Identify possible ways that sl can account for investment

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Reference no: EM132664374

In September 20X5, the CEO of Sunny Ltd (SL) invested $200,000 in the shares of Little Master Ltd (LM), a company listed on a stock exchange. SL incurred a brokerage fee of $1,000 for the purchase of LM's shares. While SL's CEO is keen to invest in LM, he also wants to maximise the profit of SL for the year ended 31 December 20X5.

The following information on LM is available:

The company's net profits have been increasing by 20% per annum and it is assumed that this trend will continue.
The company's profit for the year ended 31 December 20X4 was $130,000.
The company has 781,250 shares outstanding. SL purchased LM's shares at $1.60 per share.
The share price is expected to be $2.00 per share by end of December 20X5.
Assume SL received cash dividend of $1,600 from LM in November 20X5. SL complies with the requirements of FRS 109 (SFRS(I) 9) Financial Instruments where applicable.

Required

Question (i) Based on the information provided, identify the possible ways that SL can account for its investment in LM in its own financial statements. For each of the possible ways, provide a short explanation of the accounting treatment of SL's investment in LM, including the dividend received and also its holding in LM on the balance sheet date, 31 December 20X5. Prepare the necessary journal entries.

Question (ii) Which of the ways or methods you have identified in (i) would maximise SL's profit for the year ended 31 December 20X5?

Question (iii) How will your answer to (i) change if SL has a contractual right to appoint a director to the board of LM?

Reference no: EM132664374

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