In early 2020, for the first time, HTSM Corp. invested in the common shares of another Canadian company. It acquired 5,000 shares of Toronto Stock Exchange–traded Bayscape Ltd. at a cost of $68,750. Bayscape is projected to reach a value of $15.50 per share by the end of 2020 and $17.00 by the end of 2021, and has consistently paid an annual dividend of $0.90 per share. HTSM is also a Canadian public corporation with a December 31 year end.

The controller of HTSM is uncertain about which accounting method to use. The company is interested in establishing a closer relationship with Bayscape, but if that fails, HTSM considers the investment a good opportunity to make a gain on its sale in the future. The controller has been advised that the investment could be accounted for at cost or at fair value. If at fair value, a decision would have to be made about whether to put the changes in fair value through net income or other comprehensive income. As one step in making a decision, the controller would like to know what the effect would be on total assets and net income in each of 2020 and 2021 if the predictions about Bayscape’s share prices and dividends are correct. Assume there would be no recycling of realized investment gains and losses.

Instructions

a. Prepare and complete a table with a column for each of the three accounting alternatives indicated and rows for journal entries to recognize each of the following: 

(1) the 2020 dividend, (2) any December 31, 2020 adjustments, (3) the 2021 dividend, and (4) any December 31, 2021 adjustments.

b. Based on the table in part (a), prepare a summary comparison of each accounting method, indicating the effect of applying each of the three accounting methods on: (1) total assets at December 31, 2020, (2) 2020 net income, (3) total assets at December 31, 2021, and (4) 2021 net income.

c. Determine the effect on net income for the year ended December 31, 2022, under each of the accounting method options, assuming the investment in Bayscape was sold in early 2022 for $17.00 per share.

d. Identify the accounting policy choices that would be available to the controller if HTSM applied ASPE instead of IFRS, and when each would be appropriate.

e. Ethics Which method, if any, would result in higher income being reported earlier on? Would it be considered unethical for HTSM to choose that method?