On December 31, 20X5, Space Co $\quad$ $\quad$ $\quad$

question 6

Essay

On December 31, 20X5, Space Co. purchased 100% of the outstanding common shares of Shuttle Ltd. for $1,200,000 in shares and $200,000 in cash. The statements of financial position of Space and Shuttle immediately before the acquisition and issuance of the notes payable were as follows (in 000s):
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Space}\quad\quad\quad\quad\text {Shuttle}$
$\begin{array}{lllll}&\text { Book } & \text { Fair } & \text { Book } & \text { Fair } \\&\text { Value } & \text { Value } & \text { Value } & \text { Value } \\\text { Cash } & \$ 360 & \$ 360 & \$ 200 & \$ 200 \\\text { Accounts receivable } & 520 & 500 & 380 & 340 \\\text { Inventory } & 800 & 880 & 400 & \\\text { Property, plant, and equipment } & \underline{1,820} & 2,000 & \underline{1,420} & 1,520 \\& \$ 3,500 & & \$ 2,400 &\end{array}$ $\begin{array}{lllll}\text { Accounts payable } & \$ 380 & \$ 380 & \$ 260 & \$ 260 \\\text { Long-term liabilities } & 1,200 & 1,200 & 1000 & 1000 \\\text { Common shares } & 500 & & 600 & \\\text { Retained earnings } & \underline{1,420} & & \underline{540} & \\& \underline{\$ 3.500} & & \underline{ \$ 2.400} &\end{array}$ The difference in the carrying value and the fair value of the property, plant, and equipment for Shuttle relates to its office building. This building was originally purchased by Shuttle in January 20X1 and is being depreciated over 30 years.
During 20X6, the year following the acquisition, the following occurred:
1. Shuttle borrowed $350,000 from Space on June 1, 20X6, and was charged interest at 10% per annum, which it paid on a monthly basis. There were no repayments of principal made during the remaining of the year.
2. Throughout the year, Shuttle purchased merchandise of $800,000 from Space. Space's gross margin is 30% of selling price. At December 31, 20X6, Shuttle still owed Space $250,000 on this merchandise; 75% of this merchandise was resold by Shuttle prior to December 31, 20X6.
3. Shuttle paid dividends of $250,000 at the end of 20X6 and Space paid dividends of $500,000.
During 20X7, the following occurred:
1. Shuttle paid $150,000 on the loan payable to Space on May 30, 20X7.
2. Throughout the year, Shuttle purchased merchandise of $1,000,000 from Space. Space's gross margin is 30% of selling price. At December 31, 20X6, Shuttle still owed Space $150,000 on this merchandise; 85% of this merchandise was resold by Shuttle prior to December 31, 20X7.
3. Shuttle paid dividends of $250,000 at the end of 20X7 and Space paid dividends of $500,000. Required:
Space has decided to record its investment in Shuttle using the equity method. Determine the balance in the Investment in Shuttle account at December 31, 20X7, using the equity method.
Prepare the statement of financial position and the statement of comprehensive income for the year ended December 31, 20X7, for Space, assuming it accounts for its investment in Shuttle using the equity method.

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