On January 1, 2008, Pretty Company acquired 80% of the common stock of Sweety Company for $195,000. On this date, Sweety had total owners' equity of $200,000 (common stock, other paid-in capital and retained earnings of $10,000, $90,000 and $100,000 respectively). Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess to the patents is to be amortized over 20 years. On July 1, 2009, Sweety borrowed $100,000 from Pretty with a 10% 1-year note; interest is due at maturity. On January 1, 2009, Pretty held merchandise acquired from Sweety for $10,000. During 2009, Sweety sold merchandise to Pretty for $50,000, $20,000 of which is still held by Pretty on December 31, 2009. Sweety's usual gross profit on affiliated sales is 50%. On December 31, 2008, Pretty sold equipment to Sweety at a gain of $10,000. During 2009, the equipment was used by Sweety. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value. Both companies have a calendar-year fiscal year. Required: i) Which method is being used by Pretty to account for its investment in Sweety? Provide one reason to justify (2 marks) your selection. ii) Complete the schedules and worksheet necessary to produce the consolidated financial statements of Pretty Company and its subsidiary for the year ended December 31, 2009. (Provided in Attachments 1 & 2) (28 marks)

On January 1, 2008, Pretty Company acquired 80% of the common stock of Sweety Company for $195,000. On this date, Sweety had total owners' equity of $200,000 (common stock, other paid-in capital and retained earnings of $10,000,$90,000 and $100,000 respectively). Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess to the patents is to be amortized over 20 years. On July 1,2009, Sweety borrowed $100,000 from Pretty with a 10%1-year note; interest is due at maturity. On January 1, 2009, Pretty held merchandise acquired from Sweety for $10,000. During 2009, Sweety sold merchandise to Pretty for $50,000,$20,000 of which is still held by Pretty on December 31,2009. Sweety's usual gross profit on affiliated sales is 50%. On December 31,2008 , Pretty sold equipment to Sweety at a gain of $10,000. During 2009, the equipment was used by Sweety. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value. Both companies have a calendar-year fiscal year. Required: i) Which method is being used by Pretty to account for its investment in Sweety? Provide one reason to justify your selection. (2 marks) ii) Complete the schedules and worksheet necessary to produce the consolidated financial statements of Pretty Company and its subsidiary for the year ended December 31, 2009. (Provided in Attachments 1 \& 2) (28 marks)