Sub Corporation has a total of 500,000 common shares issued. On January 2, 2012, Partridge Inc., a publicly traded company, purchased a block of these shares in the open market at $10 per share to hold as a long-term equity investment. At the end of 2012, Sub Corporation reported profit of $350,000 and Partridge received a $0.50-per-share dividend from Sub. Sub Corporation's shares were trading at $12 per share at December 31, 2012.
This problem assumes three independent situations related to the accounting for this investment by Partridge:
Situation 1: Partridge purchased 60,000 Sub common shares.
Situation 2: Partridge purchased 125,000 Sub common shares.
Situation 3: Partridge purchased 500,000 Sub common shares.
Instructions
(a) For each situation, identify whether Partridge should use the cost model, the fair value model, the equity method or consolidation to account for its investment in Sub.
(b) For situations 1 and 2, record in Partridge's books all transactions related to the investment for the year ended December 31, 2012.
(c) Track the movement throughout the year in the investment account and any related investment revenue account for situations 1 and 2 in columnar format, showing the balance in these accounts at the beginning of the fiscal year and the amount of any transactions affecting the accounts during the year to arrive at the balance in these accounts at the end of the fiscal year on December 31, 2012.
(d) In situation 3, what kind of financial statements should be prepared to report the combined operations of Partridge and Sub? Whose name will be on the financial statements?
(e) In situation 2, what other method could Partridge use if it was reporting under ASPE rather than IFRS and the shares did not trade in an active market? Why do you think this option exists?