Weekly Corp., a December 31 year-end company that applies IFRS, acquired an investment in 1,000 shares of Credence Corp. in mid-2010 for $29,850. Between significant volatility in the markets and in the business prospects of Credence Corp., the accounting for this investment presented a challenge to Weekly. Toward the end of 2014, Credence discontinued the small annual dividend of $0.50 per share it had been paying, and announced that a major patent responsible for 50% of its income had lost most of its value due to a technological improvement by a competitor.
Situation 1: Credence Corp. is a private company and the shares were acquired in a private transaction between the principals of the two companies. Because the shares were not actively traded, Weekly applies the cost method to account for this investment. In late 2013, Weekly determined that its value had probably fallen marginally to approximately $26,000. In 2014, Weekly became increasingly concerned and, at year end, carried out a thorough analysis of the present value of the likely cash flows to be derived from this investment and estimated an amount of $12,400.
Situation 2: Credence Corp. is a publicly traded company on the Toronto Stock Exchange, and Weekly has opted to account for its investment at fair value through net income. By the end of 2013, the price of Credence shares had fallen to 526.50 per share from $29.00 the previous year, and by the end of2014 was trading at $ 11.10.
Situation 3: Credence Corp. is a private enterprise owned by a group of 20 investors, and is a supplier of materials to Weekly. Weekly purchased the shares to cement the relationship between the two companies and has opted to account for its investment at fair value through OCI. In late 2013, Weekly was beginning to worry about its investment and determined that its value had probably fallen marginally to approximately 526,000 from $27,000 the previous year. In 2014, Weekly was more concerned and, at year end, carried out a thorough analysis of the present value of the likely cash flows to be derived from this investment and estimated an amount of $12,400.
Weekly Corp. adjusts the carrying amount of its investments directly when recognizing an impairment loss, and each type of investment income is accounted for and reported separately.
Instructions
(a) For each situation, identify the impairment model that Weekly should apply assuming it applies IFRS using IAS 39.
(b) Assuming Weekly applies IFRS using IAS 39, prepare the appropriate journal entries at December 31, 2013, and December 31, 2014, under each situation presented.
(c) If Weekly is a private company that applies ASPE, prepare the appropriate journal entries at December 31, 2013, and December 31, 2014, under situations 1 and 2.