QUESTION 1 (24 Marks)
On January 1, 2021, Pearl Corporation acquired 150,000 common shares of Sapphire Company
for $20 each. At the time, Sapphire had 1,000,000 common shares outstanding. The investment
was classified as FV-NI. During 2021, Sapphire reported net income of $225,000 and declared
and paid dividends of $16,000. At the end of 2021, the fair value of Sapphire’s shares was $23
per share.
REQUIRED:
a) Prepare Pearl Corporation’s journal entries for the investment in Sapphire for the
2021 fiscal year. (3 Marks)
On January 1, 2022, Pearl Corporation acquired another 200,000 common shares of Sapphire
Company for $23 each. The book values of Sapphire’s net assets were equal to fair values except
for specialized equipment, which was understated by $36,000. The equipment had an estimated
remaining life of 12 years. During 2022, Sapphire reported net income of $265,000 and paid
dividends of $15,000. At December 31, 2022, the fair value of Sapphire’s shares was $26 per
share.
REQUIRED:
b) Prepare the journal entries on the books of Pearl Corporation for the investment in
Sapphire for the 2022 fiscal year. (4 Marks)
On January 1, 2023, Pearl Corporation acquired another 100,000 common shares of Sapphire
Company for $26 per share. The book values of Sapphire’s net assets were equal to fair values
except for specialized equipment, which was now understated by $31,900 and had an estimated
remaining useful life of 11 years. During 2023, Sapphire Company reported a net income of
$280,000 and paid dividends of $16,000. At December 31, 2023, the fair value of Sapphire’s
shares was $29 per share.
REQUIRED:
c) Prepare the journal entries on the books of Pearl Corporation for the investment in
Sapphire for the 2023 fiscal year. (6 Marks)
On January 1, 2024, Pearl Corporation acquired another 200,000 common shares of Sapphire
Company for $29 each. The book values of Sapphire’s net assets were equal to fair values except
for specialized equipment, which was now understated by $29,000 and had an estimated remaining
useful life of 9 years. During 2024, Sapphire Company reported a net income of $275,000 and
paid dividends of $12,000. At December 31, 2024, the fair value of Sapphire’s shares was $27 per
share.
REQUIRED:
d) Prepare the journal entries on the books of Pearl Corporation for the investment in
Sapphire for the 2024 fiscal year. (6 Marks)
Assignment 2B School of Business
© 2020, Southern Alberta Institute of Technology
3
QUESTION 1 (continued)
On January 1, 2025, Pearl Corporation sold 32,500 shares of Sapphire Company for $27 per share.
On the date of the sale, Pearl showed a balance of $13,000 in its contributed surplus account.
REQUIRED:
e) Prepare the journal entry on the books of Pearl Corporation to record the sale of the
shares in Sapphire. (5 Marks)
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School of Business Assignment 2B
© 2020, Southern Alberta Institute of Technology
QUESTION 2 (6 Marks)
Following is the organizational structure of the Parsley Group of Companies (percentages indicate
each company’s ownership of the subsidiary):
70% 90%
60% 65%
80%
Sesame Corp.
Parsley Corporation
Sage Ltd. Salt Ltd.
Saffron Inc. Sugar Ltd.
For the fiscal year ended December 31, 2020, each company reported the following net incomes:
Parsley Corporation $1,500,000
Sage Ltd. 900,000
Salt Ltd. 650,000
Sugar Ltd. 500,000
Saffron Inc. 300,000
Sesame Corp. 150,000
REQUIRED:
Assuming there were no intercompany transactions during the year, calculate the total net
income attributable to Parsley for the fiscal year ended December 31, 2020. (6 Marks)
Assignment 2B School of Business
© 2020, Southern Alberta Institute of Technology
5
QUESTION 3 (4 Marks)
On January 1, 2020, Pineapple Corporation and Papaya Ltd. agreed to purchase a pipeline together,
and signed a contract to operate the pipeline together as a joint operation. The pipeline cost
$28,000,000 in total, with Pineapple contributing 60% of the capital, and Papaya paying the
remainder. The joint operation agreement specified that revenues and expenses were to be split
between the two parent companies based on the proportion of capital invested. The two partners
hired a management company (Squeeze Corporation) to operate the pipeline on their behalf. The
pipeline was estimated to have a remaining useful life of 30 years. During 2020, the pipeline
generated total revenue of $8,300,000, which was paid out in cash to each of Pineapple and Papaya.
At the end of 2020, Squeeze charged a management fee of $4,500,000 for operating the pipeline.
REQUIRED:
Prepare all the journal entries required to record the joint operation on the books of
Pineapple Corporation. (4 Marks)