Herauf10e SM Ch08 FINAL

Chapter 8
Consolidated Cash Flows and

Changes in Ownership
Copyright  2022 McGraw Hill Ltd. All rights reserved.

Solutions Manual, Chapter 8 1
A brief description of the major points covered in each case and problem.
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.
2 Modern Advanced Accounting in Canada, Tenth Edition
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.

This problem requires the calculation of consolidated profit attributable to the parent’s
shareholders and noncontrolling interest when a parent has indirect holdings in a subsidiary.

This problem involves the reduction of percentage ownership in a subsidiary due to a sale of
shares in the open market. It requires the computation of the balance in the investment account
under the equity method and the calculation of noncontrolling interest on the income statement
and balance sheet.

A consolidated cash flow statement is presented and the student is required to answer a series
of questions regarding the consolidation process.

The preparation of a consolidated cash flow statement is required along with an explanation on
why 100% of the subsidiary’s dividends do not appear on the consolidated cash flow statement.

The preparation of a consolidated cash flow statement is required given that there has been a
reduction in the parent's investment during the year.

This problem requires the calculation of customer contracts, consolidated profit, retained
earnings, and noncontrolling interest for the second year after acquisition when the parent
increases its percentage ownership from 75% to 95%.

This problem involves the sale of shares by the parent –first from 90% to 70% and then from
70% to 40%. It requires the calculation of the balance in the investment account under the
equity method and noncontrolling interest on the consolidated balance sheet after the two
different sales of shares.

The preparation of a consolidated balance sheet is required immediately after the parent's
ownership decreases due to a new share issue by the subsidiary.

A journal entry and calculations of undepleted acquisition differential are required when there
has been a reduction in the parent's ownership.

This problem is concerned with the calculations of the investment account, undepleted
acquisition differential and noncontrolling interest when the parent sells and is deemed to sell
part of its investment.

This problem requires the calculation of consolidated profit attributable to the parent’s
shareholders and noncontrolling interest when a parent has indirect holdings and an explanation
of how the revenue recognition principle supports adjustments for unrealized profits.

This problem requires the calculation of consolidated profit, retained earnings, and
noncontrolling interest for the first year after acquisition when the subsidiary has cumulative
preferred shares outstanding.

This problem requires the calculation of consolidated profit, other consolidation amounts and the
parent’s profit under the equity method when there is an indirect shareholding involved.

This problem is concerned with a business combination in 3 steps of 25%, 20% and 10%. It
requires journal entries under the cost and equity methods, the calculation of the investment
account balance under the two methods and the calculation of select account balances for the
consolidated financial statements.

This problem requires the preparation of a consolidated balance sheet and consolidated
retained earnings statement where indirect shareholdings are involved.
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.

This comprehensive problem requires the preparation of consolidated financial statements when
the subsidiary has preferred shares outstanding. Calculations involved with an ownership
reduction and unrealized profits in inventory and plant and equipment are also required.

This problem involves a series of questions based on the 2020 financial statements of Canopy
Growth Corporation, a Canadian company. The questions involve an analysis of the cash flow
statement, judgements involved in accounting for business combinations and changes in the
parent’s percentage ownership.

This is a comprehensive problem involving the step acquisitions of a subsidiary company that
has preferred shares in its capital structure. There are unrealized profits in inventory and
equipment. The problem also requires the calculation of goodwill impairment loss and NCI
under the identifiable net assets method. Non-controlling interest is measured using the market
price of the subsidiary’s shares at the date of acquisition. A consolidation worksheet is also
required.

Problem 8-22 (90 min.) (prepared by Peter Secord, Saint Mary’s University)
The preparation of consolidated financial statements is required when the subsidiary has
convertible preferred shares and there have been unrealized intercompany profits from asset
transfers. Also required is a brief discussion on the reporting implications if the preferred shares
were converted to common shares. A consolidation worksheet is also required.
SOLUTIONS TO REVIEW QUESTIONS
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.
3. The depletion of the acquisition differential is similar to depreciation expense in that it is

deducted in the determination of net income but does not represent a cash outflow.
Therefore, as with depreciation expense, the depletion of the acquisition differential is
added back to consolidated net income to determine cash flow from operations in the
consolidated cash flow statement. The adjustments are made to the revenue and expense
items that contain the depletion of the acquisition differential i.e. to amortization expense
for depletion of the acquisition differential pertaining to equipment.
4. Dividend payments to noncontrolling shareholders represent a flow of cash outside the

economic entity, and, as a result, they must be disclosed on the consolidated cash flow
statement. The only dividends that can be reported in the consolidated statement of
retained earnings are those that are paid to the parent's shareholders. From the
consolidated entity's point of view, dividends declared or paid to noncontrolling

shareholders represent a reduction of the equity of the noncontrolling interest in the
subsidiary's assets. If a statement of changes in noncontrolling interest were presented, it
would show an increase from the allocation of entity net income, and a decrease from
dividends to noncontrolling shareholders.
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
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.
11. Net income for the year 17,000)

Allocated to preferred shares (12,000)
Net income for common shares 5,000
The common shareholders have the right to income remaining after the claim of the
preferred shareholders. In this case, income of $5,000 “belongs” to the common
shareholders.
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

financial statements are prepared. Therefore, a negative acquisition differential should be
added to consolidated contributed surplus and a positive acquisition differential should be
deducted from consolidated contributed surplus (if there is any) or from consolidated
retained earnings.
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.

15. All three companies should be included in the consolidated financial statements. XYZ Inc,
should be consolidated with EXL Limited because EXL holds majority ownership of XYZ.
EXL should be consolidated with ABC Company because ABC holds majority ownership of
EXL.
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
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
Liabilities (800 + 390) $ 1,190 $ 1,190

Shareholders’ equity (600 + 1,312; 600 + 1,500) 1,912 2,100
$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
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
Liabilities (800 + 390) $ 1,190 $ 1,190

Non-controlling interest (Note 1) 525 600
Shareholders’ equity (Note 1) 1,987 2,100
$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
In scenario A, a gain on sale is reported on January 1, Year 8 as a direct credit to

contributed surplus. In scenario B, no gain on sale is recorded on January 1, Year 8
because a gain of $188 was reported on December 31, Year 7. In all cases, noncontrolling
interest is measured at 40% of the carrying amounts of the subsidiary’s assets and liabilities
on the consolidated balance sheet at the date of the sale.
Case 8-2
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]
For this transaction, the difference is $330,000 calculated as follows:
Acquisition cost (54 x 100,000 x 20%) 1,080,000

Carrying amount of Stiff shares acquired (35 x 100,000 x 20%) 700,000
Carrying amount of acquisition differential acquired (250,000 x 20%) 50,000 750,000
Excess 330,000
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
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%)

Class B 1,800 (75%) 600 (25%) 2,400 (100%)
Total 3,800 (31%) 8,600 (69%) 12,400 (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
Liabilities $340 $155 $495

Common shares 100 100
Class A common shares 50
Class B common shares 24
Retained earnings (20 + 1; 40) 21 (40) 21
Non-controlling interest (80% x (50-40) + 25% x 24)- - 14
$461 $189 $630
Jokavic’s separate entity financial statements show a debt-to-equity ratio of 2.8 and conforms
with the restrictions in the bank covenants. However, the consolidated financial statements
show a debt-to-equity ratio of 3.7 and exceed the maximum amount of 3. Therefore, the
proposed transactions will not avert the problem. You will have to continue to prepare
consolidated financial statements and face the risk that the bank loan may be called for full
repayment.
Case 8-4
Canada Transport Enterprises Inc. ("CTE")
Attention: Gerard Joel

DRAFT REPORT
Dear Gerard:
Sale of Traveller Bus Lines ("TBL")

As requested, we have reviewed the information provided. Our report:
 recommends ways in which the selling price can be maximized

 provides comments and recommendations on how the agreement should be changed to
minimize possible disputes in the future, and
 summarizes the accounting issues of significance to CTE that will arise on the sale of
TBL
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.
Recommendations on ways to maximize the selling price

The sale of TBL will have a significant impact on CTE's share price. Therefore, by maximizing
the sale price, you will be maximizing the gain from the sale and maximizing the recorded equity

for CTE. However, the sale of TBL, one of CTE's profitable divisions, may adversely affect the
share price if the market feels that you did not get enough for the division. Management should
consider the impact of the sale on the share price.
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.
Possible adjustments to the selling price

The accounting policies chosen for TBL's financial statements will impact the calculation of the
selling price. Adjustments that increase the net value of TBL assets sold are more desirable
than adjustments that affect the earnout payment because CTE will receive all increases in the
CA and only 55% of increases that affect the July 31, Year 8 earnings.
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
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.
School buses – useful life

The carrying amount of the school buses on TBL's balance sheet appears to be less than the
fair value of these buses, based on a recent report. The reason may be because we have
depreciated these assets over 10 years instead of 15 years. An adjustment should be made to
the financial statements and, as a result, the selling price will increase. The amount of the
adjustment will depend on the age of the buses
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]

Travel the country
The cash received for the passes should be recorded as deferred revenue and then recognized
as revenue over the 3-month period of the contract because the travel will be provided over a
three-month period. [IFRS 15.31] In turn, a liability for giving skis or skates to customers should
be established for the expected cost of the skis or skates and should be expensed over the
three-month period. This will decrease the selling price.
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

selling price will decrease. TBL is receiving the benefit; therefore, CTE should not bear the cost
of moving. One possible alternative to providing for this amount is to account for these
payments on a cash basis, assuming that CTE will be able to sublet.
Significant accounting issues – CTE

There are various accounting issues that CTE must consider on the sale of TBL.
Reporting the sale of TBL

Although CTE can announce the sale and the potential profit that would result, it cannot report
the sale in its first quarter's income statement because of the timing of the sale. CTE may want
to change the timing of the sale accordingly. Otherwise, note disclosure can be provided. Under
the efficient market hypothesis, note disclosure would have the same impact on the share price.
In addition, the sale may have to be reported as a sale of discontinued operations. It depends
on whether TBL was the only company in an operating segment that was reported separately in
the segment-reporting note for CTE’s financial statements. If so, the gain in the financial
statements should be reported separately, net of applicable taxes. [IFRS 5]
Recognition of the gain on sale of TBL

Rather than recognize the gain right away, an argument could be made that the gain should not
be recognized until the full proceeds have been received because of the guarantee included in
the sale price. However, such an approach seems unduly conservative considering who the
purchasers are. Generally, the cost of future advertising, bus restoration, or environmental
liabilities should be accrued and applied against the gain on sale. [Conceptual Framework 4.50]
Finally, the consulting income should not be recognized until it is earned. [IFRS 15]
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]
Comments on current agreement

The terminology used in the draft agreement is open to interpretation. The ambiguous wording
may create arguments in the future if one party disagrees with the other's interpretation or
earnings calculation. To minimize future disputes, we recommend the following changes to the
agreement:

1. Clause 1. The assets and liabilities included in the purchase and sale agreement should be
based on the audited financial statements rather than on the draft July 31, Year 7 financial
statements. The audited financial statements will provide you with greater assurance with
respect to the accuracy of the figures and accounts reported.
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
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.
If you have any concerns or questions, please contact us.
Yours truly,
CPA
REPORT TO VISION CLOTHING INC.

ACCOUNTING AND OTHER ISSUES
Financial concerns of the immediate future
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

debt is $55 million at January 31. There is also a potential debenture payment in March Year 3
of $50 million, which VCI has shown as a long-term liability. If the debentures that are listed as
long-term liabilities are reclassified as current liabilities, the current ratio will be 1: 1. It is
questionable whether VCI will be able to repay its liabilities. VCI had a consolidated accounting
loss last year and has one in the preliminary Year 3 statements as well. VCI has also indicated
that tax losses are about to expire and future losses are expected. Thus, even though
accounting and tax losses do not equate to cash flows, it appears that cash is being drained
from VCL
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.
Financial accounting issues
VCI is a public company, and therefore many users rely on the statements. Management will
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
Underwriter fees and share-offering costs
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
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.
XYZ Ltd. gain
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.
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]

Style Co. issues
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]
Deferred tax debits
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:
Balance at December 31, Year 2 $ 114,000

Decrease in cash balance during Year 2:
Cash flows from operations $568,000
Cash outflow for investing activities (160,000)

Cash outflow for financing activities (460,000)
Net cash outflow 52,000
Cash balance at January 1, Year 2 $166,000
(b) Dividends of $96,000 were reported:

Dividends paid to Gonzalez shareholders $90,000
Dividends paid to noncontrolling interest of
Montebello Company ($20,000 x 0.30) 6,000
Total cash payments $96,000
(c) Consolidated net income was $414,000, computed as follows:

Cash flow from operations $568,000
Adjustments to reconcile consolidated net income
and cash provided by operations (154,000)
Consolidated net income $414,000
Problem 8-2
(a) Entries recorded by Ahmed Corporation:
Investment in Gander Common Shares 540,000

Investment in Gander Preferred Shares 160,000
Cash 700,000
Record purchase of Gander shares.
Cash 6,400
Dividend Income 6,400
Record dividends on preferred shares from Gander: $400,000 x 4% x 40% = $6,400

Income from Gander Co. 93,000
Record equity-method income: ($140,000 - $16,000 for preferred ) x 0.75 = $93,000
Cash 27,000
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
NCI on consolidated balance sheet

Preferred shares 400,000 x 60% ownership 240,000
Common shares (300,000 + 420,000 +140,000 – 52,000) x 25% 202,000
Total 442,000
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:
Operating income from Tremblant (60,000 x 0.29) $17,400

Operating income from Sherbrooke [(70,000 + 60,000 x 0.36) x 0.40] 36,640
Total income assigned to noncontrolling interest 54,040
(c) Operating income of $155,960 is assigned to the controlling interest:
Consolidated operating income $210,000

Less: Operating income assigned to noncontrolling interest (54,040)
Operating income assigned to controlling interest $155,960
Or, DaSilva’s operating income $80,000

Operating income from Tremblant (60,000 x 0.35) 21,000
Operating income from Sherbrooke [(70,000 + 60,000 x 0.36) x 0.60] 54,960
Operating income assigned to controlling interest 155,960

(d) Only the $40,000 of dividends paid by DaSilva Corporation to its shareholders will be
reported as dividends declared in DaSilva’s Year 5 consolidated retained earnings
statement.
Problem 8-4
Corner Brook has 40,000 shares outstanding: $400,000 / $10 par value per share
(a) Investment in Corner Brook, January 1, Year 6:

Purchase price for 32,000 shares $720,000
Corner Brook net income in Year 4 and Year 5 $200,000
Dividends paid by Corner Brook in Year 4 and Year 5 (80,000)
$ 120,000
Proportion of stock held by Johannes x 0.80 96,000
Balance prior to sale of shares $816,000
(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
(c) Consolidated net income attributable to NCI

40% x subsidiary’s net income of $100,000 = $40,000
NCI at end of Year 6

Corner Brook’s shareholder’s equity
Common shares 400,000
Retained earnings (500,000 + (100,000 – 40,000) x 3 680,000
1,080,000
NCI’s share x 40%
432,000
Problem 8-5

(a) Since the cash flow statement is based on consolidated net income, the loss on sale of
equipment shown must have resulted from a sale to a nonaffiliate. A loss on sale to an
affiliate would be eliminated from consolidated net income, and any amount of amortized
loss from a previous sale would be included in the adjustment for depreciation expense.
(b) Bonds issued at a premium reflect a market rate that is lower than the bond's stated rate,
and, as a result, investors are willing to pay more to purchase the bond. When this
excess payment is amortized, it decreases the interest expense so that it reflects the
market rate when the bonds were issued. Therefore, the bond premium amortization
represents a noncash amount that decreases interest expense and increases income.
In this case, consolidated net income is higher because of a noncash item and that item
must be deducted to calculate cash flow from operations.
(c) Non-controlling interest in subsidiary's income = 9,800
Non-controlling interest's percentage 40%
9,800 / 40% 24,500
Goodwill impairment loss 1,000
Subsidiary's net income 25,500
(d) Dividend payments to noncontrolling shareholders do represent a flow of cash outside
the economic entity, and as a result they must be presented on the consolidated cash
flow statement. However, from the consolidated entity's point of view, these dividends
are reported as a reduction of the noncontrolling interest on the consolidated balance
sheet. The only dividends that can be reported in the consolidated statement of retained
earnings are those that are paid to the parent's shareholders.
(e) Non-controlling interest's share of dividends = 6,000
Non-controlling interest's percentage 40%
Subsidiary's total dividends declared – 6,000 / 40% 15,000
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)

Depreciation 37,500)
Bond premium amortization (1,200)
Loss on sale of land 2,500)
Decrease in accounts receivable 21,000)
Increase in inventory (38,000)
Increase in accounts payable 24,200)
Increase in accrued liabilities 200
102,800)
Investing
Proceeds from sale of land 25,500)
Purchase of buildings and equipment (98,000)
(72,500)
Financing
Issue of bonds payable 60,000)
Dividends – to shareholders of Parento (17,000)
– to noncontrolling shareholders (2,000)
41,000)
Increase in cash during the year 71,300)

Cash at beginning of year 49,800)
Cash at end of year 121,100)
(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's investment account Dec. 31, Year 1:

(1,135,000 + 610,000) 1,745,000
Parent's journal entry Jan. 1, Year 2:

Cash 644,000
Investment (30%  1,745,000) 523,500
Retained earnings - gain on sale 120,500
Effect on consolidated statements:

Cash 644,000
Non-controlling interest (30%  1,745,000) 523,500
Retained earnings - gain on sale 120,500
* Calculation of dividends paid to noncontrolling shareholders:
Opening balance of noncontrolling interest 0

Carrying amount of shares purchased from parent (30%  1,745,000) 523,500
Add noncontrolling interest’s share of sub's income 39,900
563,400
Less: Ending balance of noncontrolling interest 534,500
Non-controlling interest in sub's dividends 28,900
Parent Ltd.
Consolidated Cash Flow Statement
For the Year Ended December 31, Year 2
Operating cash flow:

Profit 583,900)
Add (deduct):
Depreciation 370,000)
Goodwill impairment loss 49,500)
Increase in inventory (535,500)
Decrease in current liabilities (748,600)
Decrease in accounts receivable 89,600)
Cash used in operations (191,100)
Investing cash flow:

Proceeds from sale of investment in Sub 644,000)

Acquisition of plant and equipment (250,000)
Cash from investing 394,000)
Financing cash flow:

Issuance of long-term debt 295,400)
Dividends – to Parent Ltd. shareholders (108,500)
– to noncontrolling shareholders (28,900)*
Cash from financing 158,000)
Net increase in cash 360,900)

Cash – January 1 350,000)
Cash – December 31 710,900)
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
Allocation and changes to acquisition differential allocated to customer contracts

Total Parent NCI
Purchase on Jan 1, Year 5 435,000 326,250 108,750
Amort. for Year 5 (3 years) (145,000) (108,750) (36,250)

Dec 31, Year 5 290,000 217,500 72,500
1
NCI sold 2,000 / 2,500 x 72,500 58,0001 (58,000)
290,000 275,500 14,500
Amort. for Year 6 (2 years) (145,000) (137,750) (7,250)

Dec 31, Year 6 145,000 137,750 7,250
(a) Calculation of consolidated profit for Year 6

Pic profit 153,000
Less: Dividends from Sic (95% x 90,000) (85,500)
67,500
Sic profit 148,000
Less: amortization of customer contracts 145,000 3,000
Consolidated profit 70,500
Attributable to:
Pic’s shareholders 70,350
NCI (5% x 3,000) 150
70,500
(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)

Pic’s ownership 75% 95%
(91,500) (82,650) (174,150)
Excess of acquisition cost over carrying amount for 2 purchase
nd
(30,200)
Consolidated retained earnings 421,650
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
Investment in Jensen (70% x 210,000) 147,000

Equity method income 147,000
Record Hein’s share of Jensen’s net income
Equity method income (180,000 / 9 years x 70%) 14,000

Investment in Jensen 14,000
Record Hein’s share of amortization of trademarks
Cash (70% x 100,000) 70,000

Investment in Jensen 70,000
Record dividend received from Jensen
(c)
Jensen’s shareholders’ equity (800,000 + 1,110,000) $1,910,000
Undepleted acquisition differential (420,000 – 180,000 / 9) 400,000
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
Investment in Jensen (40,000 x 26 – [(c) 1,617,000 – (d) 693,000])116,000

Remeasurement gain on investment in Jensen 116,000
Record remeasurement gain on 40,000 shares retained in Jensen
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
Before share issue, Craft's holdings (80%  49,000) = 39,200 shares

After share issue, Delta's shares outstanding (49,000 + 12,250) = 61,250 shares
Craft's ownership before 80%

Craft's ownership after (39,200  61,250) 64%
Change 16%

Reduction in ownership 16%  80 = 20%
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
Non-controlling interest – Dec. 31, Year 12

Previous ordinary shares 250,000
New shares issued 183,750
Retained earnings 350,000
783,750
Add: Unamortized patent 12,500
796,250
36%
286,650
(a)
Craft Ltd.
Consolidated Statement of Financial Position
as at December 31, Year 12
Buildings and equipment (600,000 + 400,000) 1,000,000)

Patent 12,500)
Inventory (180,000 + 200,000) 380,000)
Accounts receivable (90,000 + 120,000) 210,000)
Cash (50,000 + 65,000 + 183,750) 298,750)
1,901,250)
Ordinary shares 480,000)

Retained earnings 610,000)
Contributed surplus 19,600
Non-controlling interest 286,650)
Mortgage payable 250,000)
Accrued liabilities 85,000)
Accounts payable (70,000 + 100,000) 170,000)
1,901,250)

(b)
Since the acquisition differential at the date of acquisition did not contain any goodwill, there
would be no difference between the identifiable net assets and fair value enterprise methods.
Therefore, the return on equity under the identifiable net assets would be the same as the fair
value enterprise method.
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
Patents 25% 21,500

86,000
Implied value of 100% of acquisition differential

Land (38,700 / 90%) 43,000
Equipment (25,800 / 90%) 28,667
Patents (21,500 / 90%) 23,889
Total 95,556
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

Contribution surplus 800
(ii) Land Equipment Patents Total

Balance Jan. 1, Year 6 43,000 28,667 23,889 95,556
Changes in Year 6 – (5,733) (2,389) (8,122)
Balance Dec. 31, Year 6 43,000 22,934 21,500 87,434
(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
Change in noncontrolling interest

After sale (100% – 72%) 28%
Before sale (100% – 90%) 10%
Change 18%
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

Sussex issues 1,800 additional shares: 7,200 + 1,800 = 9,000 shares outstanding
6,480
Wellington's new ownership percentage = 72%
9,000
Ownership before share issue 90%

Ownership after share issue 72%
Change 18%
Percentage of investment reduction: 18% / 90% = 20%
Wellington sells 648 shares = 10% reduction
(6,480 – 648)
Ownership after sale = 64.8%
9,000
(a) Investment account Jan. 1, Year 5 for 90% interest 244,800
Total Parent NCI

Shareholders' equity – Sussex 152,000
Undepleted acquisition differential – land 120,000 108,000 12,000
Less: 20% sale to NCI (share issue) (21,600) 21,600
120,000 86,400 33,600
Less: 40% of land sold to outsiders (48,000) (34,560) (13,440)
72,000 51,840 20,160
Less: 10% sale to NCI (5,184) 5,184
Undepleted acquisition differential – land
Balance Dec. 31, Year 5 72,000 46,656 25,344
(b) Investment account Jan. 1, Year 5 244,800)

Net income to April 1 (3/12  48,000  90%) 10,800)
255,600)
Sussex share issue – April 1
Carrying amount deemed sold (20%  255,600) 51,120)

New shares (1,800  35) 63,000
Parent’s share 72% 45,360)
Loss due to share issue (5,760)
June 30 dividend (24,000  72%) (17,280)
Sept. 15: 40% of land sold (34,560)
Net income April to Dec. (9/12  48,000  72%) 25,920)
223,920)
Dec. 31 sale of 10% of shares (22,392)
Balance Dec. 31, Year 5 201,528)
(c) Calculation of noncontrolling interest Dec. 31, Year 5

Common shares 28,000)
Retained earnings Jan. 1 124,000)
Net income 48,000)
Dividends (24,000)
Issue of new shares (1,800  $35) 63,000) 211,000
239,000
Undepleted acquisition differential – land 72,000
311,000
Non-controlling interest share (100% – 64.8%) 35.2%
Non-controlling interest 109,472
Proof of Investment Account Components

Carrying amount of sub’s net assets (64.8% x 239,000) 154,872
Undepleted acquisition differential – land 72,000
Parent’s share 64.8% 46,656
Total investment account 201,528
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

Allocate Trent
60% to McGill 6,960) (6,960)
Allocate Carleton
70% to Queens 9,772) ) (9,772)
McGill’s profit – equity method 33,060)
Allocate McGill
10% to Queens 3,306) (3,306)
80% to York 26,448) ) (26,448)
Queen’s profit – equity method 35,078)
Allocate Queens
90% to York 31,570) (31,570) ) ) )
Unallocated 3,508) 3,306) 4,188) 4,640) 15,642 *
Consolidated profit – attributable to York’s shareholders (part a) 106,018
York’s profit – equity method 106,018
* Consolidated profit – attributable to noncontrolling interest (part b)
(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
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

Patent amortization – Year 5 (five-year life) (8,720)
Unamortized patent, December 31, Year 5 34,880
NCI, date of acquisition
- interest in ordinary shares (10% x 80,000) 8,000
- interest in preferred stock (100% x 53,600) 53,600
Total 61,600 (a)
Calculation of consolidated profit

PET profit 30,000
Less: Dividends from SET3 (1,800)
28,200
SET profit 20,000
Less: Patent amortization (8,720) 11,280
Attributable to:
PET’s shareholders 34,752
NCI (4,0004 + 7285]) 4,728
39,480
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

(b)
PET’s retained earnings 55,000
Total Preferred Ordinary
SET’s retained earnings,
End of Year 5 32,000 32,000
At acquisition 30,000 12,000 18,000
Change since acquisition 2,000 (12,000) 14,000
Amortization of patents (8,720) 0 (8,720)
(6,720) (12,000) 5,280
PET’s share 90% 4,752
Consolidated retained earnings, December 31, Year 5 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
Calculation of noncontrolling interest – statement of financial position (Method 1)

Preferred Ordinary Total
Preferred stock 41,600 (1,600) 40,000
Retained earnings . 32,000 32,000
41,600 50,400
92,000
Undepleted acquisition differential . 34,880
41,600 85,280
100% 10% )
41,600 8,528) 50,128
Calculation of noncontrolling interest – statement of financial position (Method 2)

Non-controlling interests at date of acquisition (a) 61,600
NCI’s share of Set’s adjusted increase in retained earnings
- on ordinary shares (10% x 5,280) 528
- on preferred stock (100% x –12,000) (12,000) (11,472)
Non-controlling interest, Dec. 31, Year 5 50,128
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
Cost of 60% of Fraser 900,000

Implied value of 100% of Fraser 1,500,000
Carrying amount of Fraser
Ordinary shares 300,000
Profit to April 1 (¼  173,000) 43,250
731,250
Allocated FV – CA –0–
Balance – broadcast rights 768,750
Closing inventory profits Before Tax After

tax 40% tax
Sophie selling 56,400 22,560 33,840
Princeton selling 18,600 7,440 11,160

(a)
Princeton Corp.
Calculation of Consolidated Profit
Income of Princeton 120,000

Less: Dividends from Sophie (70%  30,000) 21,000
Closing inventory profit 11,160 32,160
87,840
Income of Sophie (¾  284,000) 213,000
Less: Broadcast rights amortization – see part (c) 23,100
Dividend from Fraser (60%  70,000) 42,000
Closing inventory profit 33,840 98,940
114,060
Income of Fraser (¾  173,000) 129,750

Less: Broadcast rights amortization – see part (c) 57,656
72,094
Attributable to:
Princeton’s shareholders (87,840 + 70% x [114,060 + 60% x 72,094]) 197,961
Non-controlling interests (30%x[114,060 + 60% x 72,094] + 40% x 72,094) 76,033
273,994
(b) Calculation of noncontrolling interest – Dec. 31, Year 7
Fraser shareholders' equity – Dec. 31 791,000

Unamortized broadcast rights – Fraser (see part c) 711,094
1,502,094
Non-controlling interest’s share 40% 600,838
Sophie shareholders' equity – Dec. 31 1,225,000

Retained earnings Fraser – Dec. 31 491,000
Acquisition 431,250

Increase 59,750
Less: Broadcast rights amortization 57,656
2,094
60%
1,256
1,226,256
Unamortized broadcast rights – Sophie (see part c) 284,900
1,511,156
Less: Closing inventory profit 33,840
1,477,316
Non-controlling interest’s share 30% 443,195
Non-controlling interest 1,044,033
(c) Calculation of consolidated broadcast rights – Dec. 31, Year 7
Broadcast rights – Sophie 308,000

Less: amortization – Year 7 (308,000  10 × ¾) 23,100 284,900
Broadcast rights – Fraser 768,750

Less: amortization – Year 7 (768,750  10 × ¾) 57,656 711,094
995,994
(d) Calculation of net income under equity method for Year 7
If Princeton’s uses the equity method to report its investments in subsidiaries, its profit on its
separate entity income statement would be $197,961, which is equal to consolidated profit
attributable to the shareholders of Princeton as calculated in (a) above.
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

Carrying amount of Jovano’s net assets
Ordinary shares 200,000 200,000 200,000
Retained earnings 300,000 330,000 361,000
500,000 530,000 561,000
25% 20% 100%
125,000 106,000 561,000
Acquisition differential = customer lists (3-year life) 17,400 15,600 69,000
Amortization – Year 4 (5,800)
Amortization – Year 5 (5,800) (5,200)
Amortization – Year 6 n/a n/a (23,000)
Unamortized, end of Year 6 46,000
(a) Cost method Equity method

Year 4
Investment in Jovano 142,400 142,400
Cash 142,400 142,400
Investment in Jovano (50,000 x 25%) 12,500


Investment in Jovano 5,800
Cash (20,000 x 25%) 5,000 5,000

Dividend income 5,000
Year 5
Cash 121,600 121,600


Equity method income (5,800 + 5,200) 11,000
Cash (21,000 x 45%) 9,450 9,450

Year 6
Cash 63,000 63,000
Investment in Jovano ((per A above) 283,500 – (per B below) 268,650) 14,850

Remeasurement gain 14,850

Equity method income (23,000 x 55%) 12,650

Cash (22,000 x 55%) 12,100 12,100

(b) Cost method Equity method

Investment in Jovano (based on entries above)
- end of Year 4 142,400 144,100
- end of Year 5 264,000 268,650 (B)
- end of Year 6 327,000 352,550
(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%
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.

On the date of the business combination, C Company will be measured at 100% of its fair value.
Therefore, A Company revalues its existing investment in C Company to fair value of $99,320.
A Company will record a gain of $29,750 ($99,300 – $69,570). Accordingly, the $29,750
negative acquisition differential related to equipment will disappear and there will be no
acquisition differential related to 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
Unrealized profits Before Tax After

tax 40% tax
Closing inventory – A selling 7,600 3,040 4,560
– C selling 6,900 2,760 4,140
14,500 5,800 8,700
A Company
Calculation of Consolidated Net Income
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)
(a) Non-controlling interest’s share of consolidated net income 22,358*
(b)
A Company
Consolidated Retained Earnings Statement
Balance Jan. 1 1,601,860

Net income 218,292
1,820,152
Dividends 57,000
Balance Dec. 31 1,763,152
Calculation of noncontrolling interest – Dec. 31, Year 7
Shareholders' equity C 281,300

Less: closing inventory profit 4,140
277,160
20% 55,432
Shareholders' equity B
Net income (68,000 + 11,544) 79,544
1,388,464
1,491,664
25%
372,916
Preferred shares 50,000 422,916
478,348
c)
A Company
Consolidated Balance Sheet
Cash (119,100 + 50,600 + 21,300) 191,000)

Accounts receivable (226,000 + 126,000 + 57,000 – 37,000) 372,000)
Inventory (303,000 + 232,000 + 71,000 – 14,500) 591,500)
Property, plant and equipment (3,000K+2,300K+240K+40K-450K-52.7K) 5,077,300)
Accumulated depreciation (990K+580K+101K+4K-450K-52.7K) (1,172,300)
Patents 67,200)
Deferred income tax 5,800)
5,132,500)
Accounts payable (120,000 + 101,000 + 7,000 – 37,000) 191,000)

Bonds payable (800,000 + 700,000) 1,500,000)
Common shares 1,200,000)
Retained earnings 1,763,152)
Non-controlling interest 478,348)
5,132,500)
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
Land 28,000
Patents 28,000
Amortization Year 5 (4,000)
Value Dec. 31, Year 5 24,000
Intercompany profits Step selling Before Tax After

tax 40% tax
Opening inventory (10,000 x 20%) 2,000 800 1,200

Closing inventory (5,000 x 20%) 1,000 400 600
Sale of depreciable assets (Phase selling) 60,000 24,000 36,000

Realized in Year 5 (1/6 x ½) 5,000 2,000 3,000
Unrealized end of Year 5 55,000 22,000 33,000
Calculation of gain on revaluation of investment account when Phase obtains control

The investment account would show the following activity under the equity method:
Phase’s share of change in Step’s retained earnings during Years 2 & 3
(69,000 – 28,000) x 20% 8,200
Amortization of patent during Years 2 and 3 (255 + 255) (510)
Phase’s share of change in Step’s retained earnings during Year 4
(104,000 – 69,000) x 50% 17,500
Amortization of patent during Year 4(255 + 1,100) (1,355)
Phase’s share of unrealized profit in inventory at end of Year 4
(50% x 1,200) (600)
Investment account balance, January 1, Year 5 before revaluation 172,235
Value of 10,000 shares (108,000 / 6,000 x 10,000) 180,000
Gain on revaluation to fair value on January 1, Year 5 7,765
Note: When the investment account is adjusted to fair value of $180,000, the unrealized profit in
ending inventory is brought into income. It is akin to the profit being realized.
(a) Patents 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
(d) Non-controlling interest on statement of financial position

Step’s ordinary shares 200,000
Step’s retained earnings (104,000 + 400,000 – 260,000 – 55,000 – 40,000)
149,000
Profit in ending inventory (600)
400,400
NCI’s ownership 20%
NCI on statement of financial position 80,080
(e) Retained Earnings, beginning

Phase’s retained earnings, beginning 360,000
Phase’s share of change in Step’s retained earnings during Years 2 and 3
(69,000 – 28,000) x 20% 8,200
Amortization of patent during Years 2 and 3 (255 + 255) (510)
Phase’s share of change in Step’s retained earnings during Year 4
(104,000 – 69,000) x 50% 17,500
Amortization of patent during Year 4(255 + 1,100) (1,355)
Phase’s share of profit in beginning inventory (50% x 1,200) (600)
Consolidated retained earnings, beginning 383,235
(f) Cost of goods sold (610,000 + 260,000 – 80,000 – 10,000 + 1,000)
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.
(g) Phase profit (1,002,000 – 610,000 – 190,000) 202,000

Less: dividends (80% x 40,000) (32,000)
unrealized gain on sale (33,000)
Step profit (400,000 – 260,000 – 55,000) 85,000
Profit in ending inventory (600)
Changes to acquisition differential (4,000)
80,400
Gain on revaluation 7,765
Attributable to:
Shareholders of Phase 209,085
NCI (20% x 80,400) 16,080
225,165
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
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
* Dividends in arrears: 500 shares  $8  2 years = $8,000
Changes to Acquisition Differential Schedule

Balance Changes Balance
Jan. 1, YR 5 YR 5 to 11 YR 12 Dec. 31, YR 12
Accounts receivable $(2,000) $2,000 – –
Inventory 7,000) (7,000)) – –
Plant 50,000) (50,000)) – –
Long-term liabilities (20,000)) 17,500) $2,500 –
Goodwill 222,000) (134,570)) (20,560) $66,870
$257,000) $(172,070)) $(18,060) $66,870
Intercompany receivables and payables

December management fee $2,000
Intercompany profits Before tax Tax 40% After tax

Opening inventory – Star selling $31,000 $12,400 $18,600
– Par selling 30,000 12,000 18,000
$61,000 $24,400 $36,600
Closing inventory – Star selling $52,000 $20,800 $31,200

– Par selling 54,000 21,600 32,400
$106,000 $42,400 $63,600
Equipment – Star selling

July 1, Year 7 $20,000
Depreciation to Dec. 31, Year 11
($4,000  4½ years) 18,000
Balance December 31, Year 11 2,000 800 1,200
Depreciation Year 12 2,000 800 1,200
Balance December 31, Year 12 $–0– $–0- $–0–
Star Year 12 dividends $37,000

Preferred 500  $8 4,000
Common 33,000
70%
Intercompany dividends $23,100
Deferred income tax, December 31, Year 12

Closing inventory profit $42,400
Calculation of Year 12 consolidated net income

Par net income (loss) $31,000)

Less: Dividends from Star $23,100)
Closing inventory profit 32,400) 55,500)
(24,500)
Add: Opening inventory profit 18,000
(6,500)
Star net income (loss) (28,000)
Less: Changes to acquisition differential (18,060))
Preferred claim on net income (4,000))
Common net income (loss) (50,060)
Less: closing inventory profit (31,200))
(81,260)
Add: Opening inventory profit 18,600)
Equipment profit 1,200)
(61,460)
Preferred claim on net income 4,000)
Consolidated net income $(63,960)
Attributable to:
Par’s shareholders $(49,522)
Non-controlling interests ([100% x 4,000] + [30% x -61,460]) (14,438)
$(63,960)
Calculation of consolidated retained earnings – Jan. 1, Year 12
Par opening retained earnings $297,260

Less: Opening inventory profit (18,000)
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
Consolidated opening retained earnings $510,561

(a)
Par Corp.
Year Ended December 31, Year 12
Balance January 1 $510,561

Net loss (49,522)
461,039
Dividends 26,000
Balance December 31 $435,039
Calculation of noncontrolling interest – December 31, Year 12

Preferred Common Total
Preferred stock $67,000
Common shares $180,000)
Retained earnings 352,300)
532,300)
Closing inventory profit (31,200)
67,000 501,100
Undepleted acquisition differential . 66,870
67,000 567,970
100% 30%
$67,000 $170,391) $237,391
(b)
Par Corp.
Cash (57,000 + 2,700) $59,700

Accounts receivable (117,000 + 102,000 - 2,000) 217,000
Inventory (84,360 + 65,000 - 106,000) 43,360
Land (47,000 + 87,000) 134,000
Plant and equipment (net) (323,000 + 553,000) 876,000
Deferred income tax 42,400
Goodwill 66,870
$1,439,330
Accounts payable (98,800 + 197,000 - 2,000) 293,800

Accrued liabilities (9,700 + 13,400) 23,100
Non-controlling interest 237,391
$1,439,330
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%
Reduction in investment account

20%  $365,179 $73,036)
New assets of Star 100,000
56% 56,000)
Loss $(17,036)

This loss will be debited to contributed surplus, if any exists, or to retained earnings in
shareholders’ equity. If Par were using the equity method, the following entry would be made:
Retained earnings $17,036

Investment in Star $17,036
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

Company’s operations during the year ended March 31, 2020. The production and
sale of cannabis have been recognized as essential services in Canada and across
Europe. Due to the rapid developments and uncertainty surrounding COVID-19, it is
not possible to predict the impact that COVID-19 will have on the Company’s business,
financial position and operating results in the future. Additionally, it is possible that
estimates in the Company’s consolidated financial statements will change in the near
term as a result of COVID-19. The Company is closely monitoring the impact of the
pandemic on all aspects of its business.
(h) As per the consolidated balance sheets, for 2020: Cash and cash equivalents 19.0%
(1,303,176 / 6,857,745) Goodwill 28.5% (1,954,471 / 6,857,745) for 2019: Cash and
cash equivalents 29.0% (2,480,830 / 8,565,115) Goodwill 17.4% (1,489,859 /
8,565,115)
(i) As IsNo Deficit
Debt 1,679,875 1,679,875
Equity 5,108,120 5,108,120 + 4,323,236
= 0.33 = 0.18
(j) As per Note 23 on page 41, Canopy Rivers represents 95.2% (211,086 / 221,758) of the
noncontrolling interest at the end of 2020.
(k) As per Note 23 on page 41, the portion of Canopy Rivers’ interest in the consolidated
entity at the end of 2020 that came from acquisition and ownership changes was 95.1%
([55,777 + 143,487 + 1,530] / 211,086) and -16.8% ([21,488 + 20,325 – 77,313] /
211,086) came from cumulative comprehensive income (loss).
(l) As per Note 20 on page 34, Canopy’s percentage ownership interest in Canopy Rivers
was 27.3% and Canopy’s percentage of voting rights in Canopy Rivers was 84.4%.
Canopy owned some Multiple Voting Shares which were entitled to 20 votes for each
share and some Subordinated Voting Shares which were entitled to 1 vote for each
share. The combination of the two shareholdings produced the results above.
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

acquires an additional 45%, it would gain control. A business combination has occurred. The
subsidiary is measured at fair value and a gain or loss is recognized when adjusting the
previous investments to fair value.
Panet’s 80% interest will be valued at $6,400,000 calculated as follows:
Cost of 225,000 common shares (45%) 3,600,000
Implied value of 80% (3,600,000 x 80 / 45) 6,400,000
The acquisition differential is then calculated as follows:

Panet NCI
80% 20%
Implied value of 80% (3,600,000 x 80 / 45) 6,400,000
Fair value of NCI’s interest in Saffer (15 x 100,000) 1,500,000
Carrying amount of Saffer’s shareholders’ equity
Common shares 3,000,000
Retained earnings 3,200,000
6,200,000 4,960,000 1,240,000
Acquisition differential Jan. 1, Year 11 1,700,000 1,440,000 260,000
Allocated:
Accounts receivable – 63,600 -50,880 -12,720
Plant and equipment 900,000 720,000 180,000
Long-term liabilities - 200,000 -160,000 -40,000
Balance – goodwill 1,063,600 930,880 132,720

Jan. 1, YR 11 to Dec. 31, YR 11 YR 12 Dec. 31, YR 12
Accounts receivable – 63,600 63,600
Plant and equipment 900,000 - 45,000 - 45,000 810,000
Long-term liabilities - 200,000 20,000 20,000 - 160,000
636,400 38,600 - 25,000 650,000
Goodwill – Panet’s purchase 930,880 - 82,400 - 55,200 793,280
– NCI’s purchase 132,720 - 20,600 - 13,800 98,320
1,700,000 - 64,400 - 94,000 1,541,600

Panet’s share
(80% x subtotal + Goodwill) 1,440,000 - 51,520 - 75,200 1,313,280 (d)
NCI’s share
(20% x subtotal + Goodwill) 260,000 - 12,880 - 18,800 228,320 (e)
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.
Intercompany sales – Saffer 3,200,000

– Panet 2,800,000
6,000,000
Intercompany receivables and payables

30%  560,000 = 168,000
Unrealized profits Before tax Tax 40% After tax

Opening inventory
Saffer selling 107,000 42,800 64,200
Panet selling 157,000 62,800 94,200
264,000 105,600 158,400
Closing inventory
Saffer selling (400,000  35%) 140,000 56,000 84,000
Panet selling (250,000  45%) 112,500 45,000 67,500
252,500 101,000 151,500
Equipment – Saffer selling
July 1, Year 12 210,000 84,000 126,000
Depreciation Year 12
(210,000 ÷ 10½  ½) 10,000 4,000 6,000
Balance Dec. 31, Year 12 200,000 80,000 120,000
Calculation of consolidated net income – Year 12
Panet’s net income under the equity method 4,012,660

Less: Investment income from Saffer 1,627,660

Closing inventory profit 67,500 1,695,160
2,317,500
Add: opening inventory profit 94,200
2,411,700
Saffer 2,285,000
Less: Changes to acquisition differential 94,000
Closing inventory profit 84,000
Equipment profit 120,000 298,000
1,987,000
2,051,200
Consolidated net income 4,462,900
Attributable to:
Panet’s shareholders (2,411,700 + 80% x (2,051,200 – 50,000) 4,012,660
NCI (20% x 2,001,200 + 100% x 50,000) 450,240
4,462,900
(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
Attributable to:
Panet’s shareholders 4,012,660
NCI (20% x 2,001,200 + 100% x 50,000) 450,240
4,462,900

* Gain on sale of equipment was not shown as a separate income statement item, therefore
must have been netted against other expenses. Upon consolidation it must be added back, as
it is unrealized.
Calculation of noncontrolling interest – Dec. 31, Year 12
Preferred Common
Share capital 500,000 3,000,000
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
Cash (522,000 + 178,000) 700,000

Accounts receivable (2,455,000 + 333,000 – 168,000) 2,620,000
Inventory (500,000 + 400,000 – 252,500) 647,500
Plant and equipment (10,720,000 + 9,110,000 + 810,000 – 200,000) 20,440,000
Land (5,390,000 + 1,000,000) 6,390,000
Goodwill 891,600
Deferred income taxes (101,000 + 80,000) 181,000
31,870,100
Current liabilities (3,055,000 + 555,000 – 168,000) 3,442,000

Long-term liabilities (4,055,000 + 2,055,000 + 160,000) 6,270,000
31,870,100
(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
NCI on income statement under fair value enterprise method 450,240

Add: NCI’s share of goodwill impairment (20%) 13,800
NCI on income statement under identifiable net assets method 464,040
(c) The debt-to-equity ratio would increase because debt would remain the same while equity
would decrease under the identifiable net assets method.
Continuity Schedule for Panet’s Investment in Saffer:

Cost of 40,000 common shares (8%) 500,000
Unrealized gain in Years 8 and 9 60,000
Fair value of 8% interest on January 1, Year 10 560,000
Fair value of 175,000 common shares (35%) on January 1, Year 10 2,450,000
Carrying amount of Saffer’s shareholders’ equity
5,700,000
Panet's %: 175,000 / 500,000 = 35% 1,995,000
Acquisition differential Jan. 1, Year 10 455,000
Allocated:
Inventory 120,000  35% 42,000
Land 1,000,000  35% 350,000 392,000
Balance – goodwill 63,000

Jan. 1, YR 10 YR 10 Dec. 31, YR 10
Inventory 42,000 - 42,000
Land 350,000 – 350,000
Goodwill 63,000 63,000
455,000 - 42,000 413,000
Investment in Saffer, Jan 1, Year 10 2,450,000

Share of change in retained earnings during Year 10
(3,200,000 – 2,700,000) x 35% 175,000
Changes to acquisition differential for Year 10 (42,000)
Carrying amount of investment in Saffer, Dec 31, Year 10 2,583,000
Gain in value of investment (2,583,000 – [3,600K/225K x 175K]) 217,000
Fair value of investment using value paid for Jan 1, Year 11 purchase 3,600,000
Retained earnings Saffer
Dec. 31, Year 12 4,911,000
Jan. 1, Year 11 3,200,000
Increase 1,711,000
Less: Changes to acquisition differential for Years 11 and 12
(64,400 + 94,000) 158,400
Closing inventory profit 84,000
Equipment profit 120,000 362,400
1,348,600
80% 1,078,880
Less: Closing inventory profit (67,500)
Balance on Dec. 31, Year 12 $7,411,380

(d) See journal entries below.
CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER
PANET COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, YEAR 12
Eliminations
Panet Saffer Dr. Cr. Consolidated
Income Statements - Year 12
$ $ $
Sales
16,100,000 10,100,000 5 6,000,000 20,200,000
Investment income from
1,627,660
Saffer 1 1,627,660
17,727,660 10,100,000 20,200,000
Cost of goods sold 9,660,000 6,060,000 7 252,500 5 6,000,000 9,708,500
6 264,000
Selling and administrative 1
2,522,000 552,000 3,109,000
expense 4 45,000 1 10,000
Income tax 1,054,000 752,000 6 105,600 7 101,000 1,730,600
8 80,000
Other expenses 479,000 451,000 4 69,000 4 20,000 1,189,000
11 210,000
13,715,000 7,815,000 15,737,100
$ $ $
Net Income
4,012,660 2,285,000 4,462,900
Attributable to:
Non-controlling interest 8 450,240 $ 450,240
Shareholders of Panet 4,012,660
Total 8,760,000 6,475,000
Retained Earnings Statements - Year 12
$ $ $
Balance, January 1 7,375,720 2,876,000 3 2,876,000 7,375,720
Abov
Profit 4,012,660 2,285,000 e 8,760,000 6,475,000 4,012,660
11,388,380 5,161,000 11,388,380
Dividends 500,000 250,000 1 160,000 500,000
9 90,000

$ $ $
Balance, December 31 10,888,380 4,911,000 10,888,380
Total 11,636,000 6,725,000

Balance Sheet, December 31, Year 12
Assets:
$ 522,000 $ $ 700,000
Cash
178,000
1 168,000 2,620,000
Accounts receivable 2,455,000 333,000
0
Inventories 500,000 400,000 7 252,500 647,500
Plant and equipment (net) 10,720,000 9,110,000 3 855,000 4 45,000 20,440,000
1 200,000

1
Investment in Saffer 7,411,380 2 1,909,480 1 1,467,660
6 158,400 3 8,011,600
Land 5,390,000 1,000,000 6,390,000
Goodwill 3 960,600 4 69,000 891,600
Deferred tax asset 7 101,000 181,000
11 80,000
$ $ $
Total assets
26,998,380 11,021,000 31,870,100

Liabilities:
$ $ 10 168,000 $
Current liabilities
3,055,000 555,000 3,442,000
Long-term liabilities 4,055,000 2,055,000 4 20,000 3 180,000 6,270,000
7,110,000 2,610,000 9,712,000
Shareholders’ equity:
10% noncumulative
500,000
preferred shares 3 500,000
Common shares 9,000,000 3,000,000 3 3,000,000 9,000,000
Abov 11,636,000 6,725,000 10,888,380
Retained earnings 10,888,380 4,911,000
e
Non-controlling interest 9 90,000 2 1,909,480 2,269,720
8 450,240
19,888,380 8,411,000 22,158,100

Total liabilities and $ $ $
shareholders’ equity 26,998,380 11,021,000 31,870,100
$19,478,48

0 $ 19,478,480 0


Journal Entries
1 Investment income $ 1,627,660
Investment in Saffer $1,467,660
Dividends paid (80% x (250,000 - 50,000) 160,000
To adjust investment account under equity method to balance at beginning of year
2 Investment in Saffer 1,909,480

Non-controlling interest (note b) 1,909,480
To establish noncontrolling interest at beginning of year
3 Common shares 3,000,000

Preferred shares 500,000
Plant and equipment 855,000
Long-term liabilities 180,000
Goodwill 960,600
Investment in Saffer 8,011,600
To eliminate subsidiary's shareholders' equity and
establish acquisition differential at beginning of Year 12
4 Other expense 20,000

Long-term liabilities 20,000
Selling and administrative
expense 45,000
Other expense 69,000
Goodwill 69,000
To record changes to acquisition differential for Year 12
5 Sales 6,000,000
Cost of goods sold 6,000,000
To eliminate intercompany sales
6 Investment in Saffer 158,400

Cost of goods sold 264,000
Income tax expense 105,600
To eliminate unrealized profits in beginning inventory
7 Cost of goods sold 252,500

Inventory 252,500
Deferred income tax asset 101,000
Income tax expenses 101,000
To eliminate unrealized profits in ending inventory
8 Non-controlling interest-P&L 450,240

Non-controlling interest-SFP 450,240
To record NCI's share of income for the year
9 Non-controlling interest-SFP 90,000

Dividends paid (50k + 20% x (250k-50k) 90,000
To record NCI's share of dividends paid

1
0 Current liabilities 168,000
Accounts receivable 168,000
Eliminate intercompany receivables and payables
1
1 Other expenses (gain on sale) 210,000
Selling and administrative
expense 10,000
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

12/31/YR 6 YR 7 YR 8 YR 8 12/31/YR 8
Patent 300,000 (60,000) (58,000)* (14,000)* 168,000
Inventory 105,000 (105,000)
Brand name (40 years) 2,375,000 (59,375) (59,375) 2,256,250
Sales supply contract (500,000) 250,000 250,000 0
Goodwill 595,000 595,000
2,875,000 (25,625) (132,625) 14,000 3,019,250
* Patents (12/31/YR 6) 300,000

Amort. Year 7 60,000
Amort. 1 half Year 8
st
30,000 90,000
Balance June 30, Year 8 210,000
Portion sold (20,000/300,000 x 210,000) 14,000
196,000
Amort. 2 half Year 8
nd
30,000 – (20,000/300,000 x 30,000) 28,000

168,000
Intercompany profits PPC selling Before Tax After

tax 40% tax
Opening inventory (15,000 x 60%) 9,000 3,600 5,400
Closing inventory (22K/60K x [60,000 – 42,000]) 6,600 2,640 3,960
The intercompany loss on the transfer of computer hardware can stand because it is indicative
of a permanent decline in value.
Intercompany sales 60,000

Annual dividends to preferred shareholders (12 x 12,500 shares) 150,000
Calculation of consolidated net income, Year 8

Ultra net income 220,000
PPC net income 1,135,000
1,140,400
Less: closing inventory profit 3,960

1,136,440
Add: Acquisition differential amortization 132,625
Less: Acquisition differential, sold patents (14,000) 1,255,065
Attributable to:
Shareholders of Ultra 993,545
NCI (100% x 150,000 + 30% x [1,255,065 – 150,000]) 481,520
1,475,065
(i) Consolidated Income Statement

Sales (6,200,000 + 4,530,000 – 60,000 + 250,000) 10,920,000

Other income (120,000 + 7,000) 127,000
Gain on patent sale (50,000 – 14,000) 36,000
11,083,000
Cost of purchases (4,035,000 + 2,590,000 – 60,000) 6,565,000
Change in inventory (15,000 + 10,000 – 9,000 + 6,600) 22,600
Loss on write-down of computer equipment 1,080,000
Other expenses (850,000 + 675,000 + 3,600 – 2,640) 1,525,960
Depreciation and amortization (75,000 + 142,000 + 117,375) 334,375
Interest (45,000 + 35,000) 80,000
9,607,935
Net income 1,475,065
Attributable to:
NCI 481,520
1,475,065
(ii) Calculation of consolidated retained earnings – Jan. 1, Year 8

Ultra retained earnings 1,300,000
PPC retained earnings 117,000
Acquisition * 25,000
Increase since acquisition 92,000
Less: Opening inventory profit 5,400

86,600
Add: Changes to acquisition differential 25,625
112,225
70% 78,558
1,378,558
* Net assets 1,525,000

Preferred shares 1,400,000
Carrying amount of common shares 125,000

Balance January 1 1,378,558

Net income 993,545
Balance December 31 2,372,103
(iii) (1) Software patents and copyrights (350,000 + 450,000 + 168,000) 968,000
(2) Inventory – software (350,000 + 380,000 – 6,600) 723,400
(3) Non-controlling interest December 31, Year 8

Total Preferred Common
R/E Jan. 1 117,000 — 117,000
Net income 1,135,000 150,000 985,000
1,252,000 150,000 1,102,000
Dividends 150,000 150,000 —
R/E Dec. 31 1,102,000 — 1,102,000
Preferred shares 1,400,000 1,400,000 —
Common shares 100,000 — 100,000
Bal. Dec. 31 2,602,000 1,400,000 1,202,000

Shareholders’ equity
Preferred 1,400,000
Common 1,202,000
Add: undepleted acquisition differential 3,019,250
Less: closing inventory profit (3,960)
4,217,290
30% 1,265,187
(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.

(c) See journal entries below.
CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER
ULTRA SOFTWARE LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, YEAR 8
Eliminations
Ultra PPC Dr. Cr. Consolidated
Income Statements - Year 8
Sales $ 6,200,000 $4,530,000 5 $ 60,000 4 $ 250,000 $10,920,000
Other income 120,000 7,000 127,000
Gain on patent sale 50,000 5 14,000 36,000
Total income 6,320,000 4,587,000 11,083,000

Cost of purchases 4,035,000 2,590,000 5 60,000 6,565,000
Change in inventory 15,000 10,000 7 6,600 6 9,000 22,600
Loss on write-down of computer
equipment 1,080,000 0 0 1,080,000
Other expenses 850,000 675,000 6 3,600 7 2,640 1,525,960
Depreciation and amortization 75,000 142,000 5 117,375 334,375

Interest 45,000 35,000 80,000
Total expenses 6,100,000 3,452,000 9,607,935
Profit $ 220,000 $1,135,000 $ 1,475,065
Attributable to:
Non-controlling interest 8 481,520 $ 481,520
Total $683,095 $ 321,640
Retained Earnings Statements - Year 8
Balance, January 1 $ 1,300,000 $ 117,000 3 $117,000 1 $ 78,558 $ 1,378,558
Profit 220,000 1,135,000 683,095 321,640 993,545
1,520,000 1,252,000 2,372,103
Dividends 0 150,000 9 150,000 0
Balance, December 31 $ 1,520,000 $1,102,000 $ 2,372,103
Total $800,095 $ 550,198


Balance Sheet, December 31, Year 8
Cash $ 320,000 $ 150,000 $ - $ - $ 470,000
Accounts receivable 300,000 280,000 580,000
Inventory 350,000 380,000 7 6,600 723,400
Deferred income tax asset 7 2640 2,640
Furniture and equipment (net) 540,000 675,000 1,215,000
Building (net) 800,000 925,000 1,725,000
Land 450,000 200,000 650,000
Patents and copyrights 350,000 450,000 3 240,000 4 72,000 968,000
Brand name 3 2,315,625 4 59,375 2,256,250
Goodwill 3 595,000 595,000
Investment in PPC 2,100,000 1 78,558 3 4,517,625 0
2 2,333,667
6 5,400

Total $ 5,210,000 $3,060,000 $ 9,185,290

Accounts payable $ 340,000 $ 138,000 $ 478,000
Mortgage payable 350,000 350,000
Bank loan payable 320,000 320,000
Sales supply contract 4 250,000 3 250,000 0
Preferred shares (12,500 outstanding) 1,400,000 3 1,400,000 0
Common shares (300,000 outstanding) 3,000,000 3,000,000
Common shares (100,000 outstanding) 100,000 3 100,000 0

Retained earnings 1,520,000 1,102,000 Above 800,095 Above 550,198 2,372,103
Non-controlling interests 9 150,000 2 2,333,667 2,665,187
8 481,520
Total $ 5,210,000 $3,060,000 $ 9,185,290

$8,270,98
5 $8,270,985

Journal Entries
1 Investment in PPC 78,558
Retained earnings (note a) 78,558
To adjust retained earnings to equity method at beginning of year
2 Investment in PPC 2,333,667

Non-controlling interest (note b) 2,333,667
To establish noncontrolling interest at beginning of year
3 Common shares 100,000

Preferred shares 1,400,000
Patent 240,000
Brand name 2,315,625
Goodwill 595,000
Sales supply contract 250,000
Investment in PPC 4,517,625
To eliminate subsidiary's shareholders' equity and
establish acquisition differential at beginning of Year 8
4 Sales supply contract 250,000

Sales revenue 250,000
Depreciation expense 117,375
Gain on sale of patent 14,000
Patent 72,000
Brand name 59,375
To record changes to the acquisition differential for Year 8
5 Sales 60,000
Cost of purchases 60,000
To eliminate intercompany sales
6 Investment in PPC 5,400

Change in inventory 9,000
To eliminate unrealized profits in beginning inventory
7 Change in inventory 6,600

Inventory 6,600
Deferred income tax asset 2,640
Income tax expenses 2,640
To eliminate unrealized profits in ending inventory
8 Non-controlling interest-P&L 481,520

Non-controlling interest-SFP 481,520
To record NCI's share of income for the year
9 Non-controlling interest-SFP 150,000

Dividends paid (100% x 150,000) 150,000
To record NCI's share of dividends paid
Total of debits and credits $ 8,270,985 $ 8,270,985

Notes
a Consolidated retained earnings, beginning of Year 8
(= Ultra's retained earnings, beginning of Year 8 under equity method) $1,378,558
Ultra's retained earnings, beginning of Year 8 under cost method 1,300,000
Difference between cost and equity method, beginning of Year 8 $ 78,558
b NCI, end of Year 8 $2,665,187

Less: NCI's share of consolidated net income for Year 8 -481,520
Add: NCI's share of PPC's dividends for Year 8 150,000
NCI, beginning of Year 8 $2,333,667


Herauf10e SM Ch08 FINAL

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Herauf10e SM Ch08 FINAL

Uploaded by

Copyright:

Available Formats

Chapter 8

Consolidated Cash Flows and

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Problem 8-3 (15 min.)

Problem 8-4 (20 min.)

Problem 8-5 (20 min.)

Problem 8-6 (30 min.)

Problem 8-7 (30 min.)

Problem 8-8 (30 min.)

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Problem 8-10 (20 min.)

Problem 8-11 (25 min.)

Problem 8-12 (40 min.)

Problem 8-13 (30 min.)

Problem 8-14 (30 min.)

Problem 8-15 (30 min.)

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Problem 8-17 (30 min.)

Problem 8-19 (50 min.)

Problem 8-20 (50 min.)

Problem 8-21 (90 min.)

Copyright  2022 McGraw Hill Ltd. All rights reserved.

SOLUTIONS TO REVIEW QUESTIONS

3. The depletion of the acquisition differential is similar to depreciation expense in that it is

4. Dividend payments to noncontrolling shareholders represent a flow of cash outside the

Copyright  2022 McGraw Hill Ltd. All rights reserved.

11. Net income for the year 17,000)

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Liabilities (800 + 390) $ 1,190 $ 1,190

Liabilities (800 + 390) $ 1,190 $ 1,190

In scenario A, a gain on sale is reported on January 1, Year 8 as a direct credit to

For this transaction, the difference is $330,000 calculated as follows:

Acquisition cost (54 x 100,000 x 20%) 1,080,000

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Liabilities $340 $155 $495

Attention: Gerard Joel

Sale of Traveller Bus Lines ("TBL")

 recommends ways in which the selling price can be maximized

Recommendations on ways to maximize the selling price

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Possible adjustments to the selling price

School buses – useful life

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Significant accounting issues – CTE

Reporting the sale of TBL

Recognition of the gain on sale of TBL

Comments on current agreement

Copyright  2022 McGraw Hill Ltd. All rights reserved.

If you have any concerns or questions, please contact us.

REPORT TO VISION CLOTHING INC.

Financial concerns of the immediate future

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Financial accounting issues

Underwriter fees and share-offering costs

XYZ Ltd. gain

Copyright  2022 McGraw Hill Ltd. All rights reserved.

Deferred tax debits

Balance at December 31, Year 2 $ 114,000

Copyright  2022 McGraw Hill Ltd. All rights reserved.

(b) Dividends of $96,000 were reported:

(c) Consolidated net income was $414,000, computed as follows: