Herauf10e SM Ch08 FINAL
Herauf10e SM Ch08 FINAL
Herauf10e SM Ch08 FINAL
CASES
Case 8-1
One day after purchasing 100% of the shares of a company, the parent sells 40% of these
shares to an unrelated party and realizes a substantial profit. The parent wants to recognize
this gain on the date of acquisition rather than the date of sale.
Case 8-2
The company pays a premium to buy out a minority shareholder who has been very aggravating
to the controlling shareholder. You are asked to resolve a dispute over how to account for the
acquisition differential.
Case 8-3
A company plans to reduce its ownership in the subsidiary to avoid preparing consolidated
financial statements by purchasing multiple voting shares. Proforma financial statements are
required for the parent, subsidiary and consolidated entity to give effect to the change in share
structure.
Case 8-4
This case, adapted from a CPA exam, involves a public company wishing to divest a wholly
owned subsidiary. You are asked to recommend accounting policies to maximize the selling
price and how the agreement should be changed to minimize disputes in the future.
Case 8-5
This case, adapted from a CPA exam, involves a clothing store. You are asked to prepare a
report regarding cash flow problems and accounting and other issues excluding income tax and
assurance. The accounting issues include going concern, capitalize versus expense of various
expenditures and change in ownership percentage of significant-influence investment.
PROBLEMS
Problem 8-1 (10 min.)
Three short answer questions to interpret lines items on a consolidated cash flow statement.
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2 Modern Advanced Accounting in Canada, Tenth Edition
Problem 8-2 (15 min.)
Journal entries are required for the investment in common shares and investment in preferred
shares of a subsidiary under the equity method and cost method, respectively. Calculation of
noncontrolling interest on the consolidated balance sheet and income statement is also
required.
Problem 8-18 (60 min.) (prepared by Peter Secord, Saint Mary’s University)
The question requires the calculation of amounts for certain consolidated financial statement
items when step purchases have occurred and there are unrealized profits in inventory and
depreciable property, plant and equipment.
1. Theoretically yes, since it could be prepared by consolidating the cash flow statements of
the parent and its subsidiaries, but this would be a complex process. Practically though, it
is much easier to prepare the statement by analyzing the yearly changes that have
occurred in the noncash items in the consolidated balance sheet.
2. $700,000 (minus any cash on the balance sheet of the subsidiary company) would appear
as an outflow in the investing activities section. Because the $300,000 share issue did not
affect cash, it would not appear as a separate item on the consolidated cash flow
statement. However, complete footnote disclosure would be required and would indicate
the total acquisition price, the consideration given (cash and common shares), and a
summary of the assets, liabilities, and equity interest acquired.
5. The change from the cost to the equity method should be accounted for retroactively under
the following circumstances:
- when the reason for the change is to correct an error in prior periods i.e., the entity should
have been using the equity method in the past, but was using the cost method, or
- when the entity could have been using either method in the past and is now changing
from one equally acceptable method to another. For example, the parent company can
use either the cost method or equity method for recording purposes when it controls the
subsidiary and prepares consolidated financial statements.
On the other hand, if the change is being made because of a change in circumstance, the
change should be accounted for prospectively. For example, if the investor company
increases its investment from 10% to 30% of the shares of the investee company and
thereby changes from having no influence to having significant influence, then the change
is made prospectively.
6. No, the subsidiary’s net assets are only measured at fair value at the date of acquisition
i.e., when the parent first obtains control of the subsidiary. When increasing the percentage
ownership from 60% to 75%, the parent’s portion of the undepleted acquisition differential
increases and the NCI’s portion decreases by the same amount, which is the carrying
amount of the portion sold by the NCI. Neither the parent’s portion nor the NCI’s portion is
remeasured at fair value because of this transaction. This transaction is treated as a
transaction among owners. Any difference between the amount paid by the parent and the
carrying amount sold by the NCI is treated as an equity transaction and is charged or
credited directly to shareholders’ equity.
7. The noncontrolling interest is not remeasured at fair value because the parent’s interest is
not remeasured at fair value. Revaluation only occurs when the purchaser’s position
changes from not having control to having control or vice versa. Here, the parent had
control at 76% and still has control at 60%. The decrease in the parent’s carrying amount
is added to the noncontrolling interest. This transaction is treated as a transaction among
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Solutions Manual, Chapter 8 7
owners. Any difference between the amount received by the parent and the carrying
amount sold to the NCI is treated as an equity transaction and is charged or credited
directly to shareholders’ equity.
8. When the parent's ownership declines because of a subsidiary share issue, a loss to the
parent occurs due to the reduction in the parent's investment account. However, a gain
occurs from the perspective of the parent due to the parent's new share of the proceeds
from the subsidiary share issue. The two are netted and produce a net loss or gain on the
transaction. This gain or loss is reported as an equity transaction i.e., a transaction
between shareholders. The gain or loss is reported as a direct credit or charge to
shareholders’ equity i.e., a credit to contributed surplus or a debit to retained earnings.
9. No, a gain or loss realized by a parent company on the sale of part of its investment in the
common shares of its subsidiary is not eliminated in the preparation of the consolidated
financial statements because it represents a transaction between the consolidated entity
and parties outside the entity.
10. Yes, if the parent company does not own all of the preferred shares. The consolidated
income statement will show a noncontrolling interest equal to the noncontrolling interest’s
share of the subsidiary's net income applicable to the preferred shares. The consolidated
balance sheet will show an amount for noncontrolling interest equal to the noncontrolling
interest’s share of the total shareholders' equity of the subsidiary that is applicable to that
company's preferred shares.
12. Because in most situations the market value of preferred shares is related to the general
level of interest rates, it does not make sense conceptually to use a preferred share
acquisition differential to revalue the net assets of the subsidiary when consolidated
13. When a subsidiary has preferred shares, the subsidiary’s shareholders’ equity must be
split between common shareholders and preferred shareholders before determining the
amount belonging to the controlling shareholder versus the noncontrolling interest.
Similarly, when a subsidiary has preferred shares, the subsidiary’s net income must be
split between common shareholders and preferred shareholders before determining the
amount belonging to the controlling shareholder versus the noncontrolling interest. In both
cases, the preferred shareholder amount is determined first based on the terms of the
preferred shares. The common shareholders get the residual amount after determining the
amount belonging to the preferred shareholders. For cumulative preferred shares, the
preferred shareholders will eventually receive a dividend for each year regardless of
whether or not it is paid each year. After the net assets and income have been split
between preferred and common shareholders, it can then be allocated to the controlling
and noncontrolling interests based on their ownership percentages. In this case, the
noncontrolling interest consists of 70% of the preferred equity and 10% of the common
equity.
14. The subsidiary’s income is split between the preferred shareholders and common
shareholders prior to calculating the parent’s and NCI’s share of the subsidiary’s income. If
the preferred shares are cumulative, the preferred shareholders are entitled to a share of
the investee’s income each year regardless of whether dividends are paid in any given
year. However, if the preferred shares are noncumulative, the preferred shareholders will
only receive a portion of the investee’s income of a given year if dividends are declared in
that year. Similarly, when calculating consolidated retained earnings, the change in the
subsidiary’s retained earnings since acquisition must be split between the preferred
shareholders and the common shareholders prior to calculating the parent’s share of the
change in retained earnings. The preferred shareholders will receive a portion of the
investee’s income for all years for which they were entitled to receive a portion of the
income less the amount of dividends already received for those years.
16. The major consolidation problem associated with indirect shareholdings is the iterative
nature of the calculations. One must start at the lowest level of the corporate hierarchy and
work up the corporate structure. At each level, the income of the subsidiary must be
adjusted for changes to the acquisition differential and unrealized profits. Then, the income
is attributed to the controlling and noncontrolling shareholders. In the end, the
noncontrolling interest incorporates its share of each of the different entities on a
cumulative basis.
17. Cash and noncontrolling interest will decrease by $500 on the consolidated balance sheet.
The debt-to-equity ratio will increase because liabilities do not change and equity
decreases.
18. Since the parent retains control of the subsidiary, the gain on sale is reported in
contributed surplus rather than net income. Liabilities will not change but noncontrolling
interest in shareholders’ equity will increase. Therefore, the return on equity ratio will
decrease because net income did not change while shareholders’ equity increased. The
debt-to equity ratio will decrease since liabilities did not change but shareholders’ equity
increased.
SOLUTIONS TO CASES
Case 8-1
(a) A subsidiary is usually measured at fair value at the date of acquisition as per IFRS 3.32(a).
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (i.e.,
an exit price). It would reflect the highest and best use for nonfinancial asset.
Since Pepper and Salt were unrelated parties at the date of acquisition, one could argue
that $1,312 (82 x 16), the amount paid by Pepper, represented the fair value of Salt. Using
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10 Modern Advanced Accounting in Canada, Tenth Edition
this same logic, one could also argue that Salt was worth $1,500 (600 / 40%) on this date
since an unrelated party was willing to pay $600 for 40% of the shares of Salt one day after
Pepper purchased Salt.
What is the fair value of Salt as a whole? That is the big question. Once we have
determined the fair value of Salt as a whole, we can determine the fair value of Salt’s
goodwill and whether Pepper can record a gain on purchase.
The following consolidated balance sheets were prepared at December 31, Year 7 under
two different valuation alternatives:
A. The fair value of Salt as a whole is $1,312 and Salt’s goodwill is valued at $592, the
excess of amount paid by Pepper ($1,312) over the fair value of Salt’s identifiable net
assets $720 (270 + 840 – 390)
B. The fair value of Salt as a whole is $1,500 and Salt’s goodwill is valued at $780, the
difference between the value of Salt as a whole ($1,500) and the fair value of Salt’s
identifiable net assets $720 (270 + 840 – 390)
A B
Tangible assets (1,000 + 270) $ 1,270 $ 1,270
Intangible assets (400 + 840) 1,240 1,240
Goodwill 592 780
$3,102 $3,290
To answer which method best reflects economic reality, one needs to know what the fair
value of the subsidiary is. If it is $1,312, then column A best reflects economic reality and
would be required under GAAP. If the fair value of the subsidiary is really $1,500, then
column B best reflects economic reality. However, IFRS 3.32 requires that goodwill of the
subsidiary be measured as the difference between the amount paid and the fair value of the
identifiable net assets. Therefore, Pepper has to use Column A.
(b) When a parent sells a portion of its interest in the subsidiary and retains control over the
subsidiary, the value of the subsidiary’s assets and liabilities on the consolidated balance
sheet do not change – they are retained at carrying amount. This transaction is treated as a
transaction among owners. The carrying amount of the portion sold is transferred from the
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Solutions Manual, Chapter 8 11
parent’s interest to the noncontrolling interest. The parent will report a gain or loss for the
difference between the proceeds received from the sale and the carrying amount of
consideration sold. This gain will not be reported in net income but will be reported as a
direct adjustment to shareholders’ equity – either to retained earnings or contributed surplus.
[IFRS 10.23 & 12.24]
The following consolidated balance sheets were prepared at January 1, Year 8 under the
same two valuation alternatives considered above.
A B
Cash $ 600 $ 600
Tangible assets (1,000 + 270) 1,270 1,270
Intangible assets (400 + 840) 1,240 1,240
Goodwill 592 780
$3,702 $3,890
Note 1: A B
Carrying amount of Salt’s net assets
on consolidated balance sheet $ 1,312 $ 1,500
Portion sold to noncontrolling interest 40% 40%
Value assigned to noncontrolling interest 525 600
Proceeds received from noncontrolling interest 600 600
Gain on sale of 40% interest 75 0
Shareholders’ equity prior to sale 1,912 2,100
Shareholders’ equity subsequent to sale $1,987 $2,100
Both the CFO and controller are wrong. The transaction is an equity transaction between
shareholders of Stiff. Since Prince controlled Stiff both before and after this transaction, the
valuation of Stiff’s assets and liabilities for consolidation purposes will not change. Only the
parent’s and noncontrolling interests’ share of the consolidated net assets will change. Any
difference between the amount paid by Prince and the carrying amount given up by the
noncontrolling interest will not be reported in profit but will be reported as an adjustment to
shareholders’ equity. [IFRS 10.23 & .24]
The $330,000 will be reported as a reduction to contributed surplus, if any exists, or a reduction
to retained earnings.
Even if the acquisition differential were allocated to assets and liabilities, the entire amount
would not have been allocated to goodwill. $130,000 (20% x $650,000) should be allocated to
the patents to recognize the value of the patents. [IFRS 3.10] The remaining amount would be
allocated to goodwill. [IFRS 3.32] Then, the goodwill would have to be assessed for impairment
at the end of Year 13 and all subsequent years by determining the fair value of Stiff’s shares.
The recent trading price of $50 is not necessarily a true indication of the fair value of the shares.
It represents the exchange price for the parties exchanging shares on that particular date. To
acquire control of Stiff, investors typically pay a premium over the trading price for the shares.
An independent business valuation could determine the fair value of the shares. If the fair value
is less than $54 per share, the goodwill will have to be written down to reflect the impairment in
value. For example, if the fair value of the shares were only $52.50 per share, the purchase
price would have been inflated by $30,000 ($1.50 x 100,000 x 20%). In turn, goodwill would
have been overstated by $30,000 and would have to be written down by $30,000 in Year 13.
The $130,000 allocated to the patent would have to be amortized over the useful life of the patent
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14 Modern Advanced Accounting in Canada, Tenth Edition
commencing in Year 14. [IAS 38.88] Given a useful life of 4 years, the amortization expense
would be $32,500 ($130,000 / 4) per year and would cause a decrease in income of $32,500 for
Year 14.
Case 8-3
DRAFT REPORT
PROPOSED OWNERSHIP CHANGES IN ORLEANS
As requested, we have considered your proposal to change the ownership structure of Orleans
to avert a covenant violation for Jokavic’s bank loan from the Chartered Bank of Toronta.
Jokavic currently owns 6,000 (60%) of Orleans’ Class A shares and thereby has control over
Orleans. Consequently, Jokavic must prepare consolidated financial statements. The draft
financial statements as at November 30, Year show a debt-to-equity ratio of 4 which exceeds
the 3-to-1 limit in the bank covenant.
If Jokavic was to sell 4,000 of its Class A shares in the open market for $5,000, it would be left
with 2,000 (20%) of the Class A shares. Jokavic’s journal entry to record the sale would be:
Cash 5,000
Investment in Orleans Class A shares 4,000
Gain on sale 1,000
Orleans would not make any journal entry because the transaction is with the shareholders of
Orleans and not with Orleans.
When Orleans issues 2,400 Class B shares for $24,000, its journal entry will be:
Cash 24,000
Class B common shares 24,000
Jokavic would purchase 1,800 of these Class B shares for $18,000 and make the following
journal entry:
Investment in Orleans Class B shares 18,000
Cash 18,000
The combined effect of these two transactions produces the following ownership interest in the
two classes of Orleans’ common shares:
Jokavic Others Total
Class A 2,000 (20%) 8,000 (80%) 10,000 (100%)
Orleans would only own 31% of Orleans’ outstanding common shares. At first glance, this may
give the impression that consolidated financial statements would no longer be required because
Jokavic owns less than 50% of the common shares. However, the criteria for consolidation is
control to make the key operating, investing and financing decisions. These decisions are
based on voting control and not on percentage ownership.
The class A shares have one vote per share, whereas the class B shares have ten votes per
share. The combined effect of these two transactions produces the following voting interest in
the two classes of Orleans’ common shares:
Jokavic Others Total
Class A (1 vote) 2,000 (20%) 8,000 (80%) 10,000 (100%)
Class B (10 votes) 18,000 (75%) 6,000 (25%) 24,000 (100%)
Total 20,000 (59%) 14,000 (41%) 34,000 (100%)
Jokavic now has 59% of the votes and retains control in Orleans. It would have to prepare
consolidated financial statements.
The following proforma financial statements present show the overall effect of the two proposed
transactions:
Jokavic Orleans Consolidated
Investment in Orleans Class A (6 - 4) $2
Investment in Orleans Class B 18
Other assets (454 + 5 – 18; 165 + 24)) 441 $189 $630
$461 $189 $630
Case 8-4
Canada Transport Enterprises Inc. ("CTE")
Dear Gerard:
Generally, the carrying amount (CA) of a company does not approximate its fair value (FV). This
is especially true of TBL. Many of its assets are worth significantly more than the CA recorded in
the financial statements, mainly because TBL's assets have increased in value over time. For
example, the bus routes are recorded at a fraction of what they are worth today; they are
discussed in more detail below.
Other alternatives are available for valuing a business and should be considered. Specifically, a
capitalized earnings approach would be a better way to value TBL. The reason is that future
earnings will reflect the value of assets that are not fully recorded on the balance sheet – for
example, intangible assets. This approach can also be justified because earnings have been
stable and could be used to calculate the sale price.
Earnout clause
The new owners of TBL will be preparing the July 31, Year 8 financial statements, which will be
used to calculate the earnout amount. They will want to minimize the sale price. We should
specify in the agreement that the accounting policies cannot be changed in the year in which
the earnout is calculated. In addition, the new owners could make overly aggressive accruals to
further minimize the selling price. For example, they could pay unusually high salaries or
bonuses to reduce income. Restrictions should be placed in the agreement to prevent such
measures, and CTE should be allowed to independently verify the July 31, Year 8 results.
We must determine whether we must use generally accepted accounting principles or whether
we can use a disclosed basis of accounting. If a disclosed basis of accounting is acceptable,
then FVs should be used. TBL is worth significantly more on a FV basis, and these adjustments
will result in an increased selling price. Therefore, we recommend using FV for accounting
purposes.
Bus routes
The bus routes obtained approximately 40 years ago currently have no carrying amount. This
situation does not reflect the value of these routes today. The value today is significant as
indicated by the amounts paid for similar routes in subsequent years. The FV of all bus routes
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18 Modern Advanced Accounting in Canada, Tenth Edition
should be included in the selling price. Therefore, the CA of bus routes should be increased to
reflect FV. The FV can be estimated based on the amount paid for similar bus routes
purchased.
However, the FV of the bus routes may be included in the value of the goodwill already
recorded. We must determine whether the goodwill represents the value of these routes. In
addition, the earnout may also compensate CTE for the underlying value of the bus routes.
Further information is needed.
For accounting purposes, we must find out whether the value is understated because of a
change in an accounting estimate or because of an error. If it is the result of a change in an
accounting estimate, the adjustment will be made prospectively. If CTE can argue that it was
the result of an error, the adjustment will be made retroactively to the fixed asset account,
thereby increasing the selling price. [IAS 8]
Non-refundable deposits
We must find out whether these deposits were recorded in income for the July 31, Year 7
period. The entire deposit relating to the contract cancelled by the Panamee School District
should be included in the July 31, Year 7 income because, at year-end, the amount has been
earned and no future services must be provided. [IFRS 15]
In addition, it may be possible to justify including all deposits received prior to July 31, Year 7, in
income as well. We could argue that the deposit is intended to guarantee service and does not
relate to the costs of providing the service. If this assumption can be successfully argued, CTE
will receive 100% of the income, rather than 55%, with no related costs. This approach will
increase the selling price. We must consider the wording of the contract to determine the proper
accounting treatment. [IFRS 15]
Consolidation entries
Fair value increments (fixed assets and goodwill) are not currently included in the selling price.
However, these amounts should be included in the selling price since they probably represent
the FV of the assets being sold. It may be preferable to revalue the company since the goodwill
and fair value increments have likely changed since they were first recorded.
Long-term receivables
We must determine whether this amount should be written down to fair value. If so, it will
decrease the selling price. Although the security does not cover the amount of the outstanding
balance, receivable is being collected. Therefore, we should argue that the loan is not impaired
and a write-down is not necessary. [IFRS 9.5.5.15]
Advertising
Plans call for an aggressive advertising campaign ($500,000), and the agreement states that
CTE will pay for these costs. However, the benefit is likely to be received in years subsequent
to the earnout. The payment of advertising costs should be considered further.
Bus retrofit
TBL is planning substantial costs to retrofit the fleet of buses. These costs will occur next year
yet will benefit TBL for many years to come. These costs should be capitalized or excluded
from the agreement.
Futures taxes
The deferred taxes should either not be considered in determining the selling price or should be
discounted if they are to be included. Otherwise, the selling price would be reduced.
Lease facility
We must determine whether a loss should be accrued for future lease payments. If so, the
The earnout payment should be recognized in income in the year in which it is determinable. An
argument could be made to recognize the earnout payment in the current year since TBL's
income is static, but this approach may be too aggressive. [IFRS 15]
2. Clause 2. The environmental liabilities that are not included in the agreement should be
limited to those that are CTE's responsibility up to the date of sale. In addition, this
clause should be effective for only a limited period. In addition, you may want to have
an environmental assessment performed prior to the sale to determine what the
potential exposure is.
3. Clause 3. The term "net reported income" must be clearly defined to ensure that there is
no misunderstanding as to what is and what is not included in the calculation. In
addition, this calculation is based on TBL’s net income, and future profits may differ
from past results, especially if the new management is inefficient in the short term and
incurs significant "start-up" costs.
4. Clause 5. You should clarify what "compete" means and what is included in the
limitation. For example, does it mean that you cannot operate any bus line service
anywhere in the world?
5. Clause 6. The loan guarantee is for an unlimited period. Unless a specific expiry date is
used, CTE will be responsible for the loan until it is ultimately paid.
7. Clause 7. "Cost" must be explicitly defined. For example, defining cost as "full cost"
(including overhead allocations) or as "out-of-pocket cost" produces very different
results.
8. Clause 8. The phrase "restored to its original condition" must be defined. This clause
could result in a significant cost to CTE if it is not clarified. For example, it could mean a
complete reconstruction of the building.
9. Clause 9. You should place a limit on the dollar value of advertising that CTE is obliged
to provide under the agreement. As the clause is now worded, CTE could incur very
large costs.
10. Clause 12. The longer payment terms will lower the effective purchase price given the
present value of money. Either the purchase price can be increased or payment can be
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22 Modern Advanced Accounting in Canada, Tenth Edition
made sooner.
11. Clause 14. You must determine the nature of the consulting agreement – what it does
and does not include.
We would be pleased to discuss our comments and recommendations with you at your
convenience.
Yours truly,
CPA
Case 8-5
To: Vision Clothing Inc. (VCI) management
From: CPA
Re: Issues Facing VCI
Our report regarding the issues facing your company is enclosed. The report deals first with
VCI's serious cash condition. If it is not taken care of immediately, it will have adverse
repercussions on your whole operation. Second, since the year-end has recently passed and
your statements need to be finalized, we have considered the relevant accounting issues and
suggested accounting treatments. The report also discusses other issues we consider important
for your company's situation.
Yours truly,
CPA
Analysis of your preliminary financial statements and other information gathered regarding
future events shows that VCI may face a cash shortfall soon. The current portion of long-term
The cash balance at January 31, Year 3, has decreased significantly since the prior year. While
the balance sheet reflects only a moment in time and could change considerably with a single
transaction, current assets are not much greater than in the prior year and liabilities have not
greatly decreased. Inventory has remained at roughly the same level as for the prior year;
however, payables have decreased. It would appear that payables are not financing inventory to
the same extent as last year. It is difficult to reach a conclusion on these findings since
information has not yet been obtained to explain some of the balances.
Sources of financing for VCI are dwindling. The share price is down considerably, making it
more difficult to raise funds. Funds generated (or used up) in operations also appear to be
dwindling (or increasing). Companies that sell clothes through retail outlets are usually cash
businesses (few accounts receivable). If VCI cannot fund itself through operations now, it is
unlikely to generate sufficient funds to do so in the next quarter- when sales are generally lower
than at Christmas.
It would appear that the way to raise money would be through the sale of nonstrategic assets.
XYZ Ltd. is a prime candidate, since $3.7 million was considered the fair market value for 4% of
the shares. VCI's 29% interest would be worth $26.8 million. If there are buyers, the sale of XYZ
would raise much-needed funds. VCI could also try to renegotiate the terms of the debentures
and try to encourage holders to trade them in for equity instead of cash.
If one of the alternatives to generate cash is not used, VCI may face a severe cash shortage in
the next few months.
VCI is a public company, and therefore many users rely on the statements. Management will
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24 Modern Advanced Accounting in Canada, Tenth Edition
seek to improve the appearance of VCI's financial situation with potential creditors and
shareholders in mind. Management will want to reduce its debt and improve its equity. In
addition, VCI is going to require more financing and will therefore be approaching banks and
potential investors who will also rely on the statements.
Considering the cash shortage, VCI’s status as a going concern may be doubtful. Unless VCI
can explain how it will meet its obligations as debts come due, its viability will be questionable. If
VCI is not a going concern, then this fact will have to be disclosed in a note and the statements
may have to be restated to liquidation values. [IAS 1.25]
The rest of this report assumes that VCI will resolve the cash concerns. The analysis has been
made with IFRS as a constraint since VCI is a public company. Users of the statements include
present and future creditors, vendors, suppliers, current and potential shareholders, and
Canada Revenue Agency. Management may also be using the statements to evaluate the
operations or departments. Given the cash shortfall and the potential going-concern problem,
the most important users will be creditors and investors. These users will want information on
cash flow (ability to service debt) and asset values.
Specific issues
It is unclear how the costs related to issuing shares ($5 million) have been treated since they
have not been deducted from share capital. Because VCI's objective is to present a strong
balance sheet and minimize losses, these expenses may have been capitalized as some form
of asset. If so, the transaction will need to be reversed (debit equity and reduce the asset). The
$5 million was used to raise capital (a capital transaction), and the total amount should be
netted against the capital stock. Alternatively, the amount could be deducted from retained
earnings directly.
The $1 million related to the deferred stock issue should be reported as a reduction in net
proceeds from the share issue if another issue is expected. If another share issue is unlikely,
then the costs should be expensed. In either case, shareholders’ equity is reduced.
Debentures
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Solutions Manual, Chapter 8 25
The redemption of the debentures should be properly disclosed since the amount is material.
Disclosure of the terms will be useful for creditors since the terms have a bearing on cash flows.
More important, at year-end, the debenture holders still maintained the right to redeem a further
$50 million for cash in March. If it is expected that debentures will be redeemed in March Year
3, then a current liability should be set up. Since the amount redeemed in March Year 2 was the
maximum allowed, a current liability of $50 million may be warranted.
VCI’s percentage ownership in XYZ did increase from 25% to 29%. However, XYZ’s net assets
decreased because it used assets or increased its debt to redeem some of its shares.
Therefore, VCI owned a big percentage of a smaller company after the share redemption.
With a 25% interest in XYZ, VCI likely had significant influence over XYZ and would have been
using the equity method. With a 29% interest, it would continue to use the equity method. Under
the equity method, VCI would accrue its share of XYZ’s income as it is earned by XYZ. The
income should be reported in income from continuing operations and not in the bottom portion
of the income statement. VCI would not report its investment at fair value. Therefore, it was
inappropriate to recognize a gain of $3.7 million on the increase in percentage ownership. The
gain should be reversed. From the date of the increase, 29% of XYZ's income will be reported in
VCI’s statements as equity method income. [IAS 28]
Discontinued operations
The TTT division was operated as a separate division. VCI has plans to sell the assets of this
division. It may now be necessary to report the TTT division as part of discontinued operations
for the current and prior years. However, to be considered a discontinued operation, certain
conditions must be met. There must be a formal plan to dispose of the assets. Further, the
operations disposed of must constitute a different business segment. Children's shoes may be
considered a different business segment from retail clothes since the operations of a shoe store
and those of a clothing store are different. The customers of TTT are children, even though
adults purchase the shoes. Shoes are also different from clothes in the way they are shipped,
packed, displayed and sold. Separate financial information must also be available if it is to be
considered a business segment.
Copyright 2022 McGraw Hill Ltd. All rights reserved.
26 Modern Advanced Accounting in Canada, Tenth Edition
Since the shoe store operations appear to be a different business segment, operations of the
discontinued chain should be disclosed separately on both the income statement and balance
sheet for the current and prior year. VCI will benefit because investors and other potential
creditors will have the details necessary to assess continuing operations. The losses net of tax
that will be separately disclosed on the income statement will substantially reduce losses from
continuing operations, which will reflect well on VCI’s prospects.
The assets of the TTT division should be reported at the lower of cost and fair value. Any
adjustments to fair value should be included as part of income from discontinued operations.
The assets should not be depreciated. [IFRS 5]
New technology
To capitalize the costs of the new consolidation and reporting package (technology) developed
internally, certain conditions must be met. It appears that VCI has met the criteria for
capitalization since the product is clearly defined and the costs are known within reason.
Technical feasibility is not a concern since the technology has already been implemented and is
being used as an advanced analysis and reporting tool. Likewise, the costs of labour and the
other costs relate to the product development and therefore can be included in the capitalized
amount. In line with VCI’s objectives, a reasonable amount for overhead can be allocated to the
project if it can be estimated. The amount would probably be immaterial; therefore, we do not
recommend investing a lot of time in allocating such costs.
If the new inventory system at Style Co. has been internally produced, then the same approach
can be applied if VCI can clearly demonstrate that any problems it is having with the system can
and will be corrected. If the product was purchased, VCI should capitalize the implementation
costs necessary to get the product up and running. This treatment would serve to meet VCI’s
objective of reducing expenses.
The capitalized value should not exceed the net recoverable amount. The costs should be
segregated between hardware and software, given the different useful lives. Since new
technology is being developed very quickly, we recommend that VCI amortize these costs on a
simple straight-line basis over no more than five years. A longer period would suit VCI's
objectives but would be difficult to justify. [IAS 38]
The adjustment to inventory should be reflected in the year-end statements. The interim
statements may have been misstated but, if best estimates were used at the time, the interim
statements should not be adjusted. [IAS 2]
Landlord inducements
Lease inducements should be accounted for as a cost of the leased assets and lease
obligations. This will reduce the amount of depreciation expense of the asset and interest
expense on the lease liability. Alternatively, the lease inducements could be reported as a
reduction of the cost of the leasehold improvements. [IFRS: Conceptual Framework for
Financial Reporting]
To carry a deferred tax debit on the balance sheet, VCI must believe that it is probable that
taxable profit will be available against which the deductible temporary difference can be utilized.
VCI does not appear to meet the probability test since the loss is not from a nonrecurring cause.
Also, VCI does not have a proven record of profitability since there have been losses in past
years. Since future losses are expected, the loss carry-forward period may expire before it can
be used. Therefore, the deferred tax debit will have to be removed from the books, thus
increasing VCI’s loss. [IAS 12.24]
SOLUTIONS TO PROBLEMS
Problem 8-1
(a) The consolidated cash balance at January 1, Year 2, was $166,000, computed as follows:
Problem 8-2
Cash 6,400
Dividend Income 6,400
Record dividends on preferred shares from Gander: $400,000 x 4% x 40% = $6,400
Cash 27,000
Investment in Gander Common Shares 27,000
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Solutions Manual, Chapter 8 29
Record dividends from Gander: ($52,000 - $16,000 to preferred) x 0.75
(b)
NCI’s share of net income
Preferred shares (400,000 x 4%) x 60% ownership 9,600
Common shares (140,000 – 16,000) x 25% ownership 31,000
Total 40,600
Problem 8-3
(a) Consolidated operating income for Year 5 is $210,000 (80,000 + 70,000 + 60,000).
(b) Operating income of $59,800 is assigned to the noncontrolling interest:
Problem 8-4
Corner Brook has 40,000 shares outstanding: $400,000 / $10 par value per share
(b) Journal entry recorded by Johannes for sale of shares of 8,000 shares:
Cash 240,000
Investment in Corner Brook (816,000 x 8,000 / 32,000) 204,000
Contributed Surplus 36,000
Problem 8-5
Problem 8-6
(a) Parento Inc.
Consolidated Cash Flow Statement
for the Year Ended December 31, Year 4
Operating
Net Income 54,200)
Add (deduct): )
Database amortization 2,400)
(b) Santana paid dividends of $10,000 of which 20% went to the noncontrolling interest and
80% went to Parento. Only the 20% paid to the noncontrolling interest shows up on the
consolidated cash flow statement because the noncontrolling interest is an outside entity
wheras Parento is within the consolidated entity.
Problem 8-7
Shareholders' equity of Sub Dec. 31, Year 1: 1,135,000
Parent Ltd.
Consolidated Cash Flow Statement
For the Year Ended December 31, Year 2
Problem 8-8
1st 2nd
Cost of 75% purchase 717,000
Cost of 20% purchase 197,000
Implied value of 100% 956,000
Carrying amount of Sic’s net assets
Ordinary shares 200,000 200,000
Retained earnings 321,000 344,000
521,000 544,000
100 % 521,000 20% 108,800
Acquisition differential 435,000 88,200
Allocated to:
Customer contracts 435,000 58,0001
Direct charge to retained earnings for excess of cost over
Carrying amount transferred from NCI 30,200
Total 435,000 88,200
(b)
(i) Customer contracts (see amortization schedule above) 145,000
(ii) Sic’s ordinary shares 200,000
Sic’s retained earnings 402,000
602,000
NCI’s ownership 5%
30,100
NCI’s share of undepleted acquisition differential 7,250
Total NCI on statement of financial position 37,350
(iii) Pic’s retained earnings 626,000
1st 2nd
Sic’s retained earnings 344,000 402,000
Sic’s retained earnings, at acquisition 321,000 344,000
Change since acquisition 23,000 58,000
Cumulative depletion of acq. diff. (145,000) (145,000)
(122,000) (87,000)
Problem 8-9
(a)
Jensen’s shareholders’ equity $1,800,000
Undepleted acquisition differential 420,000
Total value of subsidiary for consolidation purposes 2,220,000
Hein’s percentage ownership 90%
Balance in investment in Jensen account under equity method 1,998,000 (a)
Non-controlling interest on consolidated balance sheet (10% x 2,220,000) 222,000
(b)
Cash 500,000
Investment in Jensen (20 / 90 x (a) 1,998,000) 444,000
Contributed surplus 56,000
Record sale of 20,000 ordinary shares of Jensen
(c)
Jensen’s shareholders’ equity (800,000 + 1,110,000) $1,910,000
Undepleted acquisition differential (420,000 – 180,000 / 9) 400,000
Copyright 2022 McGraw Hill Ltd. All rights reserved.
Solutions Manual, Chapter 8 37
Total value of subsidiary for consolidation purposes 2,310,000 (b)
Hein’s percentage ownership 70%
Balance in investment in Jensen account under equity method 1,617,000 (c)
Non-controlling interest on consolidated balance sheet (30% x (b) 2,310,000) 693,000
(d)
Trademarks at December 31, Year 4 180,000
Amortized in Year 5 (180,000 / 9) (20,000)
Trademarks at December 31, Year 5 160,000
(e)
Cash (30,000 x 26) 780,000
Investment in Jensen (30 / 70 x (c) 1,617,000) 693,000 (d)
Gain on sale of shares in Jensen 87,000
Record sale of 30,000 ordinary shares
Problem 8-10
Investment in Delta 490,000
Carrying amount of Delta (250,000 + 350,000) 600,000
80% 480,000
Craft’s share of unamortized patent Dec. 31, Year 12 10,000
Value of 100% of unamortized patent Dec. 31, Year 12 12,500
Analysis
Reduction in investment (20% 490,000) 98,000
New shares (12,250 shares $15) 183,750
64% 117,600
Net gain from share issue 19,600
(a)
Craft Ltd.
Consolidated Statement of Financial Position
as at December 31, Year 12
Problem 8-11
Part a
Investment account (9,000 shares) – January 1, Year 6 320,000
Carrying amount of Sub 260,000
90% 234,000
Parent’s share of acquisition differential 86,000
Allocated: Land 45% 38,700
Equipment 30% 25,800
1,800
P sold = 20%
shares
9,000
shares
7,200
New ownership = 72%
shares
10,000
shares
(i)
Cash 64,800
Investment in Sub (20% 320,000) 64,000
(iii)
Investment account Jan. 1, Year 6 320,000
20% sold (64,000)
Changes to acquisition differential (8,122 x 72%) (5,848)
Net income (72% 145,000) 104,400
Dividends (72% 80,000) (57,600)
Balance Dec. 31, Year 6 – equity method 296,952
Shareholders' equity Sub (260,000 + 145,000 – 80,000) 325,000
72% 234,000
Balance – Parent’s share of undepleted acquisition differential 62,952
100% of undepleted acquisition differential (62,952 / 72%) 87,434
Part b
Cash 64,800
Contribution surplus 2,500
Non-controlling interest [18% (260,000 + 95,556)] 64,000
or, 1,800
Shares sold by P: = 18%
10,000
Problem 8-12
Wellington owns 90% of Sussex, therefore: 90% 7,200 = 6,480 shares
6,480
Wellington's new ownership percentage = 72%
9,000
(6,480 – 648)
Ownership after sale = 64.8%
9,000
Problem 8-13
(a & b)
York Queens McGill Carleton Trent Total
Profit 54,000) 22,000) 26,700) 15,400) 11,600) 129,700)
Less – inventory profits (6,000) ) (600) (1,440) ) (8,040)
Consolidated profit 48,000) 22,000) 26,100) 13,960) 11,600) 121,660
(c) It makes no difference whether McGill sells to York, its parent, or to Carleton, another
subsidiary. In both cases, the entire amount of the unrealized profits is eliminated on
consolidation because the sales were within the consolidated entity. Therefore, the profit
has not been realized with an entity outside of the consolidated entity and should be
eliminated on consolidation. The unrealized profit will be deducted from McGill’s income
and 10% of the unrealized profit will be absorbed by the noncontrolling interest in McGill
regardless of whether McGill sold to Carleton or York.
Problem 8-14
Cost of 90% (900 1,000) of SET 72,000
Implied value of 100% of SET 80,000
Shareholders' equity Total Preferred Ordinary
Ordinary shares 20,000 20,000
Preferred stock 40,000 41,6001 (1,600)
Retained earnings 30,000 12,0002 18,000
90,000 53,600) 36,400
Acquisition differential (all allocated to patents) 43,600
Notes:
1. Liquidation value of 4,000 shares x $10.40 = 41,600
2. Dividends in arrears: 4,000 shares x $1/year x 3 years = 12,000
3. Dividends on ordinary shares: (18,000 – 4,000 x $1/year x 4 years) x 90% = 1,800
4. Income for preferred: 4,000 x $1/year x 1 year = 4,000
5. Income for ordinary: 10% x [11,280 as per above – 4,000]
(a)
PET Company
Statement of Retained Earnings
For the year ended December 31, Year 5
Retained earnings, beginning of year $50,000
Profit 34,752
Dividends (25,000)
Retained earnings, end of year $59,752
(c)
Calculation of noncontrolling interest – income statement
Interest in preferred shares (100% x 4,000) 4,000
Interest in ordinary shares (10% x [11,280 as per above – 4,000]) 728
Total 4,728
Problem 8-15
Cost of 70% of Sophie 945,000
Implied value of 100% of Sophie 1,350,000
Carrying amount of Sophie
Ordinary shares 550,000
Retained earnings Jan. 1 421,000
Profit to April 1 (¼ 284,000) 71,000
1,042,000
Acquisition differential 308,000
Allocated: FV – CA –0–
Balance – broadcast rights 308,000
Problem 8-16
Jan. 1, Year 4 Jan. 1, Year 5 Jan. 1, Year 6
Percentage acquired 25% 20% 10%
Percentage owned 25% 45% 55%
Cost of purchase 142,400 121,600 63,000
Previous equity interest remeasured at fair value
(63,000 / 10 x 45) 283,500 (A)
Total value of 55% 346,500
Year 5
Investment in Jovano 121,600 121,600
Cash 121,600 121,600
Year 6
Investment in Jovano 63,000 63,000
Cash 63,000 63,000
(c)
Jovano’s shareholders’ equity, end of Year 6 (200,000 + 395,000) 595,000
Unamortized customer lists 46,000
641,000
Hidden’s percentage ownership 55%
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Solutions Manual, Chapter 8 53
Hidden’s $ interest 352,550
(d)
(i) customer lists 46,000
(ii) noncontrolling interest on the statement of financial position
Jovano’s shareholders’ equity, end of Year 6 (200,000 + 395,000) 595,000
Unamortized customer lists 46,000
641,000
NCI’s percentage ownership 45%
NCI’s $ interest 288,450
(iii) consolidated net income attributable to the noncontrolling interest
Jovano’s net income for Year 6 56,000
Changes to acquisition differential (23,000)
33,000
NCI’s percentage ownership 45%
NCI’s $ interest 14,850
Problem 8-17
A's 40% of C
Acquisition differential – equipment Jan. 1, Year 4 (42,500)
Changes, Years 4–6 12,750)
Balance, Dec. 31, Year 6 (29,750)
Proof:
Investment in C, Jan. 1, Year 7 69,570)
Shareholders' equity, C Jan. 1, Year 7 248,300
40% 99,320)
Undepleted acquisition differential – as above (29,750)
Note:
A business combination occurred on January 1, Year 7 when B Company purchased its 40%
interest in C Company because A Company now controls C Company. A Company will be able
to control 80% of the votes in C Company because it owns 40% of C Company directly and
controls B Company, which owns another 40% of C Company.
A's 75% of B
Bal. Changes Bal. Changes Bal.
Jan. 1/6 Year 6 Dec. 31/6 Year 7 Dec. 31/7
Buildings (20 yrs) 40,000 (2,000) 38,000 (2,000) 36,000
Patents (8 yrs) 89,600 (11,200) 78,400 (11,200) 67,200
129,600 (13,200) 116,400 (13,200) 103,200
A’s share (75%) 97,200 (9,900) 87,300 (9,900) 77,400
Proof:
Investment in B, Jan. 1, Year 7 1,068,990
Shareholders' equity B, Jan. 1, Year 7 1,308,920
75% 981,690
Undepleted acquisition differential – as above 87,300
B Company’s accumulated depreciation on January 1, Year 6 450,000
B's 40% of C
Investment in C, Jan. 1, Year 7 99,320
Shareholders' equity C, Jan. 1, Year 7 248,300
40% 99,320
Acquisition differential –0–
C Company’s accumulated depreciation on January 1, Year 7 52,700
Intercompany receivables and payables 37,000
A B C Total
Net income 131,800) 68,000) 33,000) 232,800
Gain on revaluation of C 29,750 29,750
Changes to acq. diff. (13,200) (13,200)
Inventory profits (4,560) ) (4,140) (8,700)
Consolidated net income 156,990) 54,800) 28,860) 240,650)
Allocate C – 40% to B 11,544) (11,544)
– 40% to A 11,544) ) (11,544)
B’s net income 66,344)
Allocate B – 75% to A 49,758) (49,758) )
Attributable to NCI 16,586) 5,772) 22,358) *
Attributable to A’s shareholders ) 218,292)
A’s net income – equity 218,292)
(b)
A Company
Consolidated Retained Earnings Statement
for the Year Ended December 31, Year 7
Shareholders' equity B
Common shares 400,000
Retained earnings Jan. 1 908,920
Net income (68,000 + 11,544) 79,544
1,388,464
Undepleted acquisition differential 103,200
1,491,664
25%
372,916
Preferred shares 50,000 422,916
478,348
c)
A Company
Consolidated Balance Sheet
as at December 31, Year 7
Problem 8-18
Acquisition cost Allocation Schedule for first two steps
Jan 1/YR 2 Jan 1/YR 4
Cost 50,700 98,300
CA – OS 200,000 200,000
RE 28,000 69,000
228,000 269,000
% Acquired 20% 45,600 30% 80,700
Acquisition differential 5,100 17,600
Land 2,550 8,800
Patents 2,550 8,800
Amortization Year 2 - 255
Year 3 - 255
Year 4 - 255 - 1,100
Value Dec. 31, Year 4 1,785 7,700
Acquisition cost Allocation Schedule for third step when Phase obtains control
Jan 1/YR 5
Cost of 30% investment 108,000
Implied value of 100% investment 360,000
CA – OS 200,000
RE 104,000
304,000
Acquisition differential 56,000
Land 28,000
Patents 28,000
Amortization Year 5 (4,000)
Value Dec. 31, Year 5 24,000
(b) Property, plant, and equipment (540,000 + 298,000 + 28,000 – 55,000) 811,000
(c) Current assets (173,000 + 89,000 – [80,000 +10,000] x 50% -1,000) 216,000
149,000
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Solutions Manual, Chapter 8 59
Profit in ending inventory (600)
Undepleted acquisition differential 52,000
400,400
NCI’s ownership 20%
NCI on statement of financial position 80,080
781,000
Note: No adjustment is made for the profit in beginning inventory. Since the adjustment to fair
value at the beginning of Year 5 brought the intercompany profit from beginning inventory into
income, the typical adjustment to realize the profit in beginning inventory is not required for this
question.
Problem 8-19
PART A
Cost of 70% (1,400 2,000) of Star $232,400
Implied value of 100% 332,000
Shareholders' equity Total Preferred Common
Preferred stock $67,000) $67,000)
Common shares 180,000) 180,000) Dr
Retained earnings (97,000) 8,000* (105,000) Dr
$150,000 $75,000) 75,000
Acquisition differential $257,000
Allocated: FV – CA
Accounts receivable (2,000)
Inventory 7,000
Plant 50,000
Long-term liabilities (20,000) 35,000
Goodwill $222,000
279,260
Star retained earnings, Jan. 1, Year 12 $417,300)
Acquisition (105,000)
Increase 522,300)
Less: Changes to acquisition differential $172,070
Opening inventory profit 18,600
Equipment profit 1,200 191,870)
Adjusted increase 330,430)
70% 231,301
Copyright 2022 McGraw Hill Ltd. All rights reserved.
Solutions Manual, Chapter 8 63
Consolidated opening retained earnings $510,561
(b)
Par Corp.
Consolidated Balance Sheet
as at December 31, Year 12
PART B
Since dividends paid by Star in Year 12 exceeded the annual minimum of $4,000 (500 x $8 per
share), the income attributed to the preferred shareholders would be the same regardless of
whether the preferred shares were cumulative or noncumulative. Therefore, consolidated net
income attributable to Par’s shareholders would not change.
PART C
Investment account – cost basis, Dec. 31, Year 12 $232,400)
Retained earnings – Par – equity basis $435,039
Retained earnings – Par – cost basis 302,260
132,779
Investment account – equity basis – Dec. 31, Year 12 $365,179
January 1, Year 13
Ownership reduction 70% – 56% = 14%
14% 70% = 20%
Problem 8-20
The following answers were determined using the 2020 consolidated financial statements of
Canopy Growth Corporation and are in thousands:
(a) Canopy uses accounting principles generally accepted in the United States of
American (“U.S. GAAP”) as per note 2 of the financial statements.
(b) Canopy employs the indirect method of accounting for operating cash flows as
presented in the consolidated statements of cash flows. The statement starts with net
loss and shows adjustments to convert it to a cash basis.
(c) The first line on the cash flow statement is net loss. It includes both the parent’s and
noncontrolling interests’ share of the loss. The income statement includes both parent’s
and noncontrolling interests’ share of the income before it is split between the two
groups at the bottom of the income statement.
(d) The biggest cash outflow during the year was purchases of and deposits on property,
plant and equipment of $704,944 as per the investing activities section of the
consolidated statements of cash flow.
(e) Cash paid for business acquisitions of $498,838 was reported as Net cash outflow on
acquisition of subsidiaries in the investing activities section of the consolidated
statements of cash flows. The details of the acquisitions are provided in note 28.
(f) The company discloses the following under Use of Estimates in Note 2 to the financial
statements: The preparation of these consolidated financial statements and
accompanying notes in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported. Actual results could differ
from these estimates.
(g) In Note 3 on page F-17, the Company discloses the following with respect to COVID-
19 estimation uncertainty:
On March 2020, the World Health Organization recognized the outbreak of COVID-19
as a global pandemic. Government measures to limit the spread of COVID-19,
including the closure of nonessential businesses, did not materially impact the
Problem 8-21
It is assumed that Panet’s first purchase of 8% does not provide significant influence or control.
Panet will account for its 8% investment at fair value through profit/loss. Therefore, it is not
necessary to allocate the acquisition cost. It is assumed that Panet’s second purchase of 27%,
which brings the percentage ownership to 35%, does result in significant influence. Panet will
use the equity method. Therefore, it is necessary to allocate the acquisition cost. When Panet
For details of the change in the investment account over the 5-year period ending December 31,
Year 12, see the continuity schedule at the end of this problem.
(a) (i)
Panet Company
Consolidated Income Statement
for the Year Ended Dec. 31, Year 12
Sales (16,100,000 + 10,100,000 – 6,000,000) $20,200,000
Cost of sales (9,660,000 + 6,060,000 – 6,000,000 – 264,000 + 252,500) 9,708,500
Selling and admin (2,522,000 + 552,000 + 45,000 – 10,000) 3,109,000
Other (479,000 + 451,000 – 20,000 + 69,000 + 210,000)* 1,189,000
Income tax (1,054,000 + 752,000 + 105,600 – 101,000 – 84,000 + 4,000) 1,730,600
Total expenses 15,737,100
Consolidated net income 4,462,900
Attributable to:
Panet’s shareholders 4,012,660
NCI (20% x 2,001,200 + 100% x 50,000) 450,240
4,462,900
Preferred Common
Share capital 500,000 3,000,000
Retained earnings 4,911,000
7,911,000
Less: Closing inventory profits (84,000)
Gain on equipment (120,000)
500,000 7,707,000
100% 20%
1,541,400
NCI’s share of undepleted acquisition differential
(650,000 x 20% + 98,320) 228,320
500,000 1,769,720
2,269,720
(a) (ii)
Panet Company
Consolidated Balance Sheet
as at December 31, Year 12
(b) Goodwill impairment loss under fair value enterprise method 69,000
Less: NCI’s share (20%) 13,800
Goodwill impairment loss under identifiable net assets method 55,200
(c) The debt-to-equity ratio would increase because debt would remain the same while equity
would decrease under the identifiable net assets method.
5 Sales 6,000,000
Cost of goods sold 6,000,000
To eliminate intercompany sales
1
1 Other expenses (gain on sale) 210,000
Selling and administrative
expense 10,000
Plant and equipment 200,000
Income tax expense 80,000
Deferred tax asset 80,000
Eliminate unrealized profit in depreciable assets
$19,478,48
Total of debits and credits $ 19,478,480 0
Notes
$
a NCI, end of Year 12 2,269,720
Less: NCI's share of consolidated net income for Year 12 -450,240
Add: NCI's share of PPC's dividends for Year 12 90,000
$
NCI, beginning of Year 12 1,909,480
Problem 8-22
Cost of 70% of common (70,000 x $30) 2,100,000
Implied value of 100% 3,000,000
Carrying amount of net assets 1,525,000
Less: preferred shares 1,400,000
Carrying amount of common shares 125,000
Acquisition differential 2,875,000
Allocated:
Patents 300,000
Inventory 105,000
Brand name 2,375,000
Supply contract (500,000)
2,280,000
Balance: goodwill 595,000
Changes to Acq. Diff.
Balance Amort. Amort. Sold Balance
The intercompany loss on the transfer of computer hardware can stand because it is indicative
of a permanent decline in value.
(iii) (1) Software patents and copyrights (350,000 + 450,000 + 168,000) 968,000
(b)
Conversion of the preferred shares would result in no change in the dollar amount of
shareholders’ equity of PPC but all net income earned in the future would belong to the common
shares. Twenty-five thousand new common shares would be issued. The parent’s ownership
would change from 70% to 56% (70,000/125,000), a 20% reduction while the noncontrolling
interest would increase to 44%. The undepleted acquisition differential would remain the same
in total but the split between the parent and noncontrolling interest would change to their new
percentage ownership. The parent’s investment account would be reduced by 20% for the
deemed sale of 20% of its previous holdings and then would be increased by 56% of the value
attributed to the new common shares, which would normally be the carrying amount of the
preferred shares prior to their conversion to common shares.
5 Sales 60,000
Cost of purchases 60,000
To eliminate intercompany sales