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.

• create 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)