On January 1, 20X5, Huma Co. paid $97,500 for 75% of Peru Ltd.s outstanding common shares.

At the date of acquisition, Perus statement of financial position showed the following shareholders equity:

Common shares $75,000

Retained earnings $15,000

At the date of acquisition, the book value of Perus net identifiable assets were equal to their fair values.

Huma uses the cost method to account for this investment.

On December 31, 20X6, Humas inventory included $10,500 of unsold goods purchased from Peru. Peru has a 40% gross margin on all goods sold to Huma.

During 20X7, Peru sold $112,500 of goods to Huma. At December 31, 20X7, Huma still had $24,750 of goods purchased from Peru in its inventory.

During 20X7, Huma sold $150,000 in goods to Peru. At December 31, 20X7, Peru still had $22,500 of goods purchased from Huma in its inventory. Huma has a 30% fross margin on all goods sold to Peru.

During 20X7, Peru paid rent of $37,500 to Huma.

On July 1, 20X7, Huma signed a note to borrow $90,000 from Peru. The note bears an interest rate of 10%. Interest is to be paid at the end of every calendar year. Huma has paid it for 20X7.

During 20X7, Peru sold a tract of land to Huma for a gain of $30,000.

Goodwill impairment tests are conducted annually and showed the following impairments:

20X5 $3,900

20X6 1,200

20X7 2,550

Huma prepares its consolidated financial statements using the entity theory method.

Both Huma and Peru are taxed at 40%.

a. Prepare a set of consolidated financial statements at December 31, 20X7.

b. Assume that Huma uses the equity method to record its investment in Peru, instead of the cost method. Calculate the balance of the investment account at January 1, 20X7.

2. The December 31, 20X7 separate-entity financial statements for Huma Co. and Peru Ltd. are presented below Statements of Financial Position As of December 31, 20X7 Huma Peru Noncurrent assets: Land Equipment, net Investment in Peru Ltd 262,500 $28,500 57,000 70,500 97,500 717,000 99,000 Current assets 48,000 Inventory Note receivable Accounts receivable Cash 105,000 17.775 170, 775 $887.775$255,600 40,500 90,000 15,000 11,100 156,600 Total assets 2. The December 31, 20X7 separate-entity financial statements for Huma Co. and Peru Ltd. are presented below Statements of Financial Position As of December 31, 20X7 Huma Peru Noncurrent assets: Land Equipment, net Investment in Peru Ltd 262,500 $28,500 57,000 70,500 97,500 717,000 99,000 Current assets 48,000 Inventory Note receivable Accounts receivable Cash 105,000 17.775 170, 775 $887.775$255,600 40,500 90,000 15,000 11,100 156,600 Total assets