Could someone assist me with my homework? I’m working on a question related to the fair value net income method for investments. It includes the following details:
March 1:
Sold 1,500 common shares of David Jones at $45 per share, after deducting fees of $500.
March 1, 2023:
– DR Cash: $67,000
– DR Professional Fees Expense: $500
– DR Loss on Disposal of FV-NI Investment: $1,500
– CR FV-NI Investments: $69,000
The solution indicates a $2,000 loss for the March 1, 2023 entry. I’m curious why the $500 fee wouldn’t be expensed separately, given that this is classified as an FV-NI investment.
One response
In the context of Accounting for investments using the fair value through net income (FV-NI) method, it’s important to understand how different transactions are recorded and classified. Let’s break down your question regarding the sale of the common shares of David Jones.
When you sell investments classified as FV-NI, any gains or losses from the sale are recognized in net income at the time of the sale. Here are the components to consider in the transaction:
Sale Price Calculation:
You sold 1,500 shares at $45 each, which totals $67,500. However, there are fees associated with this sale of $500, which should be considered when calculating your net gain or loss from the sale.
Recognizing the Loss:
The entry mentions a “Loss on disposal of FV-NI investment” of $1,500. This loss is calculated as follows:
If the carrying amount (book value) of the investment was $69,000 prior to the sale, your calculation would be:
Sale Proceeds ($67,500 – $500 fees) = $67,000
Book Value = $69,000
Loss = Book Value – Adjusted Sale Proceeds = $69,000 – $67,000 = $2,000
Accounting for Fees:
The $500 professional fee is considered a cost directly associated with the sale of the investment. In this case, instead of expensing it separately, it is factored into the calculation of your gain or loss on the investment. This is consistent with the treatment in Accounting standards that require transaction costs to be deducted from the proceeds of the sale when determining gains or losses.
Therefore, you recognize a total loss of $2,000 in net income since that reflects your total loss on the investment after taking into account the costs associated with the transaction.
In summary, the reason the $500 charge is not expensed separately is that it effectively reduces the amount recognized from the sale, which is factored into the total loss calculation on disposal. This approach aligns with the fair value net income method and ensures that all relevant costs associated with the investment sale are accurately represented in the financial statements.