It is now the end of January 2023 and Sant Smoothies & Sweets Ltd. has been so

It is now the end of January 2023 and Santé Smoothies & Sweets Ltd. has been so successful, it has an amount of excess cash and would like to invest it. The Koebels also wish to expand their operation by diversifying into a deli business. They feel that there are many synergies between baked goods, smoothies, and made-to-order sandwiches and deli meats. The family decides to make the following investments:

1. 200 common shares of Loblaw
Companies Limited ............................................ $13,718
2. 400 common shares of WestJet
Airlines Ltd. .......................................................... 11,650
3. 1,000 common shares of Nouveau
Delight Ltd. .......................................................... 30,000
4. $20,000 Bell Canada 4-year,
5% corporate bonds* ........................................ 21,487

*pay annual interest on February 1, issued to yield 3%

Nouveau Delight Ltd. is a privately owned specialty deli operation that has several locations throughout the city. It off ers a variety of all-natural deli meats, gluten-free paninis, and made-to-order sandwiches and salads. Janet, Brian, and Natalie were approached by Ken Thornton, who is a shareholder of Nouveau Delight Ltd. Ken wants to retire and would like to sell his 1,000 shares in Nouveau Delight, which represent 20% of all shares issued. Nouveau is currently operated by Ken’s twin daughters, who each own 40% of the common shares.

The business has been operating for approximately five years, and in the past two years, Ken has lost interest and left the day-to-day operations to his daughters. Both daughters at times find the work at the deli overwhelming. They would like to have a third shareholder involved to take over some of the responsibilities of running a small business. Both feel that Janet, Brian, and Natalie are entrepreneurial in spirit and that their expertise would be a welcome addition to the business operation.

Ken has met with Janet, Brian, and Natalie to discuss the business operation. All have concluded that there would be many advantages for Santé Smoothies & Sweets Ltd. to acquire an interest in Nouveau Delight. One of the major advantages would be the sale of organic baked goods and smoothies at the delis.

Natalie has come to you with a few questions about these investments:

1. We are unsure about how much influence we will have in the decision-making process for Nouveau Delight. Would the amount of influence we have affect how we account for this investment? (Recall that Santé Smoothies & Sweets Ltd. reports under ASPE.)

2. How do we record these investments in the accounting records? (Be sure to discuss the importance of classifying the investments—strategic, passive, and fair value through profit or loss, fair value through other comprehensive income, or amortized cost.)

Instructions

a. Answer Natalie’s questions.

b. What other information would you likely obtain before you recommend whether the investment in the deli should be accounted for using the equity method?

c. Explain to Janet, Brian, and Natalie some of the differences in accounting for this investment on Santé Smoothies & Sweets Ltd.’s balance sheet if the cost method were chosen instead of the equity method.

d. Prepare the journal entries required to record all the investments. (Assume they were purchased on February 1, 2023.)

e. On May 31, 2023, the market value per share of the Loblaw’s shares is $72.15; that of the WestJet shares is $25.50 per share.

Prepare any journal entries required to adjust the investments at the year end and accrue any interest revenue. Assume Santé Smoothies & Sweets Ltd. chooses to use the cost method to record the investment in the deli.