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On January 1, 2020, Pearl Corporation purchased 36,000 of the 120,000 outstanding common shares of Krab Corporation, paying $32 per share cash. During the year, Krab Corporation paid $1.10 per share cash dividends and at the end of the year, Krab Corporation reported $840,000 of net income. At the end of 2020, the market value of the Krab Corporation common stock is $36 per share.

Part A:

Short Answer

1. Pearl Corporation must use the equity method of accounting. Why?
2. Why is the equity method never used when shares of preferred stock are purchased as an investment?
   1. List two events that provide "evidence" that an investor corporation is exerting significant influence over another corporation when 20-50% of the outstanding common shares are purchased.

Part B:

Give the general journal entries for Pearl Corporation to account for this investment in Krab using the equity method of accounting.

General Journal
Account Titles (debits)	Account Titles (credits)	DR	CR

Part C:

Indicate the names and balances of the investment related-accounts to be reported on Pearl Corporation's 2020 financial statements.

Income Statement:		Balance Sheet:
Name of Account	Amount	Name of Account	Amount

Part D:

Short Answer

1. Why doesn't Pearl Corporation have to prepare consolidated financial statements?
2. What are consolidated financial statements?
3. If you are looking at a consolidated balance sheet and see the account "Non-Controlling Interest", what does the balance of that account represent?

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