Sub Corporation has 1 million common shares issued. On January 10, 2015, Par Inc. purchased a block of these shares on the open market at $10 per share to hold as a strategic investment. Sub reported profit of $260,000 for the year ended December 31, 2015, and paid a $0.35 per share dividend on December 15, 2015. Sub's common shares were trading at $12 per share on December 31, 2015.
This problem assumes three independent situations that relate to how Par, a public company, would report its investment:
Situation 1: Par purchased 100,000 Sub common shares.
Situation 2: Par purchased 300,000 Sub common shares.
Situation 3: Par purchased 1 million Sub common shares.
Instructions
(a) For each situation, identify what method Par should use to account for its investment in Sub common shares.
(b) For situations 1 and 2, record all transactions for Par related to the investment for the year ended December 31, 2015. Assume that, where Par has a choice, it reports gains and losses in other comprehensive income.
(c) For situation 2, what other method could Par use if it was reporting under ASPE instead of IFRS and:
(1) Sub's shares traded on an active market?
(2) Sub's shares did not trade on an active market? Record Par's transactions for 2015 assuming it uses the alternative method allowed when Sub's shares do not trade on an active market.
(d) For situation 2, compare Par's balance sheet and comprehensive income statement accounts that relate to this investment at December 31 if
(1) The investment is reported at fair value,
(2) The cost method is used, and
(3) The equity method is used to account for the investment.
Taking It Further
Why do you think the options in part (c) are allowed for companies reporting under ASPE?