(Investments with significant influence, LO 2) On October 1, 2005 Rowanton Inc.

(Rowanton) purchased 40% of the voting shares of Durward Ltd. (Durward) for

$1,000,000 cash. As a result of the purchase, Rowanton has significant influence over Durward because it can appoint four members to Durward’s board of directors. For the year ended September 30, 2006, Durward reported net income of

$650,000. On the date that Rowanton purchased Durward, the fair value of Durward’s net assets exceeded the book value by $400,000. The difference is being amortized over four years. In addition, Rowanton’s share of profit on intercompany transactions included in Durward’s net income was $50,000 and the goodwill that was identified on acquisition had to be written down by $15,000. During fiscal 2006 Rowanton received $100,000 in dividends from Durward. Rowanton also has a September 30 year end.

Required:

a. Prepare the journal entry that would be made to record Rowanton’s investment in Durward.

b. What amount would be reported on Rowanton’s September 30, 2006 income statement as income from its equity investment in Durward?

c. What amount would be reported on Rowanton’s September 30, 2006 balance sheet for its investment in Durward?

d. Explain why the amount reported on Rowanton’s balance sheet for its equity investment in Durward changes from year to year.