Pender Corp. paid $234,000 for a 30% interest in Saltspring Limited on January 1, Year 6. During Year 6, Saltspring paid dividends of $100,000 and reported profit as follows:
Profit before discontinued operations ..... $288,000
Discontinued operations loss (net of tax) .... (30,000)
Profit ................. $258,000
Pender's profit for Year 6 consisted of $900,000 in sales, expenses of $400,000, income tax expense of $200,000, and its investment income from Saltspring. Both companies have an income tax rate of 40%.
Required:
(a) Assume that Pender reports its investment using the equity method.
(i) Prepare all journal entries necessary to account for Pender's investment for Year 6.
(ii) Determine the correct balance in Pender's investment account at December 31, Year 6.
(iii) Prepare an income statement for Pender for Year 6.
(b) Assume that Pender uses the cost method.
(i) Prepare all journal entries necessary to account for Pender's investment for Year 6.
(ii) Determine the correct balance in Pender's investment account at December 31, Year 6.
(iii) Prepare an income statement for Pender for Year 6.
(c) Which reporting method would Pender want to use if its bias is to report the highest possible return on investment to users of its financial statements? Briefly explain and show supporting calculations.