Grafton Co. purchased 2,000 of the 10,000 outstanding voting shares of Prince Ltd. on January 2, 2020, for $300,000. The rest of the shares of Prince are widely held. At the acquisition date, the summary SFP for Prince was as follows:
Cash $ 100,000
Plant and equipment 1,200,000
Land 400,000
$ 1,700,000
Liabilities $ 400,000
Common shares 800,000
Retained earnings 500,000
$ 1,700,000
At the date of acquisition, all assets and liabilities had fair values equal to their carrying values. For the year ended June 30, 2020, Prince reported net income of $200,000.
Dividends of $40,000 were declared and paid on April 30, 2020. Assume that income is earned evenly throughout the year.
Prince awarded Grafton two seats on the 10-member board of directors effective January 2, 2020. Prince and Grafton report under IFRS.
Required:
a) Prepare all the necessary journal entries on the books of Grafton, with respect to the investment for the year ended June 30, 2020, assuming that Grafton accounts for the investment in Prince as an associate.
b) Define significant influence and discuss the relevant factors in the determination of whether or not significant influence exists for Grafton.
c) Now assume that Grafton purchased 1,500 shares. Discuss the relevant factors in the determination of whether or not significant influence exists for Grafton.