Used the cost method to account for its investment

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Reference no: EM131116817

The following balance sheets have been prepared as at December 31, Year 5, for

^{Kay Corp. and}^Adams^Co.^Ltd.:

Cash	Kay $ 60,000	Adams $ 30,000
Accounts receivable	80,000	170,000
Inventory	600,000	400,000
Property and plant	1,400,000	900,000
Investment in Adams	360,000	-
	$2,500,000	$1,500,000
Current liabilities	$ 400,000	$ 150,000
Bonds payable	500,000	600,000
Common shares	900,000	450,000
Retained earnings	700,000	300,000
	$2,500,000	$1,500,000

Additional Information

Kay acquired its 40% interest in Adams for $360,000 in Year 1, when Adams's retained earnings amounted to $170,000. The acquisition differential on that date was fully amortized by the end of Year 5.
In Year 4, Kay sold land to Adams and recorded a gain of $60,000 on the trans- action. Adams is still using this land.

• The December 31, Y ear 5, inventory of Kay contained a p r ofit r eco r ded by

Adams amounting to $35,000.

• On December 31, Year 5, Adams owes Kay $29,000.

• Kay has used the cost method to account for its investment in Adams.

• Use income tax allocation at a rate of 40%, but igno r e income tax on the acquisition differential.

Required:

(a) Prepare three separate balance sheets for Kay as at December 31, Year 5, assuming that the investment in Adams is a

(i) control investment;

*(ii) joint venture investment, and is reported using proportionate consolidation; and

(iii) significant influence investment.

(b) Calculate the debt-to-equity ratio for each of the balance sheets in Part (a). Which reporting method presents the strongest position from a solvency point of view? Briefly explain.

Reference no: EM131116817

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