Question 1: (19 marks)

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:

Equipment (remaining life of 5 years) Fair Value=$1,350,000, Book Value=$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: Prepare 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-type adjustments.