On January 1, Year 1, Popa Inc. acquired 100% of the outstanding common shares of Montreal Ltd. for a total cost of $6,700. Coincidently, the carrying amounts of Montreal’s assets and liabilities were equal to their fair values on this date. 

The Year 1 financial statements for Popa and Montreal were as follows: 

Additional Information 

• Popa uses the equity method to account for its investment in Montreal. 

• Montreal paid dividends of $500 in Year 1.

Required 

(a) Prepare consolidated financial statements for Year 1. 

(b) Now assume that Popa had used the cost method to account for its investment in Montreal. Indicate the account balance for any accounts on the three sets of financial statements that would change when switching from the equity method to the cost method.  

Transcribed Image Text:

Sales Equity method income Total income Cost of goods sold Other expenses Total expenses Profit INCOME STATEMENTS For year ending December 31, Year 1 Popa $13,000 800 13,800 10,100 1,400 11,500 $ 2,300 Montreal $4,400 0 4,400 2,900 700 3,600 $ 800