The following balance sheets have been prepared as at December 31, Year 5, for
Kay Corp. and Adams Co. Ltd.:
|
Cash
|
Kay
$ 60,000
|
|
Adams
$ 30,000
|
|
Accounts receivable
|
80,000
|
|
170,000
|
|
Inventory
|
600,000
|
|
400,000
|
|
Property and plant
|
1,400,000
|
|
900,000
|
|
Investment in Adams
|
360,000
|
|
-
|
|
$2,500,000
|
|
$1,500,000
|
|
Current liabilities
|
$ 400,000
|
|
$ 150,000
|
|
Bonds payable
|
500,000
|
|
600,000
|
|
Common shares
|
900,000
|
|
450,000
|
|
Retained earnings
|
700,000
|
|
300,000
|
|
$2,500,000
|
|
$1,500,000
|
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, Y ear 5, inventory of Kay contained a p r ofit r eco r ded 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 igno r e 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.