Sandhu Travel Agency Ltd. has 400,000 common shares authorized and 120,000 shares issued on December 31, 2017. On January 2, 2018, Kang Inc. purchased shares of Sandhu Travel Agency for $40 per share. Kang intends to hold these shares as a long-term investment.
Kang's accountant prepared a trial balance at December 31, 2018, under the assumption that Kang could not exercise significant influence over Sandhu Travel Agency. Under this assumption, the trial balance included the following accounts and amounts related to the Sandhu investment:
Long-term investments.....................................$1,320,000
Dividend revenue....................................................90,000
Unrealized gain on long-term investments............120,000
Instructions
(a) How many shares of Sandhu Travel Agency did Kang purchase on January 2? (Hint: Subtract the unrealized gain from the investment account.)
(b) What percentage of Sandhu Travel Agency's shares does Kang own?
(c) What was the amount of the cash dividend per share that Kang received from Sandhu Travel Agency in 2018?
(d) What was the fair value per share of the Sandhu Travel Agency shares at December 31, 2018?
(e) Assume that, after closely examining the situation, Kang's auditors determine that it does have significant influence over Sandhu Travel Agency and the equity method should be used. Accordingly, the investment account balance is adjusted to $1.4 million at December 31, 2018. What was the net income reported by Sandhu Travel Agency for the year ended December 31, 2018?
(f) Assuming that Kang does use the equity method, what amount will it report on its income statement for 2018 with regard to this investment?
(g) How would your answer to part P12.8A(f) change if Kang reported under ASPE and chose to use the cost model when accounting for its investment in Sandhu because the shares did not trade in an active market?