Holmes, Inc. purchased 30% of Nadal Corporation's 30,000 outstanding common shares at a cost of $15 per share on January 3, 2017. The purchase price of $15 per share was based solely on the book value of Nadal's net assets. On September 21, Nadal declared and paid a cash dividend of $39,000. On December 31, Holmes's year end, Nadal reported net income of $85,000 for the year. Nadal shares had a fair value of $14.75 per share at December 31. Holmes, Inc., a private Canadian corporation, applies ASPE.
Instructions
(a) Under the assumption that the 30% holding of Nadal does not give Holmes significant influence over Nadal, identify the possible accounting methods Holmes could use under ASPE to account for its investment. Prepare all required 2017 journal entries under each acceptable method.
(b) Under the assumption that the 30% holding of Nadal gives Holmes significant influence over Nadal, prepare all required 2017 journal entries, assuming Holmes uses the equity method of accounting.
(c) Indicate the other possible accounting methods, if any, that Holmes could have chosen under the assumption in (b).
(d) From the perspective of a financial analyst, why might the equity method be considered a more informative presentation when the investor has significant influence?