The following balance sheets have been prepared as at December 31, Year 5, for
Kay Corp. and Adams Co. Ltd.:

Additional Information
€¢ Kay acquired its 40% interest in Adams for $360,000 in Year 1, when Adams€™s retained earnings amounted to $170,000. The acquisition differential on that date was fully amortized by the end of Year 5.
€¢ In Year 4, Kay sold land to Adams and recorded a gain of $60,000 on the trans-action. Adams is still using this land.
€¢ The December 31, Year 5, inventory of Kay contained a profit recorded by Adams amounting to $35,000.
€¢ On December 31, Year 5, Adams owes Kay $29,000.
€¢ 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 5, assuming that the investment in Adams is a
(i) control investment;
*(ii) joint venture investment, and is reported using proportionate consolidation; 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.

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Kay Adams Cash Accounts receivable Inventory Property and plant Investment in Adams $ 60,000 80,000 600,000 1,400,000 360,000 $2,500,000 $30,000 170,000 400,000 900,000 $1,500,000 Current liabilities Bonds payable Common shares Retained earnings $ 400,000 500,000 900,000 700,000 $2,500,000 $ 150,000 600,000 450,000 300,000 $1,500,000