,000) exceeds its carrying amount (1,560,000), B recognizes loss only to the extent of the carrying amount (unless it has further obligation).
2) Investment loss to be reported by B for year ended 31 Dec 2022 = 1,560,000
(Unrecognized excess loss = 1,800,000 − 1,560,000 = 240,000, recognized only if B has obligation)

Year 2023
- Opening carrying amount for A at 1 Jan 2023: after 2022 A’s carrying amount is reduced to zero.
(A’s opening balance 1,040,000 − A’s 2022 share of loss 1,200,000 → investment limited to zero; unrecognized loss 160,000)
- C net income 5,000,000: A’s share = 0.4×5,000,000 = 2,000,000
- Dividends 1,000,000: A’s share = 0.4×1,000,000 = 400,000
3) A’s investment at 31 Dec 2023 = 0 + 2,000,000 − 400,000 = 1,600,000

Summary answers
1) A’s investment at 31‑12‑2021 = Br.1,040,000
2) B’s investment loss to be reported for year ended 31‑12‑2022 = Br.1,560,000 (investment reduced to zero; Br.240,000 excess loss not recognized unless B has obligation)
3) A’s investment at 31‑12‑2023 = Br.1,600,000

If you want, I can also show B’s carrying amount at 31‑12‑2023 (given the 2023 results).