Spring 2013 Due: January 9, 2013
Question 1 (25 marks)
Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2010, for a cash consideration of $200,000 at a time when its shareholders’ equity amounted to $1,000,000. The shares of both companies were traded on the national stock exchange. During 2010, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2010, shares of Stamp Company were trading for $11 each. During 2011, Stamp Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2011, Posthorn Corporation sold 5,000 shares of Stamp Company for a consideration of $12 per share. At the end of 2011, the share price of Stamp Company had fallen to $6 per share. The average of market analysts’ forecasts was that the share price could be expected to rise to $8 per share over the next five years. Posthorn Corporation has not elected early adoption of the new standards for financial instruments which become effective on January 1, 2015. Required:
For each of the following independent assumptions, state the amounts that Posthorn Corporation would include in its 2011 financial statements, with respect to its investment in Stamp Company for (i) its investment in Stamp Company; (ii) net income; and (iii) other comprehensive income. a) Posthorn Corporation accounts for its investment in Stamp Company as a fair value through profit and loss investment; b) Posthorn Corporation accounts for its investment in Stamp Company as an available for sale investment; c) Posthorn Corporation accounts for its investment in Stamp Company as a significant influence investment; d) Posthorn Corporation accounts for its investment in Stamp Company using...