The following balance sheets have been prepared as at December 31, Year 6, for Kay Corp. and Adams Ventures:

Additional Information:

• Kay acquired its 40% interest in Adams for $374,000 in Year 2, when Adams's retained earnings amounted to $184,000. The acquisition differential on that date was fully amortized by the end of Year6.

• In Year 5, Kay sold land to Adams and recorded a gain of $74,000 on the transaction. Adams is still using this land.

• The December 31, Year 6, inventory of Kay contained a profit recorded by Adams amounting to $49,000.

• On December 31, Year 6, Adams owes Kay $43,000.

• 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.

Required:

(a) Prepare three separate balance sheets for Kay as at December 31, Year 6, assuming that the investment in Adams is a
(i) control investment; 

(ii) joint operation and is reported using proportionately adjusted financial statements, 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.

(c) Prepare the financial statements required for part (a) using the worksheet approach.

Transcribed Image Text:

Kay Adams Cash 74,000 2$ 37,000 Accounts receivable Inventory 108,000 191,000 635,000 421,000 Property and plant Investment in Adams 921,000 1,428,000 374,000 $1,570,000 $2,619,000 Current liabilities Bonds payable Common shares $ 414,000 $ 164,000 614,000 517,500 956,000 478,000 Retained earnings 731,500 314,000 $1,570,000 $2,619,000