Problem $5-7$

LO$2,$

Large Ltd$.$ purchased $70\%$ of Small Company on January $1,$ Year $6,$ for $$770,000,$ when the statement of financial position for Small

showed common shares of $$560,000$ and retained earnings of $$260,000.$ On that date, the inventory of Small was undervalued by

$$71,000,$ and a patent with an estimated remaining life of five years was overvalued by $$90,000.$

Small reported the following subsequent to January $1,$ Year $6$:

A test for goodwill impairment on December $31,$ Year $8,$ indicated a loss of $$20,900$ should be reported for Year $8$ on the

consolidated income statement. Large uses the cost method to account for its investment in Small and reported the following for Year

$8$ for its separate$-$entity statement of changes in equity:

Required

$($a$)$ Prepare the cost method journal entries of Large for each year.

$($b$)$ Compute the following on the consolidated financial statements for the year ended December $31,$ Year $8$:

$($i$)$ Goodwill

$($ii$)$ Noncontrolling interest on the statement of financial position

$($iii$)$ Retained earnings, beginning of year

$($iv$)$ Profit attributable to Large's shareholders

$($v$)$ Profit attributable to noncontrolling interest

$($c$)$ Now assume that Large is a private entity, uses ASPE, and chooses to use the equity method to report its investment in Small.

$($i$)$ Prepare Large's journal entries for each year related to its investment in Small.

$($ii$)$ Determine the investment in Small at December $31,$ Year $8.$