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Pender Corp. paid $234000 for a 30% interest in Salt spring Limited on January 1 Year 6. During Year 6 Salt spring paid dividends of $100000 and reported profitas follows Profit before

Pender Corp. paid $234000 for a 30% interest in Salt spring Limited on January 1 Year 6. During Year 6 Salt spring paid dividends of $100000 and reported profitas follows Profit before

Pender Corp. paid $234,000 for a 30% interest in Salt spring Limited on January 1, Year 6. During Year 6, Salt spring paid dividends of $100,000 and reported profitas follows:

Profit before discontinued operations

$288,000

Discontinued operations loss (net of tax)

(30,000)

Profit

$258,000

Pender’s profit for Year 6 consisted of $900,000 in sales, expenses of $400,000, income tax expense of $200,000, and its investment income from Salt spring. Both companies have an income tax rate of 40%.

Required :

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

(i) Prepare all journal entries necessary to account for Pender’s investment for Year 6.

(ii) Determine the correct balance in Pender’s investment account at December 31, Year 6.

(iii) Prepare an income statement for Pender for Year 6.

(b) Assume that Pender uses the cost method.

(i) Prepare all journal entries necessary to account for Pender’s investment for Year 6.

(ii) Determine the correct balance in Pender’s investment account at December 31, Year 6.

(iii) Prepare an income statement for Pender for Year 6.

(c) Which reporting method would Pender want to use if its bias is to report the highest possible return on investment to users of its financial statements?

Briefly explain and show supporting calculations.

Tripti 08-Jul-2020

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