QUESTION 2 (6 marks)

The following are the financial statements of Raleigh Corp and Tweedmere Inc. prepared on December 31, 2015:

2015 INCOME STATEMENTS

Raleigh Tweedmere

Misc. revenues 926,500 270,000

Interest revenue 3,600

Dividend revenue 10,500 _

$937,000 $273,600

Misc. expenses 736,400 229,600

Interest expense 3,600

Income tax expense 80,000 20,000

$820,000 249,600

Net income $117,000 $ 24,000

2015 RETAINED EARNINGS STATEMENTS

Bal, Jan 1 $153,000 $ 72,000

Net income 117,000 24,000

289,800 96,000

Dividends 50,000 15,000

Bal. Dec 31 $220,000 $ 81,000

BALANCE SHEETS December 31, 2015

Misc. Assets $535,125 $211,000

Note Receivables 60,000

Investment in Tweedmere 56,875 -------

$592,000 $271,000

Misc. Liabilities $212,000 $140,000

Note Payable 60,000

Common Shares 100,000 50,000

Retained Earnings 220,000 81,000

$592,000 $271,000

Other information:

1. Raleigh acquired 70% of Tweedmere on January 1, 2012 at a cost of $56,875. On this date Tweedmere retained earnings amounted to $10,000, and the acquisition differential was entirely allocated to goodwill. Impairment tests conducted yearly since acquisition yielded a loss of $3,000 in 2012 and a further loss of $2,250 in 2015.

Raleigh uses the cost method to account for the investment.

Use the entity theory for calculations.

2. The December 31, 2015 inventory of Raleigh contained purchases made from Tweedmere amounting to $10,000. Tweedmere sells to Raleigh at a 40% gross profit.

3. On July 1, 2015 Raleigh borrowed $60,000 from Tweedmere and signed a note bearing interest at 12% per year.

4. Both companies pay income tax at a rate of 40%.

REQUIRED:

Calculate the balance in the Investment in Tweedmere account as at December 31, 2015, if Raleigh had used the equity method.