Drummond Services Ltd. acquired 25% of the common shares of Bella Roma Ltd. on January 1, 2018,

Question:

Drummond Services Ltd. acquired 25% of the common shares of Bella Roma Ltd. on January 1, 2018, by paying $3.6 million for 200,000 shares. Bella Roma declared a $0.50-per-share cash dividend in each quarter that was received on March 15, June 15, September 15, and December 15. Bella Roma reported net income of $2.2 million for the year. At December 31, the market price of the Bella Roma shares was $17 per share.

Instructions

(a) Prepare the journal entries for Drummond Services for 2018, assuming Drummond cannot exercise significant influence over Bella Roma and uses the fair value through profit or loss model.

(b) Prepare the journal entries for Drummond Services for 2018, assuming Drummond can exercise significant influence over Bella Roma and uses the equity method.

(d) Prepare the journal entries for Drummond Services for 2018, assuming that the company reports under ASPE and has chosen to account for its investment using the cost model.

(e) Under ASPE, why do you think companies can choose to use the cost model?

(f) For parts P12.6A(a), P12.6A(b), and P12.6A(d), calculate the ending balance in each account affected by this investment. You may omit the Cash account.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...