Part 1

On January 1, 2020, Hornets Corp. acquired 30% of Hawks Ltd.s common shares for $400,000. Hornets ownership is deemed to possess significant influence. At that time, Hawks had 1 million no-par common shares issued and outstanding. During 2020, Hawks reported a net income of $650,000, declared and paid total cash dividends of $220,000. In 2021, adversely impacted by the pandemic, Hawks reported a net loss of $3250,000 and accordingly, did not declare any dividend.

Instructions

1. How would Hornets label this type of investment and what would be your justification? (2 marks)
2. Hornets decided to use the equity method to account for this investment. What should be the balance in this investment account at the end of 2020 and 2021? (7 marks)

Part 2

Describe how to determine whether significant influence exists in an investment. (6 marks)

Please answer all parts.