QUESTION 3

On January 1, 2020, EC Security Ltd. has purchased 30% of the outstanding common shares of MC Alarms & Cameras Inc. As part of the purchase, EC Security Ltd. will be involved in strategic decision making, as well as have 3 of 10 seats on the board of directors. Both companies have a December 31 year-end.

The acquisition price was $3,498,000 and the carrying value of net assets as at date of acquisition was $11,660,000. During the 2020 fiscal year, MC Alarms & Cameras Inc. had earnings of $1,500,000 and paid a $1.75 dividend per common share (220,000 common shares, issued and outstanding).

Required:

a) Prepare the journal entries that EC Security Ltd. will make in 2020 to account for the investment, assuming the equity method is used. What is the ending balance in the investment account as at December 31, 2020? Show all your work.

b) Give two reasons as to why an entity would make a strategic investment, as opposed to a non-strategic investment.

c) EC Security Ltd. is also looking to use excess cash to invest in debt instruments. Explain how debt instruments are recorded for accounting purposes.