The following are a number of scenarios that show variations in the nature of long term intercorporate investments. Assume that all companies are public companies.
1. A Ltd. owns 45% of B Co. Typically, only about 70% of the outstanding shares are voted at the annual meetings of B Company. Because of this, A Ltd. always casts a majority of the votes on every ballot when it votes the shares it holds.
2. A Ltd. holds no shares of B Co.; however, it holds convertible bonds issued by B Co. that, if A Ltd. converted them, would result in the ownership of 51% of the outstanding shares of B Co.
3. A Ltd. owns 75% of B Co. Recently a receiver, acting on behalf of a bank, seized a portion of B Co.'s inventory when B Co. defaulted on a loan.
4. Last year B Co. was a wholly owned subsidiary of C Inc. At the beginning of this year, B Co. was put up for sale and A Ltd. purchased all of its 100,000 voting shares from C Inc. by making a cash payment of 40% of the purchase price and issuing a promissory note for the balance owing, due in equal installments over the next two years. B Co. has a bond issue outstanding that can be converted at the option of the holder into 150,000 voting common shares of that company. At the time of the sale, C Inc. held 100% of these bonds; it has agreed to sell these bonds proportionately to A Ltd. as it receives the proceeds from the promissory note.
5. A Ltd. owns 100% of B Co., which is insolvent. A licensed trustee has seized all of its assets in bankruptcy.
6. B Co. is located in a foreign country. This country requires that its citizens hold a majority of the ownership of all businesses. A Ltd. has the expertise and technical knowledge required to successfully operate B Co. In order to satisfy the country's foreign ownership requirements, B Co. has been struc tured as a partnership, with 50 partners each having a 2% equity interest.
Forty-nine of the partners, who are all citizens of the foreign country, have signed an irrevocable agreement that establishes A Ltd. as the managing partner, with complete authority to determine the operating, financing, and investing policies of B Co.
Required:
For each scenario, discuss how A Ltd. should report its investment in B Co.