Z Ltd. is a public company with factories and distribution centers located throughout Canada. It has 100,000 common shares outstanding. In past years, it has reported high earnings, but in Year 5, its earnings declined substantially in part due to a loss of markets as a result of the North American Free Trade Agreement.
In Year 6, it closed a large number of its manufacturing and distribution facilities and reported a substantial loss for the year.
Prior to Year 6, 70,000 of Z Ltd.’s shares were held by C Ltd., with the remaining shares being widely distributed in the hands of individual investors in Canada and the United States. On January 1, Year 6, C Ltd. sold 40,000 of its shares in Z Ltd. to W Corporation.
Required:
(a) How should C Ltd. report its investment in Z Ltd., both before the sale of 40,000 shares and after the sale?
(b) How should W Corporation report its investment in Z Ltd.? Explain fully, and include in your answers a reference to Z Ltd.’s Year 6 loss.