In January 2019, Linx bought a 20% interest in BMI. This company is listed on a public stock exchange but 62% of the company's shares do not trade actively becuase they are owned by three brothers who started the company. Linx bought the shares, anticipating that in the future, Linx may be able to buy out the brothers and acquire BMI shares from them. Linx thought that this investment could be a long term one that could provide some dividend income for the company.

The brothers did not welcome Linx's investment in BMI, and they prevented Linx from electing any representatives from the company to sit on the BMI board of directors. In November 2019, BMI sold some significant operating assets and then used the proceeds from this disposal to buy back all the shares held by the brothers on December 27, 2019. The shares bought back were cancelled and no longer exist. The accountant accounts for this investment using the cost model and would welcome your opinion on whether he is accounting for this investment correctly and if not, how should he be accounting for it?

Answer rating: 100% (QA)

Cost Method of accounting is a method of accounting in which investments are recorded in books at its cost price ie Purchase Price and investment appe... View the full answer