Question:
Suppose a Sri Lankan investor purchased shares in a manufacturing company in Japan for $ 10 million. How would this transaction be recorded in the Balance of Payments in Sri Lanka according to the principle of double entry system?
(1) Debit: Capital account; Credit: Primary income account
(2) Debit: Other investment account; Credit: Portfolio investment account
(3) Debit: Portfolio investment account; Credit: Other investment account
(4) Debit: Financial derivative account; Credit: Direct investment account
(5) Debit: Capital account; Credit: Portfolio investment account
Correct Answer:
(3)
Answer Explanation:
Purchasing foreign shares (less than 10% ownership) is a Portfolio Investment. As an outflow of capital to acquire a foreign asset, it is a Debit (-) in the Portfolio Investment account. The payment reduces domestic bank reserves/foreign exchange, which is recorded as a Credit (+) in the Other Investment account.
Topic: Balance of Payments Year: 2021
Leave a Reply