ADVANCE FINANCIAL ACCOUNTING

On January 1, 2020, Cantona Company acquired 80% of the common stock of Baggio Company for $560,000. On this date Baggio had total owners' equity of $540,000, including retained earnings of $240,000. During 2020, Baggio had net income of $60,000 and paid no dividends. Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill. On January 1, 2021, Cantona held merchandise acquired from Baggio for $10,000. During 2021, Baggio sold merchandise to Cantona for $100,000, of which $20,000 is held by Cantona on December 31, 2021. Baggio's usual gross profit on affiliated sales is 40%. On December 31, 2021, Cantona still owes Baggio $20,000 for merchandise acquired in December. On January 1, 2021, Cantona sold to Baggio some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000. Baggio is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method. As at December 31, 2021, the trial balances of Cantona and Baggio are provided on the next page. Required: i) Which method is being used by Cantona to account for its investment in Baggio? Provide 2 reasons to justify your selection. ii) Prepare and complete the worksheet for consolidated financial statements for the year ended December 31, 2021. Prepare all supporting schedules. Round all computations to the nearest

Trial Balance as at December 31,2021:

Account Titles Cantona ($)

Inventory, December 31 100,000 Other Current Assets 253,000 Investment in Subsidiary 560,000 Other Long-Term Investments 50,000 Land 140,000 Buildings and Equipment 315,000 Accumulated Depreciation (208,000) Other Intangibles 60,000 Current Liabilities (150,000) Bonds Payable (100,000) Premium on Bonds Payable (5,000) Other Long-Term Liabilities (200,000) Common Stock (200,000) Other Paid-in Capital (100,000) Retained Earnings (421,000) Net Sales (600,000) Cost of Goods Sold 350,000 Operating Expenses 140,000 Dividend Income (24,000) Gain on Sale of Equipment (20,000) Dividends Declared 60,000 TOTALS 0

Account Titles Baggio ($)

Inventory, December 31 80,000 Other Current Assets 450,000 Investment in Subsidiary 0 Other Long-Term Investments 30,000 Land 70,000 Buildings and Equipment 400,000 Accumulated Depreciation (110,000) Other Intangibles 0 Current Liabilities (100,000) Bonds Payable 0 Premium on Bonds Payable 0 Other Long-Term Liabilities (150,000) Common Stock (100,000) Other Paid-in Capital (200,000) Retained Earnings (300,000) Net Sales (380,000) Cost of Goods Sold 180,000 Operating Expenses 100,000 Dividend Income 0 Gain on Sale of Equipment 0 Dividends Declared 30,000 TOTALS 0