Question: The following balance sheets have been prepared as at December

The following balance sheets have been prepared as at December 31, Year 5, for
Kay Corp. and Adams Co. Ltd.:
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, Year 5, inventory of Kay contained a profit recorded 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 ignore income tax on the acquisition differential.
(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.

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  • CreatedJune 08, 2015
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