Eleven years ago, Park Ltd. acquired 40% of the common shares of Sabala Ltd. for $3million.ThisgaveParkasignificantinfluenceoverSabala.Atthatdate, Sabala had

 

$3.5 million of retained earnings and $1.5 million of common shares. The fair values of  the identifiable assets and liabilities approximated their book values except for abuilding with a fair value of $1,500,000 more than its book value. The building had a remaining useful life of20 years at the time of acquisition.

 

OnDecember31,Year11,Sabala'sretainedearningsare$8.7million.

For the year ended December 31, Year 11, Sabala's net income is $2.2 million. Sabala declared and paid adividendof$700,000during Year11.

Park reports under I FRS.

Bothcompanieshaveagrossmarginof35%.

 

At the end of the prior year, Sabala's inventories included $200,000 of goods purchased from Park that were sold in Year11.

 

At the end of Year 11, Park's inventories included $100,000 of goods purchased from Sabala.

Required:

1. Calculate equity income and prepare the journal entries to record the Year 11transactionsrelatedtoPark's investment in Sabala.
2. Calculate the net balance in the investment in Sabala account at December 31, Year11.

Answer rating: 100% (QA)

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