On January 2, Year 1, Brady Ltd. purchased 80% of the outstanding shares of Partridge Ltd. for $4,120,000. Partridge's statement of financial position and the fair values of its identifiable assets and liabilities for that date appear later in this section. The patents had a remaining useful life of 10 years on the acquisition date. The bonds were issued on January 1, Year 1, and mature on December 31, Year 10. Goodwill impairment losses were recorded as follows:
• Year 1: $25,000
• Year 3: $12,500
Partridge declared and paid dividends of $100,000 in Year 3.
On December 31, Year 3, the financial statements of the two companies were as follows:
(a) Prepare consolidated financial statements on December 31, Year 3.
(b) Assume that Brady is a private entity, uses ASPE, and chooses to use the cost method to account for its investment in Partridge. Which items on Brady's separate-entity financial statements would have amounts different from those shown? Compute the equity method balances of these items.
(c) Calculate the current ratio, debt-to-equity ratio, and return on total shareholders' equity for Brady's Year 3 financial statements assuming that the
- Equity method was used to report its investment in Partridge;
- Cost method was used to report its investment in Partridge; and
- Consolidated statements were used to the business combination with Partridge.
Round percentages to one decimal point and other ratios to two decimal points.
(d) Briefly explain which of the different reporting methods in (c) report the highest
- Risk of insolvency.