Question

Pender Corp. paid $270,000 for a 30% interest in Saltspring Limited on January 1, Year 6. During Year 6, Saltspring paid dividends of $107,000 and reported profit as follows:

Profit before discontinued operations			$324,000
Discontinued operations loss (net of tax)			(32,100)
Profit			$291,900

Pender’s profit for Year 6 is calculated on $963,000 in sales, expenses of $107,000, income tax expense of $342,400, and its investment income from Saltspring.

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Transcation 1 : Record 30% investment in Saltspring.

Transcation 2 : Record dividends received.

Transcation 3 : Record 30% of Saltspring's profit and discontinued operations.

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

Balance in Pender’s investment account           $

(iii) Prepare an income statement for Pender for Year 6. (Negative amounts and deductibles should be indicated by a minus sign. Omit $ sign in your response.)

Pender Corp Income statement Year ended December 31, Year 6
(Click to select)  Income before income tax  Sales  Operating expenses  Comprehensive income  Income tax expense  Net income before discontinued operations  Disc. Operations - Equity method loss	$
(Click to select)  Equity method income  Sales  Income tax expense  Net income before discontinued operations  Comprehensive income  Income before income tax  Operating expenses  Disc. Operations - Equity method loss
(Click to select)  Equity method income  Net income before discontinued operations  Income before income tax  Sales  Comprehensive income  Income tax expense  Disc. Operations - Equity method loss  Operating expenses
(Click to select)  Income before income tax  Income tax expense  Sales  Equity method income  Operating expenses  Net income before discontinued operations  Disc. Operations - Equity method loss  Comprehensive income
(Click to select)  Income before income tax  Income tax expense  Sales  Equity method income  Operating expenses  Net income before discontinued operations  Disc. Operations - Equity method loss  Comprehensive income
(Click to select)  Net income before discontinued operations  Disc. Operations - Equity method loss  Sales  Equity method income  Operating expenses  Income before income tax  Income tax expense  Comprehensive income
(Click to select)  Disc. Operations - Equity method loss  Net income before discontinued operations  Sales  Equity method income  Operating expenses  Income before income tax  Income tax expense  Comprehensive income
(Click to select)  Loss  Profit	$

(b) Assume that Pender uses the cost method.

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

General Journal	Debit	Credit
(Click to select)  Dividend income  Investment in Saltspring  Unrealized gain on FVTPL investment  Equity method loss – discontinued operations  Equity method income  Net income  OCI - Equity method income  Cash
(Click to select)  Equity method income  OCI - Equity method income  Investment in Saltspring  Cash  Unrealized gain on FVTPL investment  Net income  Equity method loss – discontinued operations  Dividend income
To record 30% investment in Saltspring
(Click to select)  Equity method loss – discontinued operations  OCI - Equity method income  Dividend income  Unrealized gain on FVTPL investment  Equity method income  Cash  Investment in Saltspring  Net income
(Click to select)  Net income  Unrealized gain on FVTPL investment  Equity method loss – discontinued operations  Dividend income  Equity method income  OCI - Equity method income  Cash  Investment in Saltspring
Dividends received

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

Balance in Pender’s investment account           $

(iii) Prepare an income statement for Pender for Year 6. (Negative amounts and deductibles should be indicated by a minus sign. Omit $ sign in your response.)

Pender Corp Income statement Year ended December 31, Year 6
(Click to select)  Income tax expense  Equity method income  Income before income tax  Net income before discontinued operations  Sales  Disc. Operations - Equity method loss  Comprehensive income  Operating expenses	$
(Click to select)  Net income before discontinued operations  Comprehensive income  Disc. Operations - Equity method loss  Sales  Dividend income  Operating expenses  Income tax expense  Income before income tax
(Click to select)  Sales  Operating expenses  Equity method income  Income before income tax  Disc. Operations - Equity method loss  Income tax expense  Comprehensive income  Net income before discontinued operations
(Click to select)  Income before income tax  Income tax expense  Sales  Equity method income  Operating expenses  Net income before discontinued operations  Disc. Operations - Equity method loss  Comprehensive income
(Click to select)  Income before income tax  Income tax expense  Sales  Equity method income  Operating expenses  Net income before discontinued operations  Disc. Operations - Equity method loss  Comprehensive income
(Click to select)  Profit  Loss	$

(c-1) Compute return on investment under the cost method and return on investment under the equity method. (Round your answers to 2 decimal places.)

Cost method return on investment			%
Equity method return on investment			%

(c-2) 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?

• Cost method

• Equity method

Answer 1

Part a (i)

General Journal	Debit	Credit
Investment in Saltspring	270000
Cash		270000
To record 30% investment in Saltspring
Cash (107000*30%)	32100
Investment in Saltspring		32100
Dividends received
Investment in Saltspring (291900*30%)	87570
Investment loss – discontinued operations (32100*30%)	9630
Investment income (net of tax)		97200
To record 30% of Saltspring’s profit and discontinued operations

Part a (ii)

Balance in Pender’s investment account

$325470

Investment cost Jan. 1, Year 6	270000
Dividends received	(32100)
Share of income	87570
Investment account Dec. 31, Year 6	$325470

Part a (iii)

Pender Corp Statement of Operations Year ended December 31, Year 6
Sales	963000
Investment income (net of tax)	97200
	1060200
Operating expenses	(107000)
Income before income tax	953200
Income tax expense	(342400)
Net income before discontinued operations	610800
Disc. Operations - Investment loss (32100*30%)	(9630)
profit	$601170

Part b (i)

General Journal	Debit	Credit
Investment in Saltspring	270000
Cash		270000
To record 30% investment in Saltspring
Cash (107000*30%)	32100
Investment in Saltspring		32100
Dividends received

Part b (ii)

Balance in Pender’s investment account

$270000

Part b (iii)

Pender Corp Statement of Operations Year ended December 31, Year 6
Sales	963000
Dividend income	32100
	995100
Operating expenses	(107000)
Income before income tax	888100
Income tax expense	(342400)
Profit	545700

Part c (i)

Cost method return on investment = $32100 / $275,000 = 11.89%

Equity method return on investment = ($97200 - $9630)/ $270000 = 32.43%

Part c (ii)

Equity method

Equity method considers the full increase in value of the investee whereas the cost method considers income to the extent of dividends received.