Question 1: Significant Influence Investments (Chapter 2) - 19 marks

P Corp. paid $500,000 for a 40% interest in S Limited on January 1, Year 6. This purchase gives P significant influence in S.

During Year 6, S paid dividends of $100,000 and reported profit as follows:

• Profit before discontinued operations$385,000
• Discontinued Operations loss (net of tax)(30,000)
• OCI (unrealized gain on FV-OCI investment)20,000
• Comprehensive Income$375,000

P's profit for Year 6 consisted of $1,200,000 in sales, operating expenses of $500,000, income tax expense of $210,000, and its investment income from S. Both companies have an income tax rate of 30%.

Required:

(a)

• Prepare statement of comprehensive income for P for Year 6. Use an appropriate 3-line title.

(b)Assume that P uses the cost method.

• Prepare journal entries necessary to account for P's investment for Year 6.
• Determine the correct balance in P's investment account at December 31, Year 6.
• Prepare income statement for P for Year 6. Use an appropriate 3-line title.

(c)If P wants to show the lowest debt-to-equity ratio at the end of year 6, would it prefer to use the cost or equity method to report its investment in S? Explain why.