Question

Hil Company purchased 10,000 common shares (10%) of Ton Inc. on January 1, Year 4, for $345,000, when Ton's shareholders' equity was $2,600,000, and it classified the investment as a FVTPL security. On January 1, Year 5, Hil acquired an additional 15,000 common shares (15%) of Ton for $525,000. On both dates, any difference between the purchase price and the carrying amount of Ton's share holders' equity was attributed to land. The market value of Ton's common shares was $35 per share on December 31, Year 4, and $37 per share on December 31, Year 5. Ton reported net income of $500,000 in Year 4 and $520,000 in Year 5, and paid dividends of $480,000 in both years.
The management of Hil is very excited about the increase in ownership interest in Ton because Ton has been very profitable. Hil pays a bonus to management based on its net income determined in accordance with GAAP.
The management of Hil is wondering how the increase in ownership will affect the reporting of the investment in Ton. Will Hil continue to classify the investment as FVTPL in Year 5? What factors will be considered in determining whether the equity method should now be used? If the equity method is now appropriate, will the change be made retroactively? They would like to see a comparison of income for Year 5 and the balance in the investment account at the end of Year 5 under the two options for reporting this investment. Last but not least, they would like to get your opinion on which method should be used to best reflect the performance of Hil for Year 5.
Required:
Respond to the questions raised and the requests made by management. Prepare schedules and/or financial statements to support your presentation.


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  • CreatedJune 08, 2015
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