Reference no: EM133092322

Question - A few years ago Kim shoes Ltd (shoes) established a new company called Kim's bags Ltd (bags). Shoes acquired all of the Bag's outstanding shares in exchange for $150,000 cash. In the current year, Shoes provided a short term loan of $35,000 to Bags. Bags has committed to repaying the loan by APR 30th of next year.

Shoes sold $40,000 of leather bags for $65,000.By the end of the fiscal year, Bags has used all the leather & sold all the bags made out of leather.

Bags paid Shoes $15,000 in dividends.

Shoes had net income of $103,000and Bags had net income of 39,000.

At the beginning of the fiscal year, Shoes had a retained earnings of $1,237,500 and Bags had a balance of $99,750.

Required -

1. Assume Shoes uses the cost method to record its investment in Bags. What journal entries must be made to convert this investment from the cost method to the equity method? Provide an explanation for each entry.

2. Calculate the balance of the investment in Bags account at the end of the fiscal year under

I. The cost method

II. The equity method