Equity investments: LOCOM and fair value accounting At the start of x1, Deriganov, a diversified industrial group, buys 80,000 shares of Pishchik, a china clay producer, at a price of 50 a share. Although the holding is only 5% of Pishchik’s issued share capital, Deriganov views the investment as a strategic move since it has a majority stake in another company that makes porcelain.

Pishchik reports earnings of 5/share and pays a dividend of 2.5/share in x1. At the end of x1, the market value per share has risen to 60.

There is an economic downturn in x2. Pishchik’s EPS falls to 4.2/share but the company maintains its dividend. The end-x2 market price is 47/share.

Pishchik’s earnings recover in x3 as the economy rebounds. In response to shareholder dissatisfaction with the low returns they’ve received, Deriganov decides to focus on its core activities and dispose of its porcelain and related operations. It sells all its shares in Pishchik at a price of 55/share in x3 –

prior to earnings and dividend announcements for the year.

Required

(a) Deriganov accounts for its investment in Pishchik at LOCOM. Show the effect of the investment on Deriganov’s accounts in each of the three years x1 to x3. Use journal entries or the balance sheet equation.

(b) Deriganov accounts for its investment in Pishchik at fair value. It classifies Pishchik as an availablefor-

sale investment and records unrealised holding gains and losses in equity. The decline in the market value of Pishchik’s shares in x2 is not an impairment of the investment. Show the effect of the investment on Deriganov’s accounts in each of the three years x1 to x3. Use journal entries or the balance sheet equation.

Check figures:

Gain on disposal, x3

(a) 640,000

(b) 400,000 AppenedixLO1