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Dear Tutor,
could you please help me with the following answer on Gain on Investment:
A fair value gain has been recorded on the investment in Nathan of $95m – $90m = $5m. This gain must be eliminated on consolidation because the calculation of goodwill is based on the fair value of the consideration at the date of acquisition, not at the date of the current financial statements. The double entry for the reversal is:
DEBIT Other comprehensive income $5m
CREDIT Investment in Nathan. $5mI don’t understand why we have to do this adjustment. Is it because the gain relates to the year end? Could you please explain why DR OCI.
Thank you.
Hi,
The gain on the investment has been recorded in OCI so when we remove the gain from the group accounts we have to DR OCI. The reasoning behind the gain being eliminated is the single entity concept. If we are removing the investment from the group accounts as we can’t have an investment in ourselves, then we have to remove the associated gains too.
Thanks
Thank you for your reply.
I did not understand why should we presume that it was accounted in OCI in the separate statement, but it is stated in the question that Marchant elected to show gains and losses in OCI.
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