Problem
Eleven years ago, Park Ltd. acquired 40% of the common shares of Sabala Ltd. for $3 million.This gave Park a significant influence over Sabala.At that date, 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 a building with a fair value of $1,500,000 more than its book value. The building had a remaining useful life of 20 years at the time of acquisition.
On December31, Year 11, Sabala's retainedearnings are $8.7 million.
For the year ended December 31, Year 11, Sabala's net income is $2.2 million. Sabala declaredand paid a dividendof $700,000 during Year 11.
Park reportsunder IFRS.
Both companieshave a gross margin of 35%.
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.
Task
a) Calculate equity income and prepare the journal entries to record the Year 11 transactions relatedto Park's investment in Sabala.
b) Calculate the net balance in the investment in Sabala account at December 31, Year 11.