Question 1: Significant Influence Investments (Chapter 2) - 19 marks

P Corp. paid $500,000 for a 40% interest in S Limited on January 1, Year 6. This purchase gives P significant influence in S.

During Year 6, S paid dividends of $100,000 and reported profit as follows:

Profit before discontinued operations	$385,000
Discontinued Operations loss (net of tax)	(30,000)
OCI (unrealized gain on FV-OCI investment)	20,000
Comprehensive Income	$375,000

P's profit for Year 6 consisted of $1,200,000 in sales, operating expenses of $500,000, income tax expense of $210,000, and its investment income from S. Both companies have an income tax rate of 30%.

Required:

(a) Assume that P reports its investment using the equity method.

• Prepare all journal entries necessary to account for P's investment for Year 6. (3 marks)
• Determine the correct balance in P's investment account at December 31, Year 6. (3 marks)
• Prepare a statement of comprehensive income for P for Year 6. Use an appropriate 3-line title. (4 marks)

(b) Assume that P uses the cost method.

• Prepare all journal entries necessary to account for P's investment for Year 6. (3 marks)
• Determine the correct balance in P's investment account at December 31, Year 6. (1 mark)
• Prepare an income statement for P for Year 6. Use an appropriate 3-line title. (3 marks)

(c) If P wants to show the lowest debt-to-equity ratio at the end of year 6, would it prefer to use the cost or equity method to report its investment in S? Explain why. (2 marks)

Question 2: Business Combinations (Chapter 3) - 15 marks

Manna Ltd. enters into a business combination with Noah Inc. in which Manna purchases all of the identifiable assets and liabilities of Noah Inc. To effect the business combination, Manna issued 50,000 of its common shares currently trading at $8.00 per share for all of Noah's net identifiable assets. Manna is considered to be the clear acquirer. Costs associated with the business combination are:

Legal, appraisal, and finders' fees	$5,000
Costs of issuing shares	7,000
	$12,000

Balance sheet data for the two companies immediately before the business combination are below:

	Manna Ltd. Book Value	Noah Inc. Book Value Fair Value
Cash	$ 140,000	$ 52,500	$ 52,500
Accounts Receivable	167,200	61,450	56,200
Inventory	374,120	110,110	134,220
Land	425,000	75,000	210,000
Buildings (at net)	250,505	21,020	24,020
Equipment (at net)	78,945	17,705	15,945
Total Assets	$1,435,770	$337,785
Current Liabilities	$ 133,335	$ 41,115	$ 41,115
Non-current Liabilities	------------	150,000	155,000
Common Shares	500,000	100,000
Retained Earnings	802,435	46,670
Total Liabilities and Shareholders' Equity	$1,435,770	$337,785

Required:

• Calculate any goodwill created at the time of the business combination. (3 marks)
• Prepare the journal entries on Manna's books to record the business combination. (8 marks)
• Prepare Manna's balance sheet immediately after the business combination. Use an appropriate three line title. (4 marks)