Thorne Ltd. is a wholly owned subsidiary of Fellows Corporation. The SFP, statement of comprehensive income, and the retained earnings section of the statement of changes in equity for each company are shown below. Additional information is as follows:

1. Thorne sells most of its output to Fellows. During 20X6, intercompany sales amounted to $ 3,500,000. A fellow has accounts payable to Thorne for $ 20,000.

2. Fellows own the land on which Thorne’s building is situated. Fellows lease the land to Thorne for $ 30,000 per month.

3. The long- term note payable on Thorne’s books represents a loan from Fellows. The note bears interest at 10% per annum.

4. Both companies declare dividends quarterly. The last quarter’s dividends were declared on December 31, 20X6, payable on January 10, 20X7.

5. Fellows use the cost method to account for its investment in Thorne.

Required

1. Prepare a consolidated SFP, SCI, and the SCE/ RE for Fellows Corporation.

2. What are the adjusting entries required if Fellows wishes to convert from the cost to the equity method to account for its investment in Thorne? How would Fellows’ separate-entity financial statements appear if it accounts for its investment in Thorne under the equity method?

3. Using Fellows’ separate- entity financial statements under the equity method, prepare a consolidated SFP, a consolidated SCI, and consolidated SCE/ RE for Fellows Corporation.

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Statements of Changes in Equity-Retained Earnings Section Year Ended December 31, 20X6 Retained eaings, January 1, 20x6 Net income Dividends declared Retained eamings, December 31, 20X6 $1,330,000 750,000 700,000) 1,380,000 100,000 350,000 (200,000 250,000 Statements of Financial Position December 31, 20X6 Fellows Thome ASSETS Current assets: Cash Accounts receivable Temporary investments and accrued investment income Inventories 180,000 700,000 360,000 25,000 135,000 90,000 330,000 580,000 1,240,000 PROPERTY, PLANT, AND EQUIPMENT Land Buildings and equipment Accumulated depreciation 900,000 1,500,000 (500,000) 1,000,000 900,000 700,000 500,000 $3,340,000 Long-term note receivable Investment in Thorne TOTAL ASSETS EQUITIES Current liabilities: Accounts payable and accrued liabilities Dividends payable $1,580,000 240,000 120,000 360,000 80,000 50,000 130,000 700,000 830,000 Long-term note payable Total liabilities Shareholders' equity Common shares Retained earmings TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 360,000 1,600,000 1,380,000 3,340,000 500,000 250,000 $1,580,000