On January 2, 2014, Hadley Inc., which reports under IFRS, purchased shares of Letourneau Corp. for $10 a share. Hadley intends to hold these shares as a long-term investment. During 2014, Letourneau reported profit of $1 million and paid cash dividends of $200,000. The investment's fair value at December 31, 2014, was $970,000.
Hadley's accountant prepared a trial balance as at December 31, 2014, under the assumption that Hadley could exercise significant influence over Letourneau. The trial balance included the following:
Investment in associate..............................$960,000
Revenue from investment in associate...............200,000
(a) What percentage of Letourneau's shares does Hadley own?
(b) What was the amount of cash dividend that Hadley received from Letourneau?
(c) How many Letourneau shares did Hadley purchase on January 2?
(d) Assume that after closely examining the situation, Hadley's auditors determine that Hadley does not have significant influence over Letourneau. What amount should be reported on Hadley's balance sheet at December 31, 2014? What will be reported in Hadley's income statement for the year ended December 31, 2014?
(e) How would your answer to part (d) change if Hadley reported under ASPE and Letourneau's shares were not traded on an active market?
Taking It Further
What factors should be considered when determining whether a company has significant influence over another company? Could a company have significant influence over another company if it owned 19% of the common shares of the investee? Explain.