Explaining Accounting Requirements Of Investment

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
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1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Question 1........................................................................................................................................2
Introduction..................................................................................................................................2
Body.............................................................................................................................................2
Conclusion...................................................................................................................................3
Question 2........................................................................................................................................5
Answer (a)...................................................................................................................................5
Answer (b)...................................................................................................................................5
Reference.........................................................................................................................................6

2ADVANCED FINANCIAL ACCOUNTING
Question 1
MEMORANDUM
To: Management, Hamilton Ltd
From: Accountant, Hamilton Ltd
Subject: Explaining Accounting Requirements Of Investment
Introduction
I am writing this report for stating the accounting requirement for proposed investment by the
company in another company, Orange Ltd. Suggestions required for 2 options including
purchase of 35% of the shares of Orange Ltd and purchase of 80% of the shares of Orange Ltd.
Body
Purchasing 35% shares
When shares purchased are between 20% and 50% of the outstanding common stock of other
company, purchasing company’s influence on the acquired company is significant. Deciding
factor however is whether it has significant influence or ability to have any say of the investor in
the business decision taken by the business owner. If other factors remains that may reduce
influence or the significant influence is obtained through ownership of lower than 20% equity
method will be appropriate. Under this approach the purchaser entity records the investment at
original cost. Balance of investment is enhanced by pro-rata share of investee’s income and
reduced by the pro-rata share of the dividends declared by the subsidiary. At the time of purchase
goodwill can be generated from the difference among cost of investment and book value of
investment for underlying assets.
Before acquiring the shares, the entity shall obtain most recent reviewed or audited financial
statement of the Orange Ltd for analysing the share price. When the transaction is for more than
20% of the paid up capital, opinion shall be taken from the accountants regarding the rationality
of transaction price before entering into the transaction. If the accountant applies the consultancy
report, it shall be dealt in accordance with the accounting standards. All the securities obtained