Advanced accounting updated canadian 1st edition fayerman solutions manual

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CHAPTER 6 Accounting for Investments in Associates and Joint Ventures BRIEF EXERCISES BRIEF EXERCISE 6-1

In the preparation of consolidated financial statements, adjustments are made to eliminate the effects of transactions between the parent and its subsidiaries. This procedure requires the full effect of the transactions to be eliminated, and the adjustments are made against the particular accounts affected by the transactions. The principles for adjusting for the effects of intercompany transactions are as follows: •

Adjustments must be made for transactions between the associate or joint venture and the company that give rise to unrealized profits or losses. Realization of such profits or losses occurs when the asset on which the profit or loss accrued is sold to an external party or as the future benefits embodied in the asset are consumed. There is no need to adjust for all transactions between the company and the associate or joint venture; only the transactions where profit is affected require adjustment.

•

Adjustments for transactions between a company and an associate or joint venture are done on a proportional basis, determined in accordance with the company’s ownership interest in the associate or joint venture. This is reasonable given that, under the equity method, only the company’s share of the equity of the associate or joint venture is recognized and not the full equity of the associate or joint venture.

BRIEF EXERCISE 6-2

Transactions between parent entities and subsidiaries—Consolidation • • • • • •

Upstream and downstream transactions are adjusted.

Unrealized profits and losses are adjusted.

Intragroup balances are adjusted.

They are adjusted for 100% of the effect of the transactions.

Individual accounts, such as sales and cost of sales are adjusted.

Transactions are within the group.

Transactions between companies and associates or joint ventures—Equity Method • • • • • • •

Upstream and downstream transactions are adjusted.

Unrealized profits and losses are adjusted.

Intragroup balances are not adjusted.

They are adjusted proportionately for the effects of the transactions.

The share of profits and losses and the investment accounts are adjusted.

The individual accounts are not adjusted.

There is no economic entity/group structure.

BRIEF EXERCISE 6-3

IAS 28 Investments in Associates and Joint Ventures does not give a clear indication whether the equity method is a consolidation technique or a measurement technique similar to fair value.

Many of the procedures that are used in the application of the equity method are similar to the consolidation procedures used.

If it is a measurement method, the equity method is an extension of the accrual process within the historical cost system. Revenue is recognized in relation to the investee as the investor records profits/losses, instead of merely when the investor pays dividends. The balance sheet is a one-line figure, being an alternative to fair value.

If it is a measurement technique, why adjust for the effects of intragroup transactions?

Furthermore, why not just use the fair value amount if it is available, or reliably measurable, and the equity method as a default?

Why use a criterion such as significant influence to determine associates and why not apply it to all material investments?

If it is a consolidation technique, there is an expansion of the group to include the investor’s share of the associate. The group is then more than just controlled entities.

Why not use proportionate consolidation?

Why not properly adjust for intragroup transactions?

Why expand the group beyond controlled entities?

It appears that equity accounting is a hybrid between a measurement technique and consolidation.

BRIEF EXERCISE 6-4 Equity accounting is similar to consolidation, so it is sometimes referred to as one-line consolidation.

Equity accounting is similar to consolidation in that:

• • •

•

Both recognize the investor’s share of post-acquisition equity in the income statement.

The consolidation method recognizes the non-controlling interest share, but divides equity into the parent’s and non-controlling interest’s share.

Both methods adjust for the effects of intragroup transactions.

In the income statement the share of profits and losses of an associate/joint venture is similar to the parent’s share of the post-acquisition equity of a subsidiary-however, under the equity method this is not taken against individual accounts but rather there is only a one line total presented.

In the statement of financial position, the investment in the associate/joint venture is adjusted for the increase in the investor’s share of the net assets of the associate/joint venture, which is similar to the parent’s share of the net assets of a subsidiary.

However, under the equity method of accounting, there is no recognition of the individual assets and liabilities of the associate/joint venture, but rather there is a oneline recognition in the investment account.

BRIEF EXERCISE 6-5 There are two major differences when the equity method of accounting is applied in the consolidated financial statements of the company as opposed to in the records of the company, as follows:

1.

• •

2.

•

In relation to past periods If the adjustments are made in the records of the investor, then in any period, there is only a need to recognize the effects of the current period changes in the share of the profit/loss of the associate.

If the adjustments are made on consolidation, it has no effect on actual accounts, in periods subsequent to the date of acquisition, there needs to be a recognition through retained earnings of the investor’s share of prior period profits and losses of the associate/joint venture.

In relation to dividend revenue If the adjustments are made in the accounts of the investor, then on payment of a dividend by the associate/joint venture, the adjustment is to increase cash and decrease the investment in the associate/joint venture. If the adjustments are made on consolidation, the adjustment is to decrease dividend revenue and the investment in the associate/joint venture.

BRIEF EXERCISE 6-6

When an associate or joint venture pays or declares a dividend, the company records dividend revenue. Applying the equity method requires the investment account to be adjusted for dividends paid or declared.If the company has recorded the dividend revenue when the

dividend is declared (or paid) then the equity adjustment would be to decrease dividend revenue (to remove it) and decrease the investment account balance.

When no consolidated financial statements are prepared, the adjustment in the company’s books is to increase cash and to decrease the investment in the associate/joint venture.

Where consolidated financial statements are prepared, the consolidation adjustments to remove the dividend revenue, which is included in the company’s net income for its separate financial statements, is to decrease dividend revenue and decrease the investment in the associate/joint venture.

BRIEF EXERCISE 6-7

When increasing the ownership interest from 20% to 40%, when significant influence was already present at 20% and since control was not obtained, there would be no basis to revalue the entire company. The investor is deemed to have acquired an additional share and would calculate a new acquisition analysis for the additional purchase

BRIEF EXERCISE 6-8 When there are dissimilar accounting policies between the investor and the associate,, such as one using the FIFO (first-in, first-out) inventory costing method and the other using average costing method for the same type of inventory, when calculating the company’s share of the net income of the associate, adjustments must be made to the recorded net income of the

associate so that the associate’s net income isnow measured based on policies similarto those used by the investor.

The company’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances.

Adjustments shall be made to conform the associate’s accounting policies to those of the company when the associate’s financial statements are used by the company in applying the equity method.

BRIEF EXERCISE 6-9 If a nonmonetary asset is contributed rather than cash to acquire the share of an investment in an associate or joint venture, the treatment is the same as for other transactions between the company and its associate/joint venture. The investor’s share in the associate’s/joint venture’s gains or losses resulting from these transactions is eliminated.

However, if the transaction lacks commercial substance the entire gain or loss is regarded as unrealized and is not recognized. This unrealized gain/loss is eliminated against the investment account using the equity method. It is prohibited to present a deferred gain or loss in the company’s statement of financial position in which investments are accounted for using the equity method.

To the extent that the company receives cash in addition to the equity interest, in exchange for the nonmonetary asset, the company would record a proportion of the gain or loss based on the portion relating to the cash received.

BRIEF EXERCISE 6-10 If significant influence is lost over an associate due to a conflict with other shareholders, it will discontinue the use of the equity method from the date when it ceases to have significant influence over an associate and shall account for the investment in accordance with IFRS 9 Financial Instruments from that date onward. On the loss of significant influence, the investor shall measure at fair value any investment the investor retains in the former associate. The investor shall recognize in profit or loss any difference between:

(a) the fair value of any retained investment and any proceeds from disposing of the part interest in the associate; and (b) the carrying amount of the investment at the date when significant influence is lost.

When an investment ceases to be an associate and is accounted for in accordance with IFRS 9, the fair value of the investment at the date when it ceases to be an associate shall be regarded as its fair value on initial recognition as a financial asset in accordance with IFRS 9

EXERCISES EXERCISE 6-1 Acquisition Analysis Janaury 1, 2011 Cost of investment: Net fair value of identifiable assets and liabilities: Share capital Retained earnings

50,000

30,000 120,000 150,000

Fair value acquired by Baldwin: = $150,000 × 30%

45,000

Goodwill: = $50,000 - $45,000

5,000

(a)

2011

2012

2013

Income before tax Income tax expense Net income

80,000 (30,000) 50,000

70,000 (25,000) 45,000

60,000 (20,000) 40,000

Baldwin share 30%:

15,000

13,500

12,000

Dividends paid

80,000

15,000

10,000

Baldwin share 30%:

24,000

4,500

3,000

EXERCISE 6-1 (Continued)

a) 2011 Investment in Celdron

$50,000

Cash

$50,000

To record the acquisition of the associate Celdron on January 1, 2011.

Investment in Celdron

$15,000

Share of profit of associate

$15,000

To record Baldwin’s share of the associate’s profit for the year ended December31, 2011.

Cash

$24,000

Investment in Celdron

$24,000

To record Baldwin’s share of the associate’s dividends paid for the year ended December 31, 2011.

2012 Investment in Celdron

$13,500

Share of profit of associate

$13,500

To record Baldwin’s share of the associate’s profit for the year ended December 31, 2012.

Cash Investment in Celdron

$4,500 ↓$4,500

To record Baldwin’s share of the associate’s dividends paid for the year ended December 31, 2012.

EXERCISE 6-1 (Continued) 2013

Investment in Celdron

$12,000

Share of profit of associate

$12,000

To record Baldwin’s share of the associate’s profit for the year ended December 31, 2013.

Cash

$3,000

Investment in Celdron

$3,000

To record Baldwin’s share of the associate’s dividends paid for the year ended December 31, 2013.

b) 2011 Investment in Celdron

↑ $15,000 ↑ $15,000

Share of profit of associate

To record Baldwin’s share of the associate’s profit for the year ended December 31, 2011.

Dividend Revenue

↓ $24,000 ↓ $24,000

Investment in Celdron

To record Baldwin’s share of the associate’s dividends paid for the year ended December 31, 2011.

EXERCISE 6-1 (Continued) 2012 Investment in Celdron Retained earnings

↓$9,000 ↓ $9,000

To account for the beginning retained earnings balance (from 2011 = $24,000 – $15,000 = $9,000) as at January 1, 2012.

Investment in Celdron

↑ $13,500 ↑ $13,500

Share of profit of associate

To record Baldwin’s share of the associate’s profit for the year ended December 31, 2012.

Dividend Revenue Investment in Celdron

↓ $4,500 ↓ $4,500

To record Baldwin’s share of the associate’s dividends paid for the year ended December 31, 2012.

EXERCISE 6-1 (Continued)

2013 There would be no adjustment

To account for the beginning retained earnings balance (from 2011 & 2012 = -$9,000 +$13,500 – $4,500 = $0) as at January 1, 2013.

Investment in Celdron

↑ $12,000 ↑ $12,000

Share of profit of associate

To record Baldwin’s share of the associate’s profit for the year ended December 31, 2013.

Dividend Revenue Investment in Celdron

↓ $3,000 ↓ $3,000

To record Baldwin’s share of the associate’s dividends paid for the year ended December 31, 2013.

EXERCISE 6-2

Acquisition Analysis January 1, 2013 Cost of investment: Net fair value of identifiable assets and liabilities: Share capital Retained earnings COCI

170,000

300,000 100,000 400,000

Fair value acquired by Harwood: = $400,000 × 40%

160,000

Goodwill: = $170,000 - $160,000

10,000

Year ended December 31, 2013: Recorded net income: Harwood's share 40%:

39,000

Asset revaluation: Net of Income tax of 40%: Harwood's share 40%:

100,000 60,000

Dividends paid: Harwood's share 40%:

15,000

15,600

24,000

6,000

*There is no need to adjust for differences in the depreciation method if both companies have chosen a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference. However, if it is determined that the different policies exist for the same type of asset that is used in a similar manner then it would be necessary to adjust the net income accordingly. See calculation at the end.

EXERCISE 6-2 (Continued)

a) 2013 Investment in Lexor

↑ $170,000 ↓ $170,000

Cash

To record the acquisition of the associate Lexor on January 1, 2013

Investment in Lexor

↑ $15,600 ↑ $15,600

Share of profit of associate

To record Harwood’s share of the associate’s profit for the year ended December 31, 2013

Cash

↑ $6,000 ↓ $6,000

Investment in Lexor

To record Harwood’s share of the associate’s dividends paid for the year ended December 31, 2013

Investment in Lexor Asset revaluation reserve

↑ $24,000 ↑ $24,000

To record Harwood’s share of the asset revaluation increase for the year ended December 31, 2013

EXERCISE 6-2 (Continued)

If the difference in depreciation policy is deemed to be a dissimilar accounting policy which needs to be adjusted for, the share of Lexor’s profit for the year ending December 31, 2013 would be as follows: Recorded net income:

$39,000

Difference in depreciation: $20,000 × (1–0.40)

($12,000) $27,000

Harwood’s share 40%:

$10,800

It would be $10,800 as opposed to $15,600.

b) As calculated above, depending on whether the difference in depreciation methods needs to be adjusted or not, it would $15,600 or $10,800.

EXERCISE 6-3

A) Balance in the Investment in Sitar account as at December 31, 2013 under IAS 28 January 1, 2012 Purchase Price:

22,000

2012 Profit:

24,000

2012 unrealized profit

(840)

2012 Dividend Declared: Investment in Sitar December 31, 2012

(4,000) 41,160

20% x $120,000 20% x $4200 =20% X $20,000

2013 Profit (See calculation):

19,790

=20% X $98,950

2013 Dividend paid:

(2,000)

=20% X $10,000

(3,000)

=20% X $15,000

2013 Dividend declared:

December 31, 2013 balance:

55,950

EXERCISE 6-3 (Continued)

2013 Profit as stated

100,000

June 2013 sale by Sitar to Ludowicz for $15,000

(3,500) =($15,000-$10,000) X (1-0.30)

July 2013 sale by Ludowicz to Sitar for $5,000

(1,750) =($2,500) X (1-0.30)

December 2012 sale by Sitar to Ludowicz for $18,000 6,000 x (1 - .3) 2013 Profit

The profit that was unrealized in the previous period becomes realized and is therefore added back in the calculation of the 2013 4200 share of equity.

98,950

B) Downstream sales would be removed 100%. As such, the share of profit would be $18,390 ( downstream inventory sale) Investment balance would be $55,950 - 1,400) = 54,550

EXERCISE 6-4

A) Journal entries in the records of Peyton for the year ending December 31, 2013 in relation to its investment in Merk Dividends paid:

(4,500)

2013 Net income as stated:

100,000

January 1, 2012 sale of noncurrent asset from Merk to Peyton:

140

$12,000-$10,000=$2,000 gain on the sale, $1,400 after tax $1,400 X 10% = $140 realized in the current year

June 30, 2013 sale of plant from Merk to Peyton:

(1,942)

$15,000-$12,000 = $3,000 gain on the sale, $2,100 after $2,100 X 15% X 1/2=$158

Sale of inventory from Merk to Peyton on December 1, 2013:

(5,600)

$28,000-$20,000=$8,000 gain on inventory sale, $5,600 after tax

Sale of machinery from Peyton to Merk on January 1, 2013:

140

Profit restated for intragroup transactions:

92,738

Peyton's share 25%: Investment in Merk

23,185

=25% X ($10,000+$8,000)

$6,000-$4,000=$2,000 gain, $1,400 net of tax $1,400/10 years = $140

Restated profit for the intragroup transactions at 25%

EXERCISE 6-4 (Continued) B) Balance in the Investment in Merk as at December 31, 2013 Beginning balance January 1, 2013:

70,000

Dividends in the period

(4,500)

Profit for the year:

23,185

Investment balance, December 31, 2013:

88,685

EXERCISE 6-4 (Continued)

Cash

$4,500 Investment in Merk

$4,500

To record Peyton’s share of the associate’s dividends paid for the year ended December 31, 2013

Investment in Merk

$ 24,235 Share of profit of associate $ 24,235

To record Peyton’s share of the associate’s profit for the year ended December 31, 2013.

EXERCISE 6-5 Acquisition Analysis January 1, 2011 Cost of investment: Net fair value of identifiable assets and liabilities: Share capital Retained earnings COCI Plant

60,050

150,000 15,000 30,000 3,500 198,500

Fair value acquired by Violet: = $198,500 × 30%

=$5,000 × (1-30%)

59,550

Goodwill: = $60,050 - $59,550

500

(a) Profit/loss Depreciation of plant (FVA) Net income Violet's share 30%

2011

2012

30,000 (700) 29,300 8,790

20,000 (700) 19,300 5,790

2013

(b) Acquisition balance 2011 Share of income 2011 Share of dividends December 31, 2011 Investment Account Balance 2012 Share of income 2012 Share of dividends December 31, 2012 Investment Account Balance 2013 Share of income 2013 Share of dividends December 31, 2013 Investment Account Balance

60,050 8,790 (7,500) =-($15,000 + $10,000) × 30% 61,340 5,790 (3,000) =-($5,000 + $5,000) × 30% 64,130 (1,710) (900) =-($2,000 + $1,000) × 30% 61,520

(5,000) (700) =($5,000 × (1-0.3)) / 5 years (5,700) (1,710)

EXERCISE 6-6 JEM would recognize it’s share of RET’s losses only to the point where the investment’s carrying amount reaches zero. They will discontinue the use of the equity method when the share of losses equals or exceeds the investment’s carrying amount.

However, there is a loan of $75,000 present and the investment’s carrying amount is not just the balance of the account Investment in Associate. JEM’s interest in RET also includes other long-term interests in the associate, such as long-term receivables. The base against which the losses are offset is then company’s net investment in RET. Once the equity-accounted balance of the investment returns to a positive amount, equity accounting resumes.

Share of loss of RET=$18,750 Incurred a loss of $75,000 in the year. The investment was at a $0 balance at the beginning of the year. Ordinarily the loss would not be recognized, however there was a loan granted during the year which could be considered to be part of the investment balance. Therefore, JEM’s 25 % share of the $75,000 loss would be recognized = $18,750.

Loan to affiliate Balance = $0 The loan was issued during the year, however it will be considered to be part of the net investment in affiliate account.

Investment in affiliate account = $56,250 =$0 at the beginning of the year + ($18,750) their share of losses in the year +$75,000 loan granted in the year = $56,250.

EXERCISE 6-7 Significant influence obtained on January 1, 2013 Acquisition-date fair value of investment: Net fair value of identifiable assets and liabilities of investee:

5,600 35% = $4,000/25% =$16,000 × 35% = $5,600

8,000

Net fair value acquired:

2,800

= $8,000 × 35%

Goodwill:

2,800

= $5,600 - $2,800

(a) Balance in the Investment in Associate account using the equity method at January 1, 2013 is $5,600.

(b) The amount of goodwill in the Investment in Associate account is $2,800.

EXERCISE 6-8

Calculate Revnon's share of profit or loss of Aumer for 2012 and 2013 assuming: A) under IFRS there is no difference between upstream or downstream 2012 Sales 900,000 Cost of sales 540,000 Expenses 160,000 Income before tax 200,000 Income tax expense at 40% 80,000 Net income 120,000

2013 1,200,000 780,000 170,000 250,000 100,000 150,000

Intercompany sale Cost of sales Income before tax Income tax expense at 40% Net income on sale

120,000 72,000 48,000 19,200 28,800

180,000 117,000 63,000 25,200 37,800

9,600

12,600

Net income Intragroup sale of inventory-current period Intragroup sale of inventory-prior period

120,000 (9,600) 110,400

150,000 (12,600) 9,600 147,000

Revnon's share at 30%

33,120

44,100

1/3 remaining

EXERCISE 6-8 (Continued) B)Under ASPE results for upstream are the same as above. The downstream: 2012

2013

Net income Intragroup sale of inventory-current period Intragroup sale of inventory-prior period

120,000 120,000

150,000 150,000

Revnon's share at 30% Intragroup sales on inventory

36,000 (9,600)

45,000 9,600 (12,600)

26,400

42,000

Under both IAS 28 and ASPE the amounts will be the same.

EXERCISE 6-9 A) The share of profit or loss in Birch for each of the years 2011 to 2013:

2011 Profit/(Loss) 5,000 Rexol's share at 35% 1,750 goodwill impairment B) Balance in the Investment in Birch account as at December 31, 2013: Acquisition date: 65,158 2011 Share of Profit 1,750 2012 Share of Loss (9,450) 2013 Share of Loss (7,200) Balance as at December 31, 2013: 50,258

2012 (27,000) (9,450)

A) The share of profit or loss in Birch for each of the years 2011 to 2013: 2011

2012

Profit/(Loss) 5,000 (27,000) Rexol's share at 35% 1,750 (9,450) goodwill impairment B) Balance in the Investment in Birch account as at December 31, 2013: Acquisition date: 65,158 2011 Share of Profit 1,750 2012 Share of Loss (9,450) 2013 Share of Loss (7,200) Balance as at December 31, 2013: 50,258

2013 (12,000) (4,200) -3000

2013 (12,000) (4,200) (3,000)

EXERCISE 6-10 2013 joint venture had net income of $30,000 Cash from other venturer:

100,000

Fair value of asset contributed:

700,000

Percentage of transaction that relates to cash Gain on exchange

14% = $100,000 / $700,000 = 14% 350,000

=$700,000 - $350,000

14% Gain to recognize immediately:

50,000

=$350,000 × 14%

Balance of gain to be unrealized:

300,000

=$350,000 - $50,000

Share of unrealized gain:

40% 120,000

=$300,000 × 40%

(a) The balance in the investment account as at December 31, 2013 for Taft: Fair value of equipment contributed

700,000

Cash received

(100,000)

Balance of gain to be unrealized

(300,000)

Balance in the Investment account at January 1, 2013:

300,000

(b) The share of the profit or loss in the joint venture for 2013: Taft's share of profit

18,000

Amortization of unrealized profit 300000/4

75,000

Investment account December 31, 2013

393,000

=$30,000 × 60%

(c) Gain or loss to be recorded by Taft in 2013: Gain to recognize immediately:

50,000

(d) What would change in the above calculations if the sale was deemed to have commercial substance?

Invesment account: Fair value of equipment contributed

700,000

Cash received

(100,000)

Share of unrealized gain

(120,000)

Investment account January 1, 2013

480,000

Gain or loss to be recorded by Taft in 2013: Balance of gain to be unrealized

300,000

Share of unrealized gain

(120,000) 180,000

Gain to recognize immediately

50,000 410,000

amortization of unrealized gain 120000/4 share of profit investment account December 31, 2013

30000 18000 528000

PROBLEMS PROBLEM 6-1 Acquisition Analysis 1-Jan-13 2011 dividend revenue Acquisition date fair value of investment previously held

66,000

Net fair value of identifiable assets and liabilities: Share capital COCI Retained earnings Machinery 5000 x .7 Inventory 2000 x .7

2012 dividend revenue Fair value gain 100,000 60,000 50,000 3,500 1,400

Fair value acquired by Vairvais: =$214,900 X 30%

2,000 3,600 4,000

214,900

64,470

Goodwill: =$66,000-$64,470 Depreciation of machinery p.a. for 5 years Adjustment for inventory in 2013

Fair value gain

3,000

1,530

210 420

=$3,500 X 30% X 1/5 =$1,400 X 30%

(350)

$10,000-$8,000=$2,000 profit, net of tax of 30% =$1,400, 1/4 remaining = $350

2013 Events: Sale of inventory from Clarys to Vairvais Sale of non-current asset from Vairvais to Clarys Depreciation of non-current asset sold

(7,000) =$10,000 profit, net of tax of 30% = $7,000 420 =$7,000 * 12% * 1/2

Total adjustments

(6,930)

PROBLEM 6-1 (Continued) A) The share of profit or loss from Clarys for the year ended December 31, 2013

Net income

32,000

Adjustments from above

(6,930) 25,070

Vairvais share at 30%

7,521

Depreciation of machinery at acquisition

(210)

Sale of machinery

(420)

Vairvais share of 2013 profit

6,891

B) The balance in the Investment in Clarys account at December 31, 2013

Balance at acquisition

66,000

COCI change

-

2013 Share of profit

6,891

2013 Share of dividends (5,000+5,000) x .3

(3,000)

Balance in Investment in Clarys account at December 31, 2013

69,891

PROBLEM 6-2 Acquisition Analysis January 1, 2012 Cost of investment: Net fair value of identifiable assets and liabilities: Share capital Retained earnings Depreciable non-current assets

13,650

20,000 10,000 10,500 40,500

Fair value acquired by Belanger: = $40,500 × 30%

12,150

Goodwill:

1,500

( = $13,650 - $12,150 )

Depreciation of depreciable assets p.a. for 5 years

630

= $10,500 × 30% × 1/5

Additional Information: Ending inventory Beginning inventory COCI increase

(21,000) Profit before tax $30,000, after tax of 30% = $21,000 7,000 Profit before tax $10,000, after tax of 30% = $7,000 9,000 =$30,000 X 30% = $9,000

Profit for the year Ending inventory adjustment Beginning inventory adjustment Net income

180,000 (21,000) 7,000 166,000

Belanger's share at 30%

49,800

Depreciation adjustment

(630)

Belanger's total share at 30%

49,170

PROBLEM 6-2 (Continued)

A) Journal entries for the year ended December 31, 2013 if consolidated financial statements are not prepared Dr. Cash Cr. Investment in Chime To reflect the dividend paid $50,000 X 30%

15,000

Dr. Dividend receivable Cr. Investment in Chime To reflect the dividend declared $50,000 X 30%

15,000

15,000

15,000

Dr. Investment in Chime 9,000 Cr. Asset revaluation reserve =$30,000 X 30%, See calculation above To reflect Belanger's share of the associate's COCI for the year ended December 31, 2013

9,000

Dr. Investment in Chime 49,170 Cr. Share of profits or losses of associate 49,170 See calculation above. To reflect Belanger's share of the associate's profit for the year ended December 31, 2013

B)Effects on consolidation for the year ended December 31, 2013 if consolidated financial statements are prepared Change in retained earnings balance Adjustment for unrealized inventory profit

40,000 (7,000) 33,000

Belanger's share at 30%

9,900

Depreciation adjustment

(630) 9,270

=$50,000-$10,000

PROBLEM 6-2 (Continued) Investment in Chime Retained earnings See calculation above. To reflect the balance at the beginning of the year.

9,270 9,270

Investment in Chime 9,000 Asset revaluation reserve 9,000 =$30,000 X 30%, See calculation above To reflect Belanger's share of the associate's COCI for the year ended December 31, 2013

increase increase

increase increase

Investment in Chime 49,170 increase Share of profits or losses of associate 49,170 increase See calculation above. To reflect Belanger's share of the associate's profit for the year ended December 31, 2013 Dividend revenue Investment in Chime To reflect the dividend paid $50,000 X 30%

15,000 15,000

decrease decrease

Dividend revenue Investment in Chime To reflect the dividend declared $50,000 X 30%

15,000 15,000

decrease decrease

Balance in the investment account

51,090

PROBLEM 6-3 (a) Acquisition Analysis 01-Jan-10

Cost of investment:

65,880

Net fair value of identifiable assets and liabilities: Share capital Retained earnings Inventories Plant Equipment Accounts receivable Land

100,000 60,000 3,500 4,200 700 (700) 14,000 181,700

Sold by December 31, 2010 Sold December 31, 2013-5 years (4 years elapsed) 5 years Collected by December 31, 2010

Fair value acquired by Ejez: =$181,700 X 40%

72,680

Gain on bargain purchase

(6,800)

PROBLEM 6-3 (Continued) Depreciation of plant Depreciation of equipment

336 56

Retained earnings January 1, 2013 Retained earnings January 1, 2010 Change

80,000 60,000 20,000

Ejez's share at 40% Depreciation and gain on sale of plant Depreciation of Equipment Inventory Accounts receivable Gain on bargain Change since acquisition

8,000 (1,008) (168) (1,400) 280 6,800 12,504

2013 Net income Ejez's share at 40%

18,000 7,200

Depreciation and gain on sale of plant Depreciation of equipment

(672) (56)

Ejez's share of profit

6,472

=$4,200 X 40% X 1/5 =$700 X 40% X 1/5

=$4,200 X 40% share X 3/5 years =$700 X 40% X 3/5 =$3,500 X 40% share =$700 X 40% share

PROBLEM 6-3 (Continued) A) The share of profit or loss of Campbell that Ejez would reflect on its Consolidated statement of comprehensive income 2013 Net income Ejez's share at 40%

18,000 7,200

Depreciation and gain on sale of plant Depreciation of equipment

(672) (56)

Ejez's share of profit

6,472

B) Balance in the Investment in Campbell account at December 31, 2013: Balance at acquisition

65,880

Share of change since acquisition

12,504

2013 Share of profit

6,472

2013 Dividend Paid

(2,000)

=$5,000 X 40%

2013 Dividend declared

(1,600)

=$4,000 X 40%

81,256

PROBLEM 6-4 Acquisition Analysis 01-Jan-11 Cost of investment:

63,200

Net fair value of identifiable assets and liabilities: Share capital Retained earnings

125,000 11,000

Fair value acquired by Cynna: =$136,000 X 40%

54,400

Goodwill: =$63,200-$54,400

8,800

Beginning Retained earnings of Eckers Retained earnings of Eckers at acquisition Change

16,000 11,000 5,000

Cynna's share of the change in retained earnings

2,000

Sale of motor vehicle June 30, 2011 Inventory December 31, 2012

PROBLEM 6-4 (Continued)

136,000

(588) (224) 1,188

1.5 year ago. $3,000 gain, $2,100 net of tax. 5 years remaining= $420 per year X 40% =$168 =$4,000-$3,200=$800 gain, $560 net of tax. X 40% = $224

Profit for the year Share of profit for the year

Sale of motor vehicle Beginning inventory Ending inventory

18,100 7,240

168 224 (448) 7,184

1.5 year ago. $3,000 gain, $2,100 net of tax. 5 years remaining= $420 per year X 40% =$168 =$4,000-$3,200=$800 gain, $560 net of tax. X 40% = $224 =$1,600 profit, net of tax of 30% =$1,120 X 40% share = $48

A) Journal entries for the year ended December 31, 2013 Dr. Cash Cr. Investment in Eckers To reflect the dividend paid

1,600

Dr. Dividend receivable Cr. Investment in Eckers To reflect the dividend declared

2,000

Dr. Investment in Eckers Cr. Share of profit or losses of associates To reflect the share of 2013 profit

7,184

1,600

2,000

7,184

PROBLEM 6-4 (Continued) B) Investment in Eckers as at December 31, 2013 under IAS 28 Balance at acquisition Change since acquisition 2013 share of profit 2013 dividends paid 2013 dividends declared Balance at December 31, 2013

63,200 1,188 7,184 (1,600) (2,000) 67,972

calculation above calculation above calculation above calculation above

C) Investment in Eckers as at December 31, 2013 under ASPE Balance at acquisition Change since acquisition 2013 share of profit 2013 dividends paid 2013 dividends declared Balance at December 31, 2013

63,200 852 6,848 (1,600) (2,000) 67,300

2000-588-560 7240+168+560-1120 calculation above calculation above

PROBLEM 6-5

Ridegmont acquired 90% of Gourmand on January 1, 2009 for $150,750

Consideration transferred:

150,750

Net fair value of identifiable assets and liabilities:

Share capital

100,000

Retained earnings

20,000

Inventory

3,500

sold by December 31, 2009

Depreciable assets

7,000

5 year life

130,500 Fair value acquired by Ridgemont: =$130,500 X 90%

117,450

Goodwill: =$150,750-$117,450

33,300

Inventory Dep Asset/ depn Goodwill IT exp/ FITL Total

NI

Beg R/E -net

-2000

-3500 -5600

SFP

33300 =600 -1400

PROBLEM 6-5 (Continued)

-9100

1400/year

Acquisition Analysis Primo 01-Jan-12 Cost of investment:

3,500

Net fair value of identifiable assets and liabilities: Share capital Retained earnings Inventory Depreciable assets

10,000 2,150 350 700 13,200

Fair value acquired by Ridgemont: =$13,200 X 25%

3,300

Goodwill: =$3,500-$3,300

Beginning Retained earnings of Primo Retained earnings of Primo at acquisition Change Ridgemont's share of the change in retained earnings FVA inventory FVA Depreciable asset

200

4,200 2,150

=$6,000-$2,600+$600+200

2,050

513 (88) (35)

Sale of motor vehicle in 2012 profit Sale of motor vehicle in 2012 depreciation

(140) 14

Beginning impact on investmentin Primo

264

=$2,050 X 25% =$350 X 25% =$700/ 5 years = 140 per year x 25% =$800 profit before tax, net of tax = $560 25% =$140 X 20% X 1/2

PROBLEM 6-5 (Continued) Profit for the year Current period sale of inventory Sale of motor vehicle FVA Depreciable assets

500 (280) 28 (35)

Gourmand's share of profit at 25%

213

Dividends: Reduce dividend revenue Reduce investment in Primo

50 50

=$2,600-$600 x 25% =$2,000 X 80% X (1-.30) x 25% =$560 x 20% x 25% =$700/5 x 25%

=$200 X 25% =$200 X 25%

B) The balance of the Investment in Primo as at December 31, 2013 Balance at acquisition Change in balance from acquisition until January 1, 2013 Share of profit for the year Share of dividends for the year

3,500 264 213 (50) 3,927

PROBLEM 6-5 (Continued) Gourmand adjusted Other Revenue: 5,000 – 50 (dividend revenue) +213(share of profit) = 5,163 Gourmand adjusted Retained Earnings: Beginning retained earnings

80,000

Adjusted for share of equity in joint venture to beginning 2013

Ending retained earnings

264 80,264 94,000

Adjusted for share of equity to beginning of the year

264

2013 share of profit

213

2013 dividend revenue removed

(50) 94,427

Retained earnings - consolidated Beginning retained earnings

Ridgemont Gourmand Beginning R/E(above)

120000

80,264

At acquisition

(20,000) 60,264

FVA inventory

(3,500)

FVA dep asset

(5,600) 51,164 x 90%

46048 166048

PROBLEM 6-5 (Continued)

End retained earnings

Ridgemont Gourmand End R/E(above) At acquisition FVA inventory FVA dep asset

162000

94,427 (20,000) 74,427 (3,500) (7,000) 63,927 x 90%

57,535 219,535

PROBLEM 6-5 (Continued)

Sales Revenue Less: Cost of sales Gross Profit Less: Depreciation Other expenses

Plus: Other revenue Income before income tax Less: income tax expense Net income

Ridgemont 200,000 110,000 90,000 16,000 22,000 38,000 52,000 30,000 82,000 20,000 62,000

Gourmand 60,000 30,000 30,000 4,000 3,000 7,000 23,000 5,163 28,163 10,000 18,163

Adjustments

2,000

-

-

-

(3,600)

(600) -

Total Consolidated 260,000 140,000 120,000 22,000 25,000 47,000 73,000 31,563 104,563 29,400 75,163