Sandhu Ltd. has 400,000 common shares authorized and 120,000 shares issued on December 31, 2013. On January 2, 2014, Kang Inc., which reports under IFRS, purchased shares of Sandhu for $40 per share on the stock market from another investor. Kang intends to hold these shares as a long-term investment. Kang's accountant prepared a trial balance as at December 31, 2014, under the assumption that Kang could not exercise significant influence over Sandhu. Under this assumption, the trial balance included the following accounts and amounts related to the Sandhu investment:
Long-term investment............................................$1,320,000
Dividend revenue......................................................90,000
Unrealized gain on long-term investment OCI...................120,000
Instructions
(a) How many shares of Sandhu did Kang purchase on January 2?
(b) What percentage of Sandhu does Kang own?
(c) What was the amount of the cash dividend per share that Kang received from Sandhu in 2014?
(d) What was the fair value per share of Sandhu shares at December 31, 2014?
(e) Assume that aft er closely examining the situation, Kang's auditors determine that Kang does have significant influence over Sandhu. Accordingly, the investment account is adjusted to $1.4 million at December 31, 2014. What was the profit reported by Sandhu for the year ended December 31, 2014?
(f) Assuming that Kang does have significant influence over Sandhu, what amount will Kang report on its income statement for 2014 with regard to this investment?
(g) How would your answer to part (f) change if Kang reported under ASPE and chose to use the cost method to account for its investment in Sandhu because the shares did not trade in an active market?
Taking It Further
What are the potential advantages to a company of having significant influence over another company? Explain.