Hat Limited has 300,000 common shares issued. On October 1, 2014, Pankaj Inc. purchased a block of these shares on the open market at $40 per share to hold as a strategic equity investment. Hat reported profit of $675,000 for the year ended September 30, 2015, and paid a $0.40 per share dividend. Hat's shares were trading at $43 per share on September 30, 2015.
This problem assumes three independent situations that relate to how Pankaj, a public company, would report its investment:
Situation 1: Pankaj purchased 30,000 Hat common shares.
Situation 2: Pankaj purchased 90,000 Hat common shares.
Situation 3: Pankaj purchased 300,000 Hat common shares.
Instructions
(a) For each situation, identify what method Pankaj Inc. should use to account for its investment in Hat Limited.
(b) For situations 1 and 2, record all transactions for Pankaj related to the investment for the year ended September 30, 2015. Assume that, where Pankaj has a choice, it reports gains and losses in other comprehensive income.
(c) For situation 2, what other method could Pankaj use if it was reporting under ASPE instead of IFRS and:
(1) Hat's shares traded on an active market?
(2) Hat's shares did not trade on an active market? Record all not trade on an active market.
(d) For situation 2, compare Pankaj's balance sheet and comprehensive income statement accounts that relate to this investment at September 30 if
(1) The investment is reported at fair value,
(2) The cost method is used, and
(3) The equity method is used to account for the investment.
Taking It Further
Assuming that Hat's shares were trading on a public market at $45 on September 30, 2016, and Pankaj owned 30,000 common shares of Hat, what amount would be reported in accumulated other comprehensive income at September 30, 2016, relating to this investment? Assume that Pankaj has a 30% tax rate.