Hat Limited has a total of 200,000 common shares issued. On October 3, 2011, CT Inc., a publicly traded company, purchased a block of these shares in the open market at $50 per share to hold as a long-term equity investment. Hat reported profit of $575,000 for the year ended September 30, 2012, and CT received a $0.25-per-share dividend on that date. Hat's shares were trading at $53 per share at September 30, 20012.
This problem assumes three independent situations related to the accounting for this investment by CT:
Situation 1: CT purchased 25,000 Hat common shares.
Situation 2: CT purchased 70,000 Hat common shares.
Situation 3: CT purchased 200,000 Hat common shares.
Instructions
(a) For each situation, identify whether CT should use the cost model, fair value model, equity method or consolidation to account for its investment in Hat.
(b) For situations 1 and 2, record in CT's books all transactions related to the investment for the year ended September 30, 2012.
(c) Track the movement throughout the year in the investment account and any related investment revenue account for situations 1 and 2 in columnar format, showing the balance in these accounts at the beginning of the fiscal year and the amount of any transactions affecting the accounts during the year to arrive at the balance in the accounts at the end of the fiscal year on September 30, 2012.
(d) Insituation 3, what kind of financial statements should be prepared to report the combined operations of CT and Hat? Whose name will be on the financial statements?
(e) Insituation 2, what other method could CT use if it was reporting under ASPE rather than IFRS and the shares did not trade in an active market? Why do you think this option exists?