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Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 1 Introduction to Advanced Financial Accounting 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities. 1) A private company in Canada that is closely held, has no debt, and wants to simplify the accounting process is most likely to report under which part of the CPA Canada Handbook? A) Part II — Accounting Standards for Private Enterprises (ASPE) B) Part IV — Accounting Standards for Pensions C) Part I — International Financial Reporting Standards (IFRS) D) Part III — Accounting Standards for Not-for-Profit Organizations Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities.

2) In Canada, a private company has the choice to report under International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). Describe why the CPA Canada Handbook provides the option for private enterprises? Answer: IFRS is meant to create consistency and comparability in international markets. One of the limitations of IFRS is the complexity of reporting for equity investments that are meant to provide information to shareholders for decision-making purposes. Many private companies are held by a small group of shareholders who are often involved in the running of the business or have access to that information. As a result, the cost of applying more complex accounting policies outweighs the benefit of the information provided to this closely held group of shareholders. To address this, the Accounting Standards Board developed the Accounting Standards for Private Enterprises to meet the needs of private enterprises. Private enterprises have the option to adopt IFRS or ASPE depending on the needs of the financial statement users. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities.

3) What are the four parts of the CPA Canada Handbook — Accounting and which entities are they applicable to? Answer: The four parts are: • Part I — International Financial Reporting Standards (IFRS) — applicable to publicly accountable, private, or not-for-profit entities. • Part II — Accounting Standards for Private Enterprises (ASPE) — applicable to private entities. • Part III — Accounting Standards for Not-for-Profit Organizations — applicable to not-for-profit entities. • Part IV — Accounting Standards for Pension Plans — applicable to pension plans. Diff: 1 Type: ES Taxonomy Category: Remembering Learning Outcome: 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities.

1.2 Discuss the conceptual framework for financial reporting and the general purpose of financial reporting. 1) In 2011, Canada adopted International Financial Reporting Standards (IFRS) for publicly accountable enterprises. Explain the rationale for adopting IFRS in Canada. Answer: As the global economy expanded, the Accounting Standards Board (AcSB) chose to adopt IFRS in Canada to improve consistency and comparability in the international capital markets. Diff: 1 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.2 Discuss the conceptual framework for financial reporting and the general purpose of financial reporting.

1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities. 1) Laliberte Products Ltd. (LPL), a public company, made several equity investments in the current year. Which of the following investments would most likely be classified as an associate in LPL's financial statements? A) 25,000 of the 30,000 outstanding voting common shares of Glabman Inc. There are significant intercompany transactions between the two companies. B) 13,500 of the 45,000 outstanding voting common shares of CCL Ltd. There are significant intercompany transactions between the two companies. C) 1,000 of the 20,000 outstanding voting common shares of Petruck Inc. There are no transactions between the two corporations and LPL plans to hold these shares for less than a year. D) 3,000 of the 3,500 outstanding non-voting preferred shares of Paradise Ltd. There is a small number of intercompany transactions between the two companies. Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

2) What is the definition of control provided in IFRS 10? Answer: IFRS 10 states that an investee has control only when all of the following three criteria are met: The power over the investee, exposure to the variable returns of the investee, and the ability to use that power to affect the earnings of the investee. First, the power to direct the relevant activities over the investee typically arises from a right such as voting rights, the right to choose key personnel or enforcement/veto rights. Power over the relevant activities would include the ability to direct the selling or buying of goods and services, direct research and development, budgeting, and the management of financial assets. Second, variable returns are defined as not fixed and with the potential to vary as a result of the performance of the investee. Finally, there must be a link between the power to control the relevant activities and the return on the investment. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

3) List the four different classifications of investments and provide a definition for each type of investment classification. Answer: The four classifications along with a definition are given below: 1. Passive Investment is an equity investment that does not meet the definition of an associate (significant influence under ASPE), joint arrangement, or subsidiary. These investments tend to be more short term and temporary in nature. These can be classified as fair value through other comprehensive income, fair value through profit and loss, and in some rare cases, cost. 2. Associate (Significant Influence under ASPE) is an equity investment where the investor has the ability to influence the activities of the investee but does not have control. 3. Joint Arrangement is a contractual agreement where the parties have joint control over the investment. These can be classified as either joint ventures or joint operations. 4. Subsidiary is an equity investment where the investor has the ability to control the activities of the investee. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

4) What is a financial asset, and would a non-strategic equity investment be included in that definition? Answer: A financial asset, as defined in IAS 32, is any of the following: • Cash • An equity investment in another company • A contractual right to receive cash or another asset from another company • A contractual right to exchange another financial instrument under potentially favourable conditions Investments in equities are listed in the definition of a financial asset; therefore, a non-strategic equity investment would meet the definition. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

1.4 Determine the classification for accounting purposes of each intercorporate investment. 1) Which of the following is NOT an indicator of significant influence? A) There are significant intercompany transactions between the investor and investee. B) The investor has the ability to shape the policies of the investee. C) The investor and investee are located in the same city and use the same legal firm. D) The ability to choose representation on the investee's board of directors or governing body. Answer: C

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

2) Kemi Inc., a public company following IFRS, owns 25% of the voting shares of Eunji Ltd. The next largest shareholder owns 15% of the voting shares. Kemi Inc. has some intercompany transactions with Eunji Ltd. and has the ability to elect one of the five members of the board of directors. Which of the following statements best describes how Kemi Inc. should account for its investment in Eunji Ltd.? A) Kemi Inc. should classify Eunji Ltd. as an associate and use proportionate consolidation to account for its investment. B) Kemi Inc. should classify Eunji as a passive investment and account for the investment using the equity method to account for its investment. C) Kemi Inc. controls Eunji Ltd. and should use the consolidation method to account for its investment. D) Kemi Inc. should classify Eunji Ltd. as an associate and use the equity method to account for its investment. Answer: D Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

3) Which of the following investments in equity investments held by MajaCo (MC) would NOT be classified as a subsidiary? A) MC owns 49% of the voting shares of DeltaCo (DC). No other investor owns more than 2% of the remaining voting shares. B) MC owns 50% of the voting shares of Epsilon Ltd. (EL). JakovCo owns the other 50% of the voting shares. The two companies agree that they will participate equally in the running of EL. C) MC owns 75% of the voting shares of TC Inc. D) MC owns 45% of the voting shares of FishelCo. A wholly owned subsidiary of MC owns 25% of the voting shares of FishelCo. The remaining shares are widely held. Answer: B Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

4) Which of the following factors is NOT an indication of an investor having significant influence over an investee? A) Ownership of 19% of the voting shares of ABC Corporation, where the remaining voting shares are owned by a husband and wife B) The ability to elect 2 of a 7-member board of directors C) Significant intercompany transactions between the investor and investee D) The ability to participate in the shaping of the policies of an investee Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

5) In the current year, AcqCo Ltd., a private company reporting under ASPE, purchased 42% of the voting shares of Woodward Inc. The remaining 58% of the voting shares are held by the original founder and her immediate family. To date, the family has elected all of the board members, and AcqCo Ltd. has not been able to obtain a seat on the board of directors. AcqCo Ltd. does not have any intercompany transactions with Woodward Inc. nor is there any exchange of management or technology. How should AcqCo Ltd. classify its investment in Woodward Inc.? A) Subsidiary B) Associate C) Passive investment with the option to classify as a fair value through other comprehensive income or fair value through profit and loss. D) Passive investment with the option to classify the investment as a fair value through profit and loss or as a cost investment. Answer: D Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

6) ABC Corporation Inc. (ABC) owns 60% of the voting common shares of Reich Corporation Ltd. (RCL), while TieCo owns 25%, and Platinum Inc. (PI) owns the remaining 15%. ABC has significant intercompany transactions with RCL. TieCo and PI have no intercompany transactions with RCL. ABC appoints eight of RCL's 10 board members; TieCo and PI each appoint one board member. Which of the following statements is true? A) TieCo has significant influence over RCL. B) TieCo and PI have significant influence over RCL. C) TieCo has no influence over RCL and should classify their investment in RCL as a passive investment. D) ABC should classify its investment in RCL as an associate since it does not have control of RCL. Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

7) Below is a list of the shareholders holding voting common shares in Karam Co.: Kayman Corporation — 45% Peng Ltd. — 40% Povhe Inc. — 15% Kayman Corporation and Peng Ltd. each have 2 seats on the 5-person board of directors. Peng Ltd. has significant intercompany transactions with Karam Co. All of the companies report under IFRS. Which of the following statements is true? A) Kayman Corporation controls Karam Co and should classify its investment as a subsidiary. B) Peng Ltd. has significant influence and should classify its investment as an associate. C) Peng Ltd. should classify their investment as a passive investment. D) Peng Ltd. controls Karam Co and should classify its investment as a subsidiary. Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

8) What factors may indicate that an investor has significant influence over an investee? Answer: IAS 28 defines significant influence as the ability to participate in or influence the operating, investing, and financial policy decisions of the investee. This means that the investor can play a role in the income-earning process. IAS 28, paragraph 6 provides additional guidance in determining the ability to influence the activities of the investee as: • The ability to choose some representation on the investee's board of directors. • The ability to participate in shaping the policies of the investee. • Significant intercompany transactions between the investee and investor. The definition of significant intercompany transactions requires professional judgment. • The loaning of management personnel to the investee. • The investor holds essential technical knowledge, patented technology, or processes needed by the investee. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

1.5 Compare the classification requirements of IFRS and ASPE. 1) In Canada, a private profit-oriented corporation may report under International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). Explain the rationale for having the option, and how the investment classification would differ. Answer: Accounting for equity investments can be more complex than required in ASPE. The reason for offering ASPE to private companies is to remove some of those complexities for closely held organizations and their financial statement users. When a company is closely held, the owners tend to be more involved with the running of the entity and therefore have access to the inner working of the business. The following are differences in the classification of equity investments under IFRS and ASPE: Passive investments: Companies reporting under IFRS have three options to classify a passive investment: FVTPL, FVOCI, and Cost. Companies reporting under ASPE have two options for classifying passive investments: FVTPL and Cost. Other comprehensive income does not exist under ASPE. Strategic investments: A) Investments where the acquirer has significant influence: Companies reporting under IFRS classify these investments as associates, whereas companies reporting under ASPE would classify their investment as a significant influence investment. Similar factors are used to determine the classification of an investment. B) Investments where the acquirer has control: Companies reporting under IFRS and ASPE both classify investments under their control as a subsidiary. Similar factors are used to determine the classification of an investment. Diff: 1 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.5 Compare the classification requirements of IFRS and ASPE.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 2 Accounting for Non-Controlled Investments 2.1 Account for passive (non-strategic) investments in equity, including journal entries. 1) Non-strategic investments may be classified as a fair value through other comprehensive income (FVOCI), fair value through profit or loss (FVTPL), or as a cost investment. Which of the following statements is true? A) Dividend revenue is reported in the income section of the statement of income for each of the three classifications. B) For a non-strategic investment classified as a FVOCI, dividend revenue is reported in the other comprehensive income section of the statement of income. C) Dividend revenue is only reported as income when the investment is classified as a cost investment. D) Dividend revenue is only reported in the income section the statement of income when the investment is classified as FVTPL or FVOCI. Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

2) Ecole Inc., a private company reporting under ASPE, owns 9% of the voting common shares of Plato Corp. Ecole Inc. has classified its investment as a passive investment. On November 15, 2022, Plato Corp. declared a dividend $100,000. The dividend will be paid on January 15, 2023. What journal entry or entries should Ecole Inc. make related to the dividends declared by Plato Corp.? A) November 15, 2022 Dr. Dividend receivable 9,000 Cr. Dividend revenue 9,000 January 15, 2023

B) January 15, 2023

C) January 15, 2023

D) November 15, 2022

January 15, 2023 Answer: A Diff: 2

Type: MC

Dr. Cash Cr. Dividend receivable

9,000

Dr. Cash Cr. Dividend revenue

9,000

Dr. Cash Cr. Investment in Plato Corp.

9,000

Dr. Dividend receivable Cr. Investment in Plato Corp.

9,000

Dr. Cash Cr. Dividend receivable

9,000

Taxonomy Category: Analyzing Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

3) Mido Corporation acquired 10% of the 200,000 outstanding voting shares of Josip Ltd. on January 1, 2022 for $150,000. On September 20, 2022, Josip declared and paid a dividend of $100,000 to its shareholders. On December 31, 2022, Josip's shares were trading at $9.25. The investment in Josip was classified as a FVOCI investment. What amount of income would be included in the profit and loss portion of the statement of income? A) $35,000 B) $10,000 C) $45,000 D) $0 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

4) Taki Corporation, a private company reporting under ASPE, acquired 12% of the 175,000 outstanding voting shares of Hoka Ltd., a publicly traded company, on January 1, 2023 for $150,000. On August 15, 2024, Hoka declared a dividend of $120,000 to its shareholders. On December 31, 2023 and 2024, Hoka's shares were trading at $9.25 and $8.75, respectively. What is the total amount of income that would be included in profit and loss for the year ending December 31, 2024? A) $3,900 B) $33,750 C) $14,400 D) $48,150 Answer: A Diff: 3 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

5) Champei Corporation, a public company, acquired 7% of the 200,000 outstanding voting shares of Okello Ltd. on January 2, 2023, for $75,000 which includes brokerage fees of $1,000. Champei's management does not plan to hold the shares for a long period and therefore has classified Okello as a FVTPL investment. On November 15, 2023 and 2024, Okello declared and paid a dividend of $150,000 and $120,000, respectively, to its shareholders. Okello's shares were trading at $4.75 on December 31, 2023. On December 10, 2024, Champei sold its investment in Okello for $87,500 ($88,500 less $1,000 in brokerage fees). What is the total amount of income that would be included in Champei's statement of income for the year ending December 31, 2024? A) $20,900 B) $31,500 C) $29,400 D) $21,900 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

6) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500. Brayan classified its investment as a FVTPL investment. The following is information related to Alina for the years ending 2023 to 2025. 2023 2024 2025 FMV per share (as of Dec 31) $ 18.00 $ 22.00 $ 23.50 Net income $ 230,000 $ 115,000 $ 275,000 Dividend declared and paid on November 15 each year $ 75,000 $ 125,000 $ 95,000 On December 31, 2025, Brayan sold its investment in Alina for $246,750 and paid a brokerage fee of $2,500. Determine the amount to be included in net income before OCI related to Brayan's investment in Alina for the year ending December 31, 2025. A) $7,125 B) $20,375 C) $72,875 D) $22,875 Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

7) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500, and paid a brokerage fee of $1,500. Brayan classified its investment as FVOCI. The following is information related to Alina for the years ending 2023 to 2025.

FMV per share (as of Dec 31) Net income Dividend declared and paid on November 15 each year

2023 $ 18.00 $ 230,000 $ 75,000

2024 $ 22.00 $ 115,000 $ 125,000

2025 $ 23.50 $ 275,000 $ 95,000

On December 31, 2025, Brayan sold its investment in Alina for $246,750 cash and paid a brokerage fee of $2,500. Which set of journal entries to record the sale of the investment is correct? A) Dr. Cash 246,750 Cr. Accounting gain—OCI 15,750 Cr. Investment in Alina Inc. 231,000 Dr. Accumulated OCI—Alina Inc. 68,250 Cr. Retained earnings 68,250 B)

Dr. Cash Cr. Accounting gain—OCI Cr. Investment in Alina Inc. Dr. Retained earnings Cr. Accumulated OCI

244,250

Dr. Cash Cr. Accounting gain Cr. Investment in Alina Inc.

246,750

51,000

13,250 231,000 51,000

15,750 231,000

Answer: a) Goodwill: Purchase price Common shares Retained earnings Acquisition differential Allocated to fair value differences: Inventory Building Patent Deferred income tax* Goodwill *Calculation of deferred income tax: Inventory @ 30% Building @ 30% Patent @ 30% Tax base Tax rate Deferred income tax

1,000,000 2,000,000

30% 30%

(125,000) 50,000 (300,000)

30% 30% 30%

$ $

37,500 (15,000) 90,000 112,500 20% $ 22,500

1,350,000 (300,000) (600,000) 450,000 (37,500) 15,000 (90,000) 22,500 360,000

Investment in NFL as of December 31, 2024: Purchase price Income is earned evenly throughout the year. The purchase happened on April 1, 2022 therefore DDI should only record 9 months of the adjusted net income for 2022. The exception is the FVD for inventory which should be included 100% for the period as it was all sold in the period:

Equity income—2022 (9 months) Adjusted for the FV amortization: Inventory (100%) Deferred income tax Building (8 years) (9 months) Deferred income tax Patent (5 years) (9 months) Deferred income tax Adjusted income Dividends—2022 Equity loss—2023 Adjusted for the FV amortization: Building (8 years) Deferred income tax Patent (5 years) Deferred income tax Adjusted loss—2023 Equity income—2024 Adjusted for the FV amortization: Building (8 years) Deferred income tax Patent (5 years) Deferred income tax Adjusted income Dividends—2024 Investment in NFL as of December 31, 2024

$1,350,000

356,250

(125,000) 25,000 4,688 (938) (45,000) 9,000 $ 224,000 (250,000) (525,000) 6,250 (1,250) (60,000) 12,000 $ (568,000) $ 650,000 6,250 (1,250) (60,000) 12,000 $ 607,000 (375,000)

30% 30%

67,200 (75,000)

30%

(170,400)

30% 30%

182,100 (112,500) $1,241,400

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods. 1) On January 1, 2022, I-Core Inc. purchased 45,000 of the 150,000 voting shares of Core Electronics Ltd. (CEL) for $325,000. On that date, CEL's shareholders' equity consisted of common shares of $125,000 and retained earnings of $85,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and land. The inventory was undervalued by $50,000, while the land was overvalued by $20,000. Both companies pay tax at a rate of 20%. What amount of goodwill would be recorded as a result of this investment? A) $245,200 B) $269,200 C) $254,800 D) $91,000 Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.

2) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. Both companies pay tax at a rate of 20%. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following: Carrying value $ 35,000 65,000 125,000

Accounts receivable Inventory Land

What amount of goodwill resulted from this investment? A) $ 13,000 B) $280,880 C) $297,520 D) $278,800 Answer: B

Fair value $ 30,000 85,000 150,000

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.

3) On January 1, 2023, Prince Leather Inc. purchased 27% of the outstanding voting shares of Soul Shoes Ltd. (SSL) for $800,000. Below is the statement of financial position for SSL, along with the fair values of the net assets on January 1, 2023: Soul Shoes Ltd. Cash Accounts receivable Inventory Property, plant, and equipment (net) Total assets Current liabilities Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Carrying value $ 103,800 326,000 560,000 1,980,000 $2,969,800

Fair value $ 103,800 300,000 600,000 2,180,000 $3,183,800

$ 306,000 340,800 500,000 1,823,000 $2,969,800

$ 306,000 355,000

Required: Assuming the tax rate is 20% for both companies, determine the amount of goodwill resulting from this investment using both the fair value method and carrying value method.

Answer: Goodwill using the fair value method: Purchase price Less the fair value of the net assets: Assets Liabilities

$800,000 $3,183,800 661,000 2,522,800

Adjusted for deferred income tax implications* Goodwill *Calculation of deferred income taxes on fair value differences: Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Tax base Tax rate Deferred income taxes Goodwill using the carrying value method: Purchase price Common shares Retained earnings Acquisition differential Allocate to the fair value differentials: Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Deferred income tax implications* Goodwill

27%

(681,156) 39,960 $158,804

$(26,000) 40,000 200,000 (14,200) 199,800 20% $39,960

500,000 1,823,000

27% 27%

26,000 (40,000) (200,000) 14,200

27% 27% 27% 27%

$800,000 (135,000) (492,210) 172,790 7,020 (10,800) (54,000) 3,834 39,960 $158,804

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.

2.8 Prepare the journal entries, including the deferred tax implications, for significant influence (associates) investments. 1) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following: Carrying value Fair value Inventory $ 750,000 $875,000 Building (remaining useful life of 8 years) 950,000 900,000 Patent (remaining useful life of 5 years) 250,000 550,000 Both companies have a December 31 year end, pay tax at a rate of 20%, and earn net income evenly throughout the year. Assume inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income as well as declared and paid dividends on October 15 each year: 12-month period 2022 2023 2024

Net income (loss) $ 475,000 (525,000) 650,000

Dividends $ 250,000 2010033 375,000

Required: a) Prepare the equity method journal entries for each year. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024.