Question3

On April 30, 20X4, B Co. established a 100%-owned subsidiary known as S Inc. B invested $550,000 in the shares of S. S has no other shares outstanding. Since its establishment, S has had the following earnings and paid the following dividends:

Required:

a. Determine the amount of S Inc.s earnings that will be reported as investment income by B Co. in 20X7, under the equity method. (5 marks)

b. Calculate the balance of the investment in S Inc. account on B Co.s books on December 31, 20X7, assuming that B Co. maintains the investment account on the equity basis. (5 marks)

c. Provide the adjusting entry B Co. will have to make on December 31, 20X7, if it uses the cost method to record and the equity method to report its investment in S Inc. (5 marks)