On January 1, Year 2, Cat Corporation purchased common shares of Mouse

Limited for $1,900,000. On this date, Mouse had common shares of $3,000,000

and Retained Earnings of $2,550,000. At acquisition, the identifiable assets and

liabilities of Mouse had fair values that were equal to carrying amounts, except

for:

Fair Value Book value

Equipment (remaining life of 5 years) $1,350,000 $ 600,000

The following relates to Mouse since the acquisition date:

Year Net Income Dividends paid

2 $ 230,000 $ 180,000

3 210,000 190,000

In Year 3, there was a goodwill impairment loss equal to 10% of the goodwill

created at acquisition date. On January 15, Year 4, the market value of 25% of

Mouse common shares was $1,400,000 and this decline was considered

permanent.

Required: Show all the journal entries that Cat should make regarding this

investment in Mouse for Years 2, 3 and on January 15, Year 4, assuming the

following two independent cases:

a) Cat owns 25% of common shares of Mouse. (13 marks)

b) Cat owns 25% of common shares of Mouse. There is only one other

shareholder who owns 75% of the Mouse common shares. (5 marks)

Round to the nearest dollar. Show all work and schedules.

Hint: Acquisition differential = $512,500. You must prepare the AD schedule

based only on %, as under the equity method, you show the impact of all

consolidation adjustments.