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on january 1 year 5 blake corporation purchased 30 of the outstanding common shares 737179

On January 1, Year 5, Blake Corporation purchased 30% of the outstanding common shares of Stergis Limited for $1,500,000.

The following relates to Stergis since the acquisition date:

Year

Net Income

Other Comprehensive Income

Dividends Paid

Year 5

$ 42,000

$10,000

$60,000

Year 6

120,000

25,000

60,000

Required:

(a) Assume that Blake is a public company and the number of shares held by Blake is enough to give it significant influence over Stergis. Prepare all the journal entries that Blake should make regarding this investment in Year 5 and Year 6. Also, state the disclosure requirements for Year 6 pertaining to Blake’s investment in Stergis.

(b) Assume that Blake is a private company. Even though it has significant influence, it chose to use the cost method to account for its investment. Prepare all the journal entries that Blake should make regarding this investment in Year 5 and Year 6.

(c) If Blake wants to show the lowest debt to equity ratio at the end of Year 6, would it prefer to use the cost or equity method to report its investment in Stergis? Briefly explain.

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