Black paid $300,000 for 20,000 (25%) of the outstanding shared of White Limited on January 1, Year-5. During Year-5, White paid dividends of $50,000 and reported other comprehensive income (OCI) of $20,000 and profit as follows:

Profit before discontinued operations $350,000

Discontinued operations loss (net of tax) (30,000)

Profit $320,000

Blacks profit for Year-5 is calculated on $1,000,000 in sales, expenses of $ 150,000, income tax expenses of $375,000, and its investment income from White. Both companies have an income tax rate of 40%.

Required:

Part A

1) Assume that Black is a public company, has significant influence over White and reports its investment using the equity method to account for this investment:

a. Prepare all the journal entries necessary to account for Blacks investment for Year-5.

b. Determine the correct balance in Blacks investment account at December 31, Year-5.

c. Prepare an income statement for Black for Year-5.

2) Assume Black is a private company, has significant influence and chooses to use the cost method to account for its investment in White:

a. Prepare all the journal entries necessary to account for Blacks investment for Year-5

b. Determine the correct balance in Blacks investment account at December 31, Year-5.

c. Prepare an income statement for Black for year-5.

Part B

January 1, Year-6, Black lost its ability to significant influence White because Purple Inc. obtained control of White Limited. Accordingly, the investment in Black is classified as FVTOCI. The fair value of Whites share was $22 per share on this date.

In Year 6, White paid dividends of $50,000 and reported a Net Income of $200,000. On December 31, Year 6, Black sold its investment for $27 per share.

1) Prepare the journal entry at January 1, Year-6 to reclassify the investment from significant influence to FVTOCI.

2) Prepare the journal entries for Year-6 related to Blacks investment in White.